Scott’s CEO: Cannabis Market a ‘Bloodbath’

Despite steep sales declines in its Hawthorne segment, which includes cannabis, the CEO of Scott’s Miracle-Gro (NYSE: SMG), Jim Hagedorn, said he still believes in the growth of the cannabis sector.

But, he noted, “It is a bloodbath out there.”

In the company’s latest earnings call, Hagedorn called out the rollout of New York’s adult-use cannabis market.

“New York has tripped over itself in developing and implementing rules, which has prevented the market from reaching its near-term potential,” he said. “But let me make this clear, New York will become a monster market, and we will see it through.”

Scott’s interest in the Empire State starts with its investment in RIV Capital, which recently acquired New York medical marijuana operator Etain.

Etain had looked like it was sitting pretty as one of the initial 10 license holders in the state, poised to capitalize on legal adult-use sales. However, the state pivoted in the final stage of legalization and instead gave priority to social justice applicants. The original 10 license holders, which had made huge investments in the market with the hopes of recouping that money in the adult-use market, are now left holding the empty dime bag.

Hagedorn insisted there was progress in the value of the investment with RIV.

“RIV holds one of 10 vertically integrated licenses that include a growing and processing operation and four dispensaries, and is developing a state-of-the-art indoor growing facility in Buffalo,” he said. But it’s not all rosy, as RIV Capital is currently facing an investor lawsuit over the Etain acquisition.

Hawthorne

Hawthorne sales for the quarter fell by 30%, with additional declines projected of up to 20-25%.

“We will retain Hawthorne’s competitive advantage in the cannabis non-plant touching space and professional horticulture,” Hagedorn said about the unit. “We are the leading solution provider for growers, which differentiates us from those who are primarily distributors.”

But the company won’t be resting on its laurels as the market shifts, he added.

“Just as importantly, we are innovating. Our scientists in Kelowna, British Columbia, the first R&D facility in North America devoted the cannabis research, are running trials on lighting, nutrients, genetics, and other technologies to improve yields, quality, and energy efficiency. Similar work is underway on hemp in Oregon, Florida, and Ohio, where we opened a controlled environment facility to supplement our greenhouses,” Hagedorn said.

“R&D’s work led to the launch of the market’s most advanced and efficient LED ever, the Gavita 2400e. We have continued to innovate with the WEGA LED lighting portfolio for indoor growers of vegetables, fruits and flowers. WEGA is expected to surpass last year’s unit sales in Europe and North America and is now one-sixth of Hawthorne’s business.”

The trend toward indoor agriculture is a key sales driver for Hawthorne, with an estimated market size of up to $40 billion annually in the U.S. and a projected annual growth rate of 13.5% through 2030, he noted.

“One final point on the cannabis industry: When it does recover, and it will, growers will be ready to invest in CapEx,” Hagedorn said. “We will be there to support the turnaround. Consolidation is happening in the industry, and we see opportunities for high-value no-cash partnerships to further strengthen Hawthorne’s ability to provide value-added and innovative solutions to growers.”

Chris Hagedorn, division president of Hawthorne, shared in the optimistic outlook.

“It’s something we remain really enthusiastic about. The last year had discouraging moments, of course, and anyone who’s been involved in the cannabis industry, I think, knows that, has experienced it,” Chris Hagedorn said. “But the commitment on our side – certainly on my side – remains pretty firm, and I think the upside that we have seen, it’s pushed out a little bit, but the end thesis is still in place.”