Hydrofarm Sales Continue to Plunge, But Sees Some Hope In Industry Trends

Sales expected to keep falling in 2023.

After the market closed on Thursday, Hydrofarm Holdings Group, Inc. (Nasdaq: HYFM) reported its financial results for its fourth quarter and full year ending December 31, 2022, as sales fell dramatically. In the fourth quarter, net sales decreased to $61.5 million versus last year’s $110.4 million for the same time period. Hydrofarm attributed the decline to a decrease in the volume of products sold resulting primarily from the industry recession, a 0.9% decline in price and mix of products sold resulting primarily from the sell-through of discounted lighting products, and a 0.5% decline from unfavorable foreign exchange rates.

The net loss was $(35.3) million in the quarter versus a net loss of $(11.0) million for last year’s fourth quarter. This translated into a net loss of $(0.78) per diluted share, or (57.4)% of net sales.

The company reminded investors that it has initiated a restructuring to further right-size the company. The restructuring includes trimming its product and brand portfolio and relocating and consolidating certain manufacturing and distribution centers, including the pending closure of two company locations, and contract terminations and amendments. The restructuring resulted in charges of $7.7 million in the fourth quarter of which approximately $6.1 million are non-cash. Hydrofarm expects the restructuring and related actions to result in cost savings of approximately $7.0 million annually.

For the full year of 2022, Hydrofarm reported that net sales decreased to $344.5 million versus $479.4 million in 2021. The net loss decreased to $(285.4) million compared to a net income of $13.4 million in 2021.

Bill Toler, Chairman and Chief Executive Officer of Hydrofarm, said, “While the current operating environment remains challenging, I am encouraged that we finished 2022 with our net sales coming in at the upper end of our previously provided outlook and that we generated positive Free Cash Flow for the third quarter in a row. We have experienced sales stabilization over the last several months and are seeing some positive indicators that the industry is moving closer to a rebound. I am pleased with the many actions behind the restructuring initiative and related actions that our team has launched to right-size our business and become a leaner, more profitable company. We remain confident in the long-term strength of our business, as our disciplined approach to working capital and restructuring actions initiated in 2022 have put us in a healthy position heading into 2023 and beyond.”

With regard to the balance sheet, Hydrofarm had $21.3 million in cash and an aggregate principal amount of debt outstanding of $125.8 million which consisted of approximately $123.8 million in principal balance on its Term Loan and approximately $2.1 million in finance leases and other debt.

On the company’s earnings call, CFO John Lindeman said, “I think we mentioned roughly $60 million of liquidity at the end of the year, that’s $20 million plus on the balance sheet and cash, plus $40 million available on the line. We continue to feel good about our liquidity position for a number of reasons. Again, our debt doesn’t come due. The bulk of our debt is really helping our term debt facility, roughly $124 million of the roughly $126 million that we mentioned. That doesn’t come due until 2028, and the principal portion of that amortizes only amortizes about 1% a year, which is roughly $1.3 million. So, from a liquidity standpoint, we continue to feel good.”

Looking Ahead

Hydrofarm’s sales are expected to continue to decline in 2023, with the outlook for sales to be approximately $290 million to $310 million. The company said this assumes that average daily sales levels continue across the first quarter of 2023 at levels similar to those achieved in the fourth quarter of 2022 and a seasonal increase in average daily sales levels begins in the early second quarter of 2023.

The company is forecasting an adjusted EBITDA that is modestly positive and is planning to have positive free cash flow. The company noted that a further reduction in inventory and net working capital would help it to generate positive free cash flow.

Positive Glimmers

Despite all the gloom and doom, Lindeman still sees signs of life in the industry. He said, “I think it’s fair to say that we were trending — the industry was trending down all the way through October. And then, it did begin to really flatten and sequentially show a little improvement, in November, December, January, and February. So that’s good. And we think that’s — when you’re taking all the factors seasonally adjust and all that, you kind of say, all right, we really are sort of — others have said bouncing along the bottom, and I think that’s probably a reasonable way to think about it. But the other thing that gives us more confidence is kind of the things people are saying, the inventory levels we’re seeing in Headset, the pricing stabilization, the kind of, let’s say, mood and tone we’re getting from customers is speaking to — there being people coming back into the business that it probably took a year or 18 months off. And we think that that is encouraging. But it’s been a ride.”

He went on to add, “Virginia has been frustrating. They keep fooling around with it a bit. New Jersey and New York have been kind of hot and cold. The ones that have kind of stood out recently, Missouri has been a really good state for the industry. I think I’ve seen a lot of quick sales there. You’ve seen Louisiana is doing pretty well. There are other places that are popping up now. But yes, the Northeast really hasn’t been that huge wave that we all thought was going to happen. And I think that’s been something that’s caught us all by surprise, and we hope they’ll get sorted out. There hasn’t really been the windfall or the tailwind that we had hoped for.”

Debra Borchardt

Debra Borchardt is the Co-Founder, and Executive Editor of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Master's degree in Business Journalism from New York University.

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