What happened
Shares of Scotts Miracle-Gro (SMG 1.15%) were slumping last month as a pair of guidance cuts showed that the lawn care company is struggling in the current market environment.
According to data from S&P Global Market Intelligence, shares of Scotts Miracle-Gro finished the month down 25%. As you can see from the chart below, the stock fell early in the month on the earnings report, and then slid through the second half of the month on broader negativity around rising interest rates.
So what
Scotts Miracle-Gro was a big winner during the pandemic as the company benefited from Americans spending more time at home and investing in their homes, and, as a result, sales have fallen during the economic reopening.
That pattern continued in the fiscal third quarter with the agriculture stock falling 6% on Aug. 3. Sales declined 26% to $1.19 billion, missing estimates at $1.23 billion. Revenue was down 14% in its core U.S. consumer segment, while sales at Hawthorne, its segment focused on cannabis growers, plunged 63%.
Management noted that consumer demand remained at near-record levels in May and June, but because so many of its retail partners had overstocked on inventory, many of them were focused on reducing inventory levels.
As sales fell, gross margin also plunged from 30.7% to 19.9%, due primarily to unfavorable fixed cost leverage, and on the bottom line, adjusted earnings per share dropped from $3.98 to $1.98, though that beat estimates at $1.89. Separately, the company had a $724.2 million impairment and restructuring charge, related in part to the cost cuts and layoffs at Hawthorne.
Management also announced a turnaround initiative, Project Springboard, with a goal of expanding margins, improving cash flow, and strengthening the balance sheet.
Finally, it cut full-year revenue guidance, saying it now expects sales to decline 8% to 9%, due to slower replenishment from its retail partners, and it called for adjusted EPS of $4 to $4.20, well below the consensus at $4.93.
On the last day of the month, the company announced that CFO Cory Miller had left the company and had been replaced by board member David Evans on an interim basis while it searches for a full-time replacement. In the update, the company also cut its full-year free cash flow guidance, saying it now expects a loss of $275 million to $325 million, compared with an earlier forecast of a $150 million loss, reflecting a reduction in accounts payable, among other things.
Now what
Scotts shares have continued to fall in September, down another 8.5% through Sept. 8 as the CFO departure and free cash flow cut pushed the stock down last week.
Scotts remains the leader in lawn and garden care, and the company should be able to bounce back from the current tumult. Still, with retailers focused on slashing inventory, and consumers more interested in spending on things like travel and restaurants, it may take several quarters for the business to start moving in the right direction.
