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Understanding GrowGeneration’s Five New Risk Factors
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Understanding GrowGeneration’s Five New Risk Factors

Retail hydroponic and organic gardening centers operator GrowGeneration Corp. (GRWG) recently delivered a robust third-quarter performance, with a near-doubling of its top-line on the back of higher same-store sales.

In a prudent move, the company has increased inventory levels across all of its product categories considering price increases in the current environment.

Keeping these developments in mind, let us take a look at the changes in GRWG’s key risk factors that investors should know.

Risk Factors

According to the TipRanks Risk Factors tool, GRWG’s top two risk categories are Finance & Corporate, and Macro & Political, each accounting for 31% of the total 16 risks identified. In its recent Q3 report, the company has added five key risk factors.

Under the Finance & Corporate risk category, GRWG noted that proper systems of internal controls over financial accounting and disclosure are important to the operation of a public company, and any failure of GRWG’s internal control over financial reporting could adversely impact its business and financial results.

Under the Legal & Regulatory risk category, GRWG highlighted that it extends credit to customers in the form of accounts receivable and promissory notes. The industries that GRWG caters to are new and fragmented. Consequently, some of GRWG’s counterparties are smaller or newer businesses, and may have higher credit risk. This exposes GRWG to collection risk, which can impact its results.

The next three risk factors, associated with the COVID-19 pandemic, fall under the Macro & Political risk category. GRWG acknowledged that the COVID-19 pandemic could have a negative impact on GRWG’s results, financial position, and business operations.

Additionally, the pandemic could also impact GRWG’s supply chain as its business depends on an efficient and effective supply chain. In the present environment, the pandemic has placed a strain on domestic as well as international supply chain, which could affect the flow or availability of GRWG’s products. It will also lead to higher out of stock inventory positions.

Further, GRWG may have to source products from different manufacturers or geographies, which may lead to higher costs, delays in receiving goods, or products of lower quality. Such a scenario could impact GRWG’s ability to deliver on time and satiate customer demand.

Lastly, GRWG is witnessing higher operating costs owing to actions taken to protect the health and safety of its workforce and customers amidst the COVID-19 pandemic. The risk remains that these steps may not be sufficient to protect against operational or reputation harm to GRWG’s business. (See Insiders’ Hot Stocks on TipRanks)

Compared to a sector average of 14%, GRWG’s Macro & Political risk factor is at 31%.

Wall Street’s Take

On November 15, Craig-Hallum analyst Eric Des Lauriers reiterated a Buy rating on the stock, but decreased the price target to $30 from $35.

The analyst attributed the lowered price target to lowered 2021 guidance by the company as it is investing in talent and technology, while focusing on Greenfield projects as opposed to acquisitions.

Consensus on the Street is a Strong Buy based on 4 Buys and 1 Hold. The average GrowGeneration price target of $33.60 implies a potential upside of 70.5% for the stock. However, shares of the company have dropped 49.6% so far this year.

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