Scotts Miracle-Gro’s (SMG) Seasonally Strong Period Not Fully Taking Root, Leading To Guidance Cut
2:01 pm Wednesday, June 08th, 2022
The landscape is looking increasingly barren for Scotts Miracle-Gro (SMG) investors after the lawn and gardening company slashed its FY22 EPS guidance this morning, putting more pressure on a stock that’s already plunged by 50% yr/yr. The weakness has mainly been a function of a steep downturn in SMG’s cannabis cultivation segment, Hawthorne, as an oversupply situation has significantly dampened sales. Today’s guidance cut, however, is partly attributable to weaker-than-expected sales in SMG’s U.S. Consumer segment. This is alarming because the company’s lawn and gardening business has been a source of strength since the pandemic hit in early 2020.
When SMG reported Q2 results on May 3, it commented that achieving the low end of its FY22 sales guidance for U.S. Consumer of plus-or-minus 2% yr/yr was the most likely outcome. At the time, unfavorable early spring weather weighed on sales, causing the seasonally-strong period to break a few weeks later than normal. Encouragingly, sales began picking up just before the quarter ended, leading many to believe that the U.S. Consumer business was back on track.
Unfortunately, it hasn’t played out as expected as SMG now anticipates U.S. Consumer sales to decline by 4-6%. Making matters worse, business is slowing again for Hawthorne and SMG now expects sales for that segment to dive by 40-45% this fiscal year. For some context, the company forecasted a 15-25% sales decline at a Raymond James investors conference in early March.
Since the early spring, a few different negative factors have materialized across both segments.
Adding some credence to that assertion is Hagedorn’s acknowledgement that SMG’s retail partners are not replenishing orders at the pace he expected. In fact, he disclosed that retailer orders are more than $300 mln below SMG’s plans for May, putting considerable pressure on the segment’s fixed cost structure.
Meanwhile, outdoor cultivation of cannabis has been slow, derailing the momentum that Hawthorne picked up in April and early May.
The weakening demand picture, combined with persistently high commodity prices, is cutting deeply into SMG’s FY22 earnings forecast. After stating at the Raymond James conference that its unlikely to achieve the low end of its original EPS guidance of $8.50-$8.90, SMG warned that reaching EPS of $8.00 was probably unattainable in its Q2 earnings report. Now, the company is guiding for EPS of $4.50-$5.00, well below analysts’ estimates.
SMG’s volatile Hawthorne segment has been mired in a slump for several quarters, but the company has been able to hang its hat on the steadier performance of its U.S. Consumer segment. In the wake of the pandemic, lawn and gardening activity flourished, creating a strong growth driver for the business. That business is now lapping very difficult yr/yr comparisons, which investors have anticipated. What’s catching investors by surprise today is the softening of demand for seed and fertilizer products and the drop in replenishment orders from SMG’s retail partners. This development adds another layer of evidence that consumers are tightening up their budgets.
