This week GrowGeneration (GRWG) received a glowing Buy recommendation from Stifel analyst Andrew Carter. The analyst also gave the stock a $22 price target and estimates 55% growth through fiscal year 2022. The stock jumped from $14 mid-week to lately selling at $16.70.
(For more on GRWG, see Jim Cramer: Here's One Specialized Chain That's Growing Like a Weed)
Carter said that the hydroponic chain store company was a scarcity among cannabis companies in that it offered free cash flow generation and the resources for continued reinvestment. The company has 28 stores in 10 states and its sales are three times its next largest competitor. He estimated that the hydroponic category will grow to $20 billion by 2030 fueled by cannabis demand and the cultivation needs for serving a fractured market.
Its three biggest markets at this time are Oklahoma, Michigan and California. Its top three product categories are nutrients & additives, environmental controls, and growing media.
Since each state requires its product to be grown within the borders, companies can't just grow in one central location. Four new states may be legalizing adult-use cannabis over the next two years and that will lead to considerable new business. For example, just this week, Pennsylvania's Governor Tom Wolf said that making adult-use cannabis legal will be one of his fall priorities as he looks to plug holes in his covid bruised budget. Carter thinks states will continue to keep the mandate to stay within borders.
The analyst suggested that 50% of the current cannabis market is in a steady, normalized state. He thinks there is growth in the legalized states of Maine, Michigan, Missouri and Massachusetts. The states that could come online include Arizona, Connecticut, New York and New Jersey. Carter did acknowledge that there could be weakness in Nevada and Oklahoma, but that seems to be outweighed by the positives of the additional states.
GrowGeneration currently has no meaningful competition. The couple of companies that are also in the space are one-third the size and not competing on the same national scale. Home Depot (HD) and Lowe's (LOW) do play in the space and have a small part of the market, but it would be difficult to give much more floor space over to the category or have the staff knowledgeable enough to support the product. Speaking of Home Depot, GrowGeneration named former HD CEO Bob Nardelli as one of its strategic advisors.
Stifel estimates sales of $362 million for fiscal year 2022. That's a 54% revenue growth from the $124 million delivered over the past 12 months. Same store sales growth is estimated to be 15% in 2021 and 11% in 2022. The average in-store ticket size is $258, which is at the high end of all retail concepts. The company hired retail veteran Tony Sullivan as its Chief Operating Officer to strengthen its retail efforts. The analyst said he believes 250 stores will be built over the next 10 years. Carter also pointed out that GrowGeneration can get a store up and running in three months. Meaning it can delay investment money but then quickly capitalize on it when the conditions are right. It is also creating a private label offering. Carter said that he believes 40% of the company's sales are in areas in which consumers are brand agnostic, meaning there is a lot of opportunity with the private label business. The gross margins on these products could be 50%. Multi-state operators (MSO) are only 20% of GrowGeneration's business and that is an area the company wants to increase, even if it comes with bulk discounts.
GrowGeneration has $60 million in cash to fund its expansion and continue its consolidation within the industry. The company has spent $19 million for its last eight acquisitions. The analyst noted that the company has successfully completed and integrated 18 different companies. There are over a thousand hydroponic stores in the space, so there is a great deal of opportunistic options.
"Our estimates consider a steady state for the business with the pace of roughly three store openings per quarter increasing to four new stores in FY22," wrote Carter. The stores are typically 10,000 square feet and require $250,000 of CapEx and $750,000 of inventory. The normal time for payback on a location is 1.5 years.
Carter also wrote, "We believe the ancillary service companies are an underappreciated asset class. We also believe these companies are well positioned to benefit from the growth of the industry without "touching the plant" (violating federal law) which leverages cannabis to drive a differentiated revenue growth profile relative to peers in similar verticals. Lastly, we think the early servicing companies have a head start when considering the unique U.S. market structure, risk tolerance and considerations beyond regulations which have kept large companies on the sidelines from making direct investment in the space."
The analyst did address past blemishes with regards to the management team, but feels it has taken steps to improve the company's C-suite and will continue to strengthen its board.