Shares of ScottsMiracle-Gro (SMG 0.27%) slumped by more than 7.5% as of midday today. The decline follows from a weak set of third-quarter results. Sales in the U.S. consumer segment were lower than expected (down 14%), and management cut its full-year guidance.
It gets worse. Its cannabis-related subsidiary, The Hawthorne Gardening Company, continues to suffer from overcapacity in the industry, and its sales declined a whopping 63%.
In fact, the overall company's sales were so weak that it left the company with "higher leverage than we want to maintain," according to CEO Jim Hagedorn on the earnings release. As a reminder, the financial world typical gauges debt levels on the basis of earnings, so as its earnings outlook gets worse, so will Scotts come under pressure to reduce debt.
Management now expects full-year adjusted earnings per share to be $4 to $4.20 compared to a prior estimate of $4.50 to $5. As a result of the declining outlook and deteriorating conditions, CFO Cory Miller said, "We are focused on implementing aggressive plans to improve cash flow, reduce debt, and return leverage to our target levels as quickly as possible."
Given that the first and second quarters tend to be the most important ones for the company, the news is obviously disappointing. Furthermore, it will lead to investors worrying that the boost in growth coming from the pandemic is creating very difficult comparisons to beat.
It's going to be a long six months for ScottsMiracle-Gro as the company starts implementing its cost savings and debt reduction measures. They are likely to be the key news generators for the company until next spring.