Debra Borchardt
The Scotts Miracle-Gro Company (NYSE: SMG) announced record second-quarter sales in its U.S. Consumer segment driven by continued support from its major retail partners. However, Scotts also noted that for the fiscal second-quarter sales dropped 8% to $1.68 billion, from $1.83 billion a year earlier. U.S. Consumer segment sales increased slightly to $1.38 billion. Sales for the Hawthorne segment decreased 44% to $202.6 million. Scotts had previously warned that sales weren’t looking very good for the segment.
“Spring weather, frankly, has been lousy in most markets and the season broke about two to three weeks later than normal,” said Jim Hagedorn, chairman, and chief executive officer. “Fortunately, consumer purchases have gained considerable ground in recent weeks. For example, key early-breaking markets in the south are down mid-single digits entering May after being down double digits two weeks earlier. The combination of improved weather, strong retailer promotions through Memorial Day, and favorable comparisons for the balance of the season should be tailwinds for the rest of the year. Still, we now believe the low end of our sales guidance range for U.S. Consumer of plus or minus 2% from last year’s performance is our most likely outcome.
For the quarter ended April 2, 2022, GAAP earnings from continuing operations were $4.94 per diluted share compared with $5.44 per diluted share in the prior year. Non-GAAP adjusted earnings, which exclude impairment, restructuring and other non-recurring items, and are the basis of the Company’s financial guidance, were $5.03 per diluted share compared with $5.64 a year ago. This beat the Yahoo Finance average analyst estimate for earnings of $4.75.
Hawthorne Drys Up
Sales for the Hawthorne segment decreased 42% to $393.2 million year-to-date. In addition to delivering the sobering news about the segment’s plunge in sales, Scotts also announced that Hawthorne was buying Australia-based Cyco, for $34 million plus contingent consideration of up to $10 million. The transaction marks the fifth Hawthorne acquisition in the past year.
Cyco is a leading brand of premium nutrients, additives, and growing media products that are used by growers of all sizes in the hydroponic market. Hawthorne has been the exclusive U.S. distributor of Cyco products, which also are sold primarily in Canada and Australia through select retailers and distributors.
Although the acquisition is small, with roughly $15 million in annualized sales, Cyco is a strategic move to expand Hawthorne’s Signature line of high-quality and high-performing nutrients and growing media, including General Hydroponics, Botanicare, Terpinator and Mother Earth. Hawthorne intends to expand the availability of the Cyco brand in North America and, through an arrangement with the current Australian distributor, will make other Hawthorne products available to hydroponic growers in that market.
“At Hawthorne, while organic sales in the second quarter were in line with what we expected, recent trends also lead us to conclude the low end of our sales guidance range is a best-case outcome for this business. We are taking steps to proactively reduce costs within the Hawthorne operation with a focus on returning the business to at least its previous level of profitability as quickly as possible.”
Late Spring Start
On a fiscal year-to-date basis entering May, consumer purchases of the company’s lawn and garden products at its largest four retailers in the U.S. are down 12% from the same period a year ago. The company said the category gained significant momentum in recent weeks after a late break to spring and planned delays of promotional activity until after the Easter holiday.
Forecast Was Too Rosy
Scotts said its previous guidance of $8 or more of non-GAAP adjusted earnings per share is likely unattainable. Management said it currently expects to provide an update to the investment community the week of June 6, 2022.
“A combination of external factors that evolved over the past two months now make it unlikely for us to meet our previous earnings target,” said Cory Miller, executive vice president and chief financial officer. “However, with one-quarter of our annual POS expected in the next six weeks, any updated earnings target we developed right now would be based on a set of hypothetical assumptions. So, we are best served to be patient and provide a more informed update a few weeks from now.”
