Hydrofarm Stock Plunges Along With Sales

Hydrofarm Holdings Group, Inc. (Nasdaq: HYFM) stock plunged by 28% in early trading to lately sell at roughly $2.35 after the hydroponic company reported declining sales following the market close on Tuesday. Hydrofarm said it is looking to shave down its costs and restructure as deflated earnings continue to tap its pockets.

The manufacturer and distributor of hydroponics equipment and supplies for controlled environment agriculture, the company released a preliminary unaudited financial report card for its second quarter ending June 30, 2022.

Hydrofarm posted estimated net sales of $96.0 million to $97.5 million, versus $133.8 million for the same period last year, representing a dip of approximately 28% calculated using the midpoint of the range. This also missed the Yahoo Finance average analyst estimate for revenues of $126 million.

Losses Build

The net loss is expected to range between $210.4 million and $200.4 million, versus a net income of $2.3 million in the same period last year. The net loss range includes estimated non-cash expenses of $189.6 million in goodwill impairment and $10.2 million in inventory reserve recorded at the end of the second quarter.  The company said that declining valuation trends within the industry and in the broader market “adversely impacted the company’s market valuation since its last quarterly report and triggered a full evaluation of the goodwill arising from prior acquisitions.”

The company also posted estimated adjusted EBITDA losses in the range of $8.4 million to $6.9 million, versus a $16.2 million gain in the same period last year.  It attributes the losses to lower net sales and falling gross profit margins — as well as higher labor and freight costs.

“We took positive steps during the second quarter to lower our cost structure and maintained a solid liquidity position,” CEO Bill Toler said. “However, the hydroponics industry recession in the U.S. and Canada continued to alter normal seasonal patterns and impacted our results. While we experienced encouraging results in March and April, sales trends weakened in the second half of the second quarter, disrupting our expected sales mix and resulting in net sales, net loss and Adjusted EBITDA below our internal expectations for the full quarter.”

The company said it has $27.4 million in cash, cash equivalents, and restricted cash, an aggregate principal amount of debt outstanding of $126.7 million – including $0 drawn on the company’s revolving credit facility, approximately $124.4 million in principal balance on its Term Loan and approximately $2.4 million in finance leases and other debt.

Toler continued, “Through our team’s net working capital management, we increased our cash position, lowered our net debt and maintained a solid liquidity position during the second quarter. Our team has also enacted additional expense-cutting measures, to further reduce our costs. When coupled with our prior cost savings actions, we estimate that we have reduced our costs by approximately $14.0 million on an annualized basis.”

Hydrofarm also has $15.3 million in contingent payments and can borrow around $71 million capacity under its revolving credit agreement. The company lowered its net debt by approximately $14.1 million during the second quarter by improving its working capital position and controlling costs. The company said it was in compliance with all debt covenants at the end of the period.

“Sales trends in July suggest that the overall industry continues to face headwinds and that typical seasonal patterns may not apply for the duration of this year,” Toler said. “For these reasons, we are revising downward our estimates for the remainder of the year. While we expect the industry to return to growth in the future, as highly populated states in the Eastern U.S. actively implement adult-use cannabis legislation and more mature states in the Western U.S. normalize, predicting the exact timing of a return to historical growth remains a challenge for the industry.

As a result, he said, “we will continue to focus on further cost-saving opportunities and liquidity actions to ensure that our leadership position in the hydroponics industry strengthens during this industry downturn.”

Lowered Outlook

With the new guidance, Hydrofarm expects approximately $330.0 million to $347.0 million in net sales “combined with some further reduction to account for the holiday-shortened months in the fourth quarter.” In October 2021, Hydrofarm lowered its outlook from a range of $565 million to $590 million of net sales to approximately $470 million to $490 million – a sign of just how bad sales have plunged.

The company — whose president stepped down in June — also said that it incurred severance costs during the period as it cut part of its workforce “to optimize our cost structure.”