While it's not a pure-play marijuana business, gardening supply company Scotts Miracle-Gro (SMG 1.72%) is considered by many to be a cannabis stock. The reason why is its secret sauce and the motor of the company's growth -- hydroponics purveyor Hawthorne, which was established in late 2014.
To measure just how much difference Hawthorne has made to Scotts' business, let's rewind to a few years before the unit's founding.
A bountiful harvest
Using a convenient and even number, we'll turn the clock back roughly 10 years to Sept. 1, 2011. Far-seeing investors plowing $3,000 into Scotts stock that day would have experienced a total return (i.e., stock price appreciation plus Scotts' regular quarterly dividends) of more than sixfold, reaching a rich $18,424.
Image source: Getty Images.
In 2011, well before the kudzu-like spread of legalized marijuana throughout North America, Scotts hewed closely to its traditional activity of selling gardening supplies.
That was hardly the stuff of high-return investor fantasies. The company's business was heavily dependent on a trio of retailers selling its wares, specifically Walmart (WMT 1.02%), Home Depot (HD 0.22%) and Lowe's (LOW 0.43%); taken together, those outlets accounted for around two-thirds of yearly revenue for Scotts.
As for financial performance, revenue zig-zagged in a relatively narrow band between $2.69 billion and $2.87 billion from 2007 to 2012. Profitability was even more erratic, with the company notching a bottom-line loss in 2008, when the financial crisis hit. Its best pre-Hawthorne year for net profitability was 2013, when it earned just a bit over $161 million.
Hawthorne became a sales and profit engine quite quickly, driven by acquisitions as well as by organic expansion as the legitimate weed market opened up. Looking at the unit's results from when Scotts began to break them out, we see sharp gains in both line items when matched against the company's core gardening supplies business ("U.S. consumer"). Here's annual net sales, in millions of dollars:
| Year | U.S. consumer | Hawthorne | Other | Total | Hawthorne % of total |
|---|---|---|---|---|---|
| 2016 | 2,204.4 | 121.2 | 180.6 | 2,506.2 | 4.8 |
| 2017 | 2,160.5 | 287.2 | 194.4 | 2,642.1 | 10.9 |
| 2018 | 2,109.6 | 344.9 | 208.9 | 2,663.4 | 12.9 |
| 2019 | 2,281.1 | 671.2 | 203.7 | 3,156.0 | 21.3 |
| 2020 | 2,823.1 | 1,083.5 | 225.0 | 4,131.6 | 26.2 |
Source: Scotts Miracle-Gro.
From 2016 to 2020, Hawthone's top line expanded -- admittedly from a very low base -- by nearly 800%, against the U.S. consumer segment's 28%. But even just taking the 2020 year-over-year growth figure, Hawthorne is still triumphant at 61% versus 24%.
We can see similar dynamics at work with the annual pre-tax income contribution (again, in millions of dollars) of the three reporting segments:
| Year | U.S. consumer | Hawthorne | Other | Total | Hawthorne % of total |
|---|---|---|---|---|---|
| 2016 | 493.7 | 11.8 | 10.4 | 515.9 | 2.3 |
| 2017 | 521.5 | 35.5 | 13.4 | 570.4 | 6.2 |
| 2018 | 496.6 | (6.1) | 11.2 | 501.7 | n/a |
| 2019 | 527.8 | 53.5 | 10.3 | 591.6 | 9.0 |
| 2020 | 686.1 | 120.1 | 11.7 | 817.9 | 14.7 |
Source: Scotts Miracle-Gro.
Well fed
Scotts clearly intends to keep stuffing Hawthorne with nourishing plant food.
In mid-August, management announced yet more acquisitions to bolster this hot unit. It has acquired peer Rhizoflora's nutrients portfolio and purchased a $3.2 million warrant for equity in Dewey Scientific. The latter is a small company that, in its words, "produces proprietary cannabis genetics with evolutionary leaps in standardization, quality, and resiliency for cultivators."
So it's no wonder that in its latest guidance, Scotts said it expected Hawthorne's full-year 2021 sales to rise by 40% to 45%, against the U.S. consumer segment's 7% to 9%. That should mean much higher profitability; on a non-GAAP (adjusted) basis, the company believes per-share net income will be $9.00 to $9.30 for the year. That low end is 24% over the 2020 amount, and more than double the 2019 result.
As a major supplier to the marijuana industry, Hawthorne and its parent are in an excellent position just now. The legalization train will keep on moving, perhaps even to the federal level. That, combined with its star business unit's already-strong performance, should keep this company's fundamentals growing like a ... well, you know.
