AeroGrow Invents New Industry, Continues Sprouting

| About: Aero Grow (AERO)

During my search for Christmas presents, I came across a new kitchen appliance I’d never seen before - a perfect gift for my Mother. Well maybe I wasn’t searching for presents at the time: I’d just developed an intense interest in learning about how plants grow - via hydroponics.

I know what you’re thinking: No! I don’t want to use it for illicit purposes. I was genuinely interested in using it to grow quality food. If you’ve ever searched for information on hydroponics you’ll quickly find that the internet is full of people using it for illegal purposes… It is VERY hard to find a nice small hydroponic setup for a decent price for growing edible food. That’s when I came across AeroGrow’s AeroGarden. It’s the perfect system for growing real food in a small space for a semi-reasonable price in the range of $150-$200 (depending on the model).

The system is innovative. It’s the first system that’s aesthetically pleasing and small enough to fit into a kitchen so you can grow fruits (strawberries, etc), vegetables, herbs or even flowers. The system comes with a herb seed kit so you can grow 7 different types of herbs (Mint, Italian Basil, Dill, Cilantro, Parsley, Purple Basil, Chives). The best part of the system is that everything is automatic. The lights and pump come on and off automatically. Literally the only thing you are required to do is add water (when a water light comes on to indicate it needs water!) and nutrient tablets (when the nutrient light comes on).

The system uses certified organic nutrient tablets (using mineral salts I believe). After the system is setup, you sit back and watch it grow. You don’t need a green thumb. After it grows large enough you may begin to harvest leaves off the herbs and add it directly to your food… from plant to food is less than a minute. The plants can last for months. The entire system uses less electricity than a 60 watt light bulb.

The Company claims that it’s using aeroponics - not hydroponics. After using the system I’d have to say it is in fact hydroponics - not aeroponics. In aeroponics the nutrient solution and water are SPRAYED or MISTED onto the roots of the plant. This is not the case as the water drips onto the roots. I believe AeroGrow made the right decision to name it AeroGarden and claim it uses aeroponics. As soon as the word hydroponics is mentioned, everyone in our culture thinks about drugs and illegal grow operations. I completely understand why they’d want to stay away from being associated with that.

During the first year of AeroGrow’s sales, many units (they are manufactured in China) were found to have problems with the pumps (I learned this while looking at customer comments on Amazon). Those problems have been dealt with and the quality has increased - My Mother’s unit works perfectly.

AeroGrow is a public company (OTCQB:AERO) with a market cap of about $67 million (current share price is $6.05). In the fourth quarter of 2007 the Company has indicated revenue is in the $14 to $14.5 million dollar range which is a 185% growth over last year and 124% greater than last quarter. The Company is growing extremely fast and retail sales have been very good. This Christmas a lot of new retail outlets began to stock AeroGardens.

“We met or exceeded expectations for sell-through in all channels of distribution this holiday season, and all our principal retailers are continuing with new promotions and planning in 2008,” said Jeff Brainard, AeroGrow’s Vice President of Sales. “We’ve now demonstrated to retailers that we can generate strong sales, and we’ll be aggressively introducing new products into new channels in 2008 and beyond.”

AeroGrow pushed retail expansion from 750 storefronts in December 2006 to more than 4,300 storefronts in December 2007.

As a customer, I can tell you this: I went to several stores and happened to see the units for sale. A few weeks later I went back and the units were gone - the stores ran out of stock. I love the idea of knowing exactly where my food is coming from. In Canada we have a large agricultural industry - but much of the fresh fruits and vegetables are not produced here year-round. We import a lot of our fruits and vegetables in the winter and due to large distances of travel the food can be expensive and ‘not-very-fresh’.

Have you seen the movie 'I Am Legend'? I’m not digressing… It’s a blockbuster movie that just came out this Christmas. An unsolicited appearance of the AeroGarden was in several scenes of the post-apocalyptic movie with Will Smith. I haven’t seen the movie yet (I will, I will!) but I imagine he was growing food with it (duh!) - Free advertising in a hit movie is a good thing.

Although AeroGrow is not yet profitable, it expects to reach profitability within the next several years. I can see this company gaining more interest and many people using the AeroGrow as a kitchen appliance to grow a little extra food. Fresh food straight from the kitchen. The Company is expanding its distribution to Japan and Europe and more retail outlets in domestic markets. AeroGrow sells replacement light bulbs, seed kits and other accessories in addition to the actual AeroGarden. The Company started an in-house catalog business and has mailed 1.25 million catalogs since its inception.

I’m cautiously optimistic. This Company is experiencing fast growth but it needs to reach profitability… I believe it will eventually reach profitability if it can keep costs under control. In short, it has an innovative product and lots of room to expand its distribution channels and expand its product offerings. I want to see some larger units to grow greater quantities of food. It may turn out to be a nice small cap stock to add to your portfolio but do your own research first. Also be careful of new competitors launching into the market and competing. I’ll leave you with this quote from the President of AeroGrow:

“Given the strong revenue performance across the board, we will continue to drive four major expansion opportunities in 2008,” said Jerry Perkins, President and COO of AeroGrow. “First, we intend to significantly expand the number of storefronts for our current product line. Second, we’ll be continuing to open new channels of distribution, with a substantial number of new storefronts, through mass distribution into big box, garden, office supply, florist, crafts and other retailers. We’ll open these new channels with the introduction of new, lower-priced products targeting the flower, culinary and gardening markets. Third, we’ll aggressively expand our international sales into the U.K., Germany, France and other European markets, as well as Japan, Korea and other sizeable markets. And finally, we’ll continue the expansion of our direct-to-the-consumer businesses including our own direct-mail catalog business, TV spots and infomercials, and web sales. The large number of storefronts and consumer markets that we can target using the products already on our drawing boards is incredible, and we’re in full pursuit of the opportunities.”

Full Disclosure: The author does NOT own shares in AeroGrow at the time of writing this article.

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