The Scotts Miracle-Gro Company (NYSE: SMG) announced two acquisitions, but at the same time warned that sales in its hydroponic division Hawthorne were expected to drop by 40% for the fiscal first quarter that ends at the end of January. Scotts said the decline in sales was caused by a slowdown in the cannabis market as well as supply chain disruptions that have delayed the sale of certain product lines. However, the company said it was maintaining its full-year company-wide outlook for adjusted earnings per share.
“We are optimistic the supply chain disruptions we’ve experienced will be corrected by the end of January and we’ll be able to meet the continued demand we’re seeing for our industry-leading signature products,” said Cory Miller, chief financial officer. “We’re also encouraged by the year-over-year increase we’ve been experiencing in pre-orders for growing media products for delivery to commercial growers in the second and third quarters. However, the decline we’ve seen in the first quarter, against a 71 percent growth comparison a year ago, is greater than we had anticipated. Based on our current view of the market, we are lowering our full-year sales guidance for Hawthorne to a range of 0 to minus 10 percent on a year-over-year basis, including the expected benefit from Luxx. This range assumes a return to growth during the second half of the year.”
Acquisitions
Scotts announced that it was buying Luxx Lighting in a deal valued at $215 million. Scotts said in a statement that the acquisition, which closed December 30, 2021, adds approximately $100 million in sales and $20 million in operating income to Hawthorne on an annualized basis. While approximately $75 million of revenue from Luxx is expected in the remainder of fiscal 2022, the transaction is expected to be neutral to earnings for the year due to the impact of purchase accounting and one-time deal costs.
Scotts also said it has purchased True Liberty Bags in a deal valued at $10 million. , the industry’s leading provider of liners and storage solutions to dry and cure plant products. Hawthorne has been the primary U.S. provider of True Liberty brands, which expands Hawthorne’s harvest portfolio.
“These strategic acquisitions reinforce our commitment to provide commercial cannabis cultivators in state-authorized markets with a complete set of solutions driven by insight and innovation,” said Chris Hagedorn, division president of Hawthorne. “While the cannabis market continues to see near-term challenges from an over-production in recent months, we see the current reality as an opportunity to further distance ourselves from the competition and strengthen our business for long-term success.
Hawthorne, which previously did not distribute Luxx, will expand the marketing and distribution of the brand in emerging markets, including the East Coast. that significantly strengthens The Hawthorne Gardening Company’s industry-leading lighting portfolio.
These deals follow the August 2021 acquisitions of HydroLogic Purification Systems, which moved Hawthorne into the water reclamation and purification category, and Rhizoflora, whose industry-leading Terpinator and Purpinator brands expanded Hawthorne’s nutrient offering.
Retail Sales
Despite the troubles at Hawthorne, Scotts said that its U.S. Consumer segment continues to perform well with POS growth in both dollars and units in every major product category and continued support in all retail channels. U.S. Consumer segment sales in the first quarter are expected to decline less than 20%, which is better than it originally anticipated.
“Consumer purchases, in units, were up 3 percent in the quarter against a 40 percent growth comparison a year earlier, and POS dollars increased 9 percent in the quarter,” Miller said. “Retail inventory levels are appropriate for this time of the year, and we remain optimistic about the potential for the segment as we prepare for the upcoming lawn and garden season.”
“While it’s too early to raise our guidance for this segment, the current trends and our continued optimism about the upcoming season, coupled with a focus on expense control in both Hawthorne and U.S. Consumer, allow us to maintain our guidance for adjusted earnings in a range of $8.50 to $8.90 per share,” Miller said.