What happened
Shares in lawn and garden products marketer Scotts Miracle-Gro (SMG 1.02%) fell by 11.7% in June, according to data provided by S&P Global Market Intelligence. That decline may seem surprising since management upgraded full-year 2021 sales and earnings guidance at the start of the month. Still, the market may have had its reasons for pessimism.
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Management expects its full-year sales to grow by 17% to 19%, and it upgraded sales guidance in both of its business segments. U.S. consumer sales are now expected to grow by 7% to 9%, up from the previous forecast range of 4% to 6%. This is a sign that consumers are maintaining their interest in gardening even as social-distancing measures are lifted. Moreover, Scotts Miracle-Gro's Hawthorne segment, which sells nutrients, lighting, and hydroponics equipment often used in cannabis production, is now expected to grow sales this year by 40% to 45%, compared to the previous forecast range of 30% to 40%.
That was all good news. However, the market apparently decided that it had already been baked into the share price, and investors sold the stock lower in June.
So what
There are a couple of potential storm clouds on the horizon for Scotts Miracle-Gro. First, offering guidance is one thing. Meeting it is another. One issue that may hinder the company on that front comes from pricing increases it intends to implement in August to offset increases in the costs of commodities. That's fair enough, but consumers may react negatively to those price increases, which could raise questions about how it will fare in its fiscal 2022. (Scotts' fiscal 2021 ends on Sept. 30.)
The second concern is that German giant Bayer is "immediately" engaging with partners to discuss the future of glyphosate-based products in the U.S. residential market." This includes Scotts, which is the marketing agent for Bayer's glyphosate-containing Roundup herbicide.
Some research has found evidence to indicate that glyphosate-based herbicides may be hazardous to human health, including a possible link to cancer. If Bayer ends sales of Roundup to residential users, that's likely to have a negative impact on Scotts' sales.
Now what
All told, the underlying growth conditions in the lawn and garden market and in the cannabis-related market remain favorable for Scotts. Still, cautious investors may want to wait to decide on a share purchase until we can see how consumers are taking the company's pending price increases, and until Bayer makes it clear what its plans are for Roundup.
