Debra Borchardt
The Scotts Miracle-Gro Company (NYSE: SMG) announced company-wide third-quarter sales growth of 8% driven by a 48% increase in the Hawthorne segment. However, a shorter quarterly calendar for Scotts and a decline in consumer segment sales affected the company negatively. Overall, sales increased to $1.61 billion beating the Yahoo Finance average analyst estimate for revenues of $.46 billion.
GAAP income from continuing operations was $229.8 million, or $4.00 per diluted share versus $204.3 million, or $3.57 per diluted share, in the prior year. This also beat the average analyst estimate for earnings of $3.39. Non-GAAP adjusted earnings, which exclude impairment, restructuring, and other non-recurring items, were $228.6 million, or $3.98 per diluted share, compared with $216.8 million, or $3.80 per diluted share.
Hawthorne Growing
On a positive note, Hawthorne segment sales increased 48% to $421.9 million versus last year’s $285.7 million. Segment income improved 37% for Hawthorne to $51.9 million Scotts also announced a further strengthening of the Hawthorne Gardening company portfolio with the acquisition of HydroLogic Purification Systems, a leading provider of products, accessories, and systems for water filtration and purification. HydroLogic will add approximately $20 million in annualized sales and the deal is valued at $65 million.
“Hawthorne saw growth in every product category and every major geographic market,” said Jim Hagedorn, chairman, and chief executive officer. “We continue to enjoy tremendous success, especially with our signature brands, as growers see the benefit of our innovation and full-service approach. North America lighting continues to be a strong driver of growth with sales up 77 percent in the quarter. Nutrient sales increased 54 percent, and growing media improved 33 percent. More importantly, our brands – Gavita, General Hydroponics, Mother Earth, and Botanicare – significantly outperformed our distributed brands in each of their respective categories.
Consumer Declines
In not such good news, the U.S. Consumer segment sales declined 4% to $1.05 billion from $1.09 billion. Segment income decreased 16% for U.S. Consumer to $264.4 million. Due to the company’s fiscal calendar, the third quarter of 2021 began six days later than the third quarter of fiscal 2020, and those six days fell during the peak lawn and garden selling season. The impact of the shift was a decline in sales for the quarter of approximately $115 million on a company-wide basis.
Hagedorn added, “In the U.S. Consumer business, consumer purchases of our products, as measured in dollars, declined 1 percent in the quarter but remain up 4 percent on a year-to-date basis. As measured in units, which aligns more closely with our sales and is a more accurate reflection this year of consumer engagement, POS was up 5 percent in the quarter and is up 8 percent year-to-date. Our results in the third quarter continue to speak to the strength of our brands and the execution of our strategy,” said Hagedorn. “Despite difficult year-over-year comparisons, we saw record Q3 sales at Hawthorne with growth in all categories. Our U.S. Consumer business continued to excel despite a modest decline in sales compared with last year’s record levels.
Outlook
Scotts reaffirmed its full-year guidance for its U.S. Consumer and Hawthorne segments as well as its outlook for adjusted earnings per share. The company continues to forecast a 17% to 19% sales growth with the U.S. Consumer segment expected to grow 7% to 9% in fiscal 2021. Hawthorne sales are expected to increase 40% to 45%. Guidance for non-GAAP adjusted earnings per share was also reaffirmed in a range of $9.00 to $9.30. The gross margin rate is now expected to decline 250 to 275 basis points, with SG&A expected to be flat to slightly down on a full-year basis.
“The continued pressure from commodity prices is likely to result in a lower gross margin rate than we expected when we last updated our guidance in June,” said Cory Miller, senior vice president, and interim chief financial officer. “However, we’re finding offsets to that pressure that are allowing us to maintain our earnings guidance on a full-year basis.”
Acquisition of HydroLogic
HydroLogic Purification Systems is based in Santa Cruz, Calif.. Scotts said that it is a leading provider of products, accessories and systems for water filtration and purification in the cannabis industry. The company said in a statement that HydroLogic will expand the Hawthorne signature brand portfolio with water filtration and purification products. “Commercial growers comprise approximately half of HydroLogic sales and typically require custom builds for their water purification and filtration needs.”
“This is a small but strategic acquisition that strengthens our portfolio of signature brands and our relationship with commercial growers,” Hagedorn said. “We continue to pursue an active pipeline of M&A opportunities for both Hawthorne and our U.S. Consumer business and are optimistic we’ll have other transactions to announce in the months ahead.”
