Hydrofarm Holdings Group, Inc. (“Hydrofarm” or the “Company”) (Nasdaq: HYFM), a leading independent manufacturer and distributor of branded hydroponics equipment and supplies for controlled environment agriculture (“CEA”), today announced financial results for its first quarter ended March 31, 2022.
First Quarter 2022 Highlights vs. Prior Year Period:
- Net sales remained flat at $111.4 million.
- Gross Profit decreased to $16.6 million compared to $23.2 million. Adjusted Gross Profit(1)(2) was $22.3 million compared to $23.4 million.
- Net loss was ($23.3) million, or a loss of ($0.52) per diluted share, compared to net income of $4.9 million, or $0.13 per diluted share. Adjusted Net Loss(1)(2) was ($7.8) million, or ($0.17) per diluted share, compared to Adjusted Net Income(1) of $7.2 million, or $0.18 per diluted share.
- Adjusted EBITDA(1)(2) decreased to $3.1 million compared to $9.9 million.
- The Company recorded a $3.2 million inventory reserve during the quarter, which was not treated as an adjustment.
Full Year 2022 Outlook:
- Net sales of approximately $480 million to $520 million.
- Adjusted EBITDA(1) of $46 million to $54 million, or approximately 10% of net sales.
(1) Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net (Loss) Income, Adjusted SG&A, Adjusted SG&A as a percent of net sales, and Adjusted EBITDA are non-GAAP measures. For reconciliations of GAAP to non-GAAP measures see the “Reconciliation of Non-GAAP Measures” accompanying the release.
(2) As a result of the $3.2 million inventory reserve, Adjusted Gross Profit, Adjusted Net Income and Adjusted EBITDA were negatively impacted.
Bill Toler, Chairman and Chief Executive Officer of Hydrofarm, said, “Over the past year, our team has strengthened our business through a number of initiatives, including our five acquisitions, the expansion of our distribution and manufacturing footprint, and the creation of new leadership roles. While we remain optimistic about the health of our business and our long-term potential, our ability to reap the benefits of our actions has been impacted by the agricultural oversupply that has hampered cannabis growing activity across the US and Canada. This dynamic was apparent in our first quarter results.”
Mr. Toler added, “We believe these industry challenges are transient, and we continue to take aggressive actions to optimize our business through pricing and cost controls that we believe will benefit our business over time. Moreover, we are seeing bright spots in our IGE business, in our commercial business, in newer legalized states, and in our peat business. With a strong product portfolio and healthy balance sheet, we remain well positioned to capture the tremendous long-term growth opportunities in the CEA industry.”
First Quarter 2022 Financial Results
Net sales in the first quarter of 2022 remained flat at $111.4 million compared to the first quarter of 2021, driven by an approximate 2.1% decrease in volume of products sold, offset by an approximate 2.2% increase in price and mix of products sold, and an approximate 0.1% decline from unfavorable foreign exchange rates.
Gross profit decreased to $16.6 million, or 14.9% of sales, during the first quarter of 2022 and included $3.9 million of expenses related to acquisitions completed in 2021 and a $3.2 million inventory reserve. Adjusted Gross Profit(1)(2) was $22.3 million or 20.0% of net sales, compared to $23.4 million or 21.0% in the first quarter of 2021. Adjusted gross profit margin(1)(2) was negatively impacted by a $3.2 million increase in inventory reserves primarily related to a surplus of lighting inventory. During the first quarter of 2022, we experienced higher freight and labor costs, offset by pricing actions and favorable sales mix of the Company’s proprietary brand products.
Selling, general and administrative (“SG&A”) expense was $43.0 million in the first quarter of 2022, or 38.6% of net sales, compared to $16.8 million in the first quarter of 2021. The increase in SG&A expense was primarily related to several non-cash charges including amortization expense and other acquisition-related costs, and distribution center relocation expenses. Adjusted SG&A(1) increased to $19.2 million or 17.2% of net sales in the first quarter of 2022, compared to $13.5 million or 12.1% of net sales in the prior year period. The increase in Adjusted SG&A(1) primarily relates to an increase in compensation costs, facility costs, and insurance expenses. The added costs were largely the result of the five acquisitions completed in 2021 as well as the Company’s preparation for future growth.
Net loss was ($23.3) million, or ($0.52) per diluted share, in the first quarter of 2022, compared to a net income of $4.9 million, or $0.13 per diluted share in the first quarter of 2021. Adjusted Net Loss(1)(2) was ($7.8 million), or ($0.17) per diluted share, in the first quarter of 2022, compared to Adjusted Net Income(1) of $7.2 million, or $0.18 per diluted share, in the first quarter of 2021.
Adjusted EBITDA(1)(2) was $3.1 million, or 2.8% of net sales, for the first quarter of 2022, compared to $9.9 million, or 8.9% of net sales, in the first quarter of 2021. The decrease in Adjusted EBITDA(1)(2) was primarily related to higher Adjusted SG&A(1) expenses on relatively flat net sales as our business has been impacted by agricultural oversupply, as well as the $3.2 million inventory reserve mentioned above.
Balance Sheet and Liquidity
As of March 31, 2022, the Company had unrestricted cash and cash equivalents of approximately $12.2 million and approximately $99.7 million of available borrowing capacity under its revolving credit facility. The Company also carried a principal amount of debt outstanding of $124.7 million under our Term Loan at the end of the quarter.
Full Year 2022 Outlook
Based on first quarter performance and recent sales trends, the Company is providing an update to its outlook for the full fiscal year 2022:
- Net sales of approximately $480 million to $520 million.
- Adjusted EBITDA(1) of $46 million to $54 million, representing a range of approximately 9.6% to 10.4% of net sales for the full fiscal year.
The Company’s 2022 outlook includes the following updated assumptions:
- Sequential improvement from negative organic growth in Q1 to positive organic growth in Q4.
- Capital expenditures of approximately $8.0 million to $10.0 million; and
- An estimated tax provision between $0 and $3 million for the full year, excluding the large discrete tax benefit of $8.5 million recognized in Q1 2022.
With respect to projected fiscal year 2022 Adjusted EBITDA, a quantitative reconciliation is not available without unreasonable effort due to the variability, complexity and low visibility with respect to certain items, including, but not limited to, stock-based compensation and employer payroll taxes, uncertainties caused by the global COVID-19 pandemic, changes to the regulatory landscape, and certain potential future transaction expenses, which are excluded from Adjusted EBITDA. The Company expects the variability of these items to have a potentially unpredictable, and potentially significant, impact on its future GAAP financial results.
(1) Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net (Loss) Income, Adjusted SG&A, Adjusted SG&A as a percent of net sales, and Adjusted EBITDA are non-GAAP measures. For reconciliations of GAAP to non-GAAP measures see the “Reconciliation of Non-GAAP Measures” accompanying the release.
(2) As a result of the $3.2 million inventory reserve, Adjusted Gross Profit, Adjusted Net Income and Adjusted EBITDA were negatively impacted.
Conference Call
The Company will host a conference call to discuss financial results for the first quarter 2022 today at 4:30 p.m. Eastern Time. Bill Toler, Chairman and Chief Executive Officer, and John Lindeman, Chief Financial Officer, will host the call.
The conference call can be accessed live over the phone by dialing 201-389-0879. A replay will be available after the call until Tuesday, May 17, 2022 and can be accessed by dialing 412-317-6671. The passcode is 13728344. The conference call will also be webcast live and archived on the corporate website at www.hydrofarm.com, under the “Investors” section.
