Inflation, weak cannabis market hurt Scotts Miracle-Gro

With $3.9 billion in annual sales Scotts Miracle-Gro Co. (NYSE: SMG) is one of the world’s largest marketers of branded lawn and garden care products.

Its Hawthorne Gardening Co. subsidiary provides fertilizers and hydroponic growing systems to the cannabis industry.

Scotts shares doubled during the first pandemic year, peaking at US $250 in March 2020. With reopening discretionary consumer spending went elsewhere and the shares have been in decline since then. Year-to-date they are down 7% at a recent price of US$45.20

In its latest quarter Scotts sales declined 6% to $1.12 billion driven by a 40% decline in the Hawthorne segment. Net income was $43.7 million, or $0.77 per diluted share, compared with a prior year loss of $443.9 million, or $8.01 per diluted share.

Scott’s expects sales to decline by 10% to 11% for the full year driven by a 2% to 4% decline in the U.S. consumer segment and a 30% to 35% decline in the Hawthorne segment.

In a conference call, CEO Jim Hagedorn said the challenges in the lawn and garden business include the combined effects of changing sentiment post-COVID, weather extremes, inflationary pressures, and consumer resistance to higher prices. A bright spot is the growth of edible organic gardening products.

A cost cutting program will help free cash flow hit $1 billion by the end of fiscal 2024 with the cash being used pay down long term debt of $2.6 billion. By fiscal year-end, it will have been reduced by nearly $300 million.

Scotts was a pandemic winner as lockdowns meant more time spent in the backyard. Its leading position and tie in with retailers such as Canadian Tire and Home Depot provided a huge tailwind. It had high hopes for the cannabis industry investment betting a US federal law decriminalizing cannabis was on the way. That law has yet to be passed and many investors have fled the sector as a result. Investments in cannabis operations have yet to pay off.

Scotts increased its dividend twice during the pandemic and also issued a special dividend. The $0.66 quarterly payment yields a high 5.61% at current prices and seems safe.

This article appeared in the Internet Wealth Builder on Oct. 16, 2023. For information on how to reprint this article please view this page.