What happened
Scotts Miracle-Gro (SMG 1.72%) investors lost ground to a falling market on Thursday. Shares were down 6% as of 11 a.m. ET, compared to a 2.4% slump in the S&P 500. The wider market's slide was a factor in Scotts' decline, but investors also have some specific worries about its lawn care and indoor growing businesses.
So what
The main reason for the stock's slump is that recession fears are intensifying. Wall Street sent shares lower across the market for that same reason on Thursday morning. All of the major U.S. indexes were down by 2% or more as traders contemplated the impacts of rising interest rates and a broader pullback in spending by consumers.
Scotts Miracle-Gro was already feeling the pressure from these trends through late September. In early August, management launched a company reorganization initiative after sales declined and profitability shrank.
Executives said they were "unsatisfied" with that performance, which was partly driven by retailers' decisions to scale back on their inventory holdings. But the pace of purchasing may decelerate even more sharply as the economy slows further.
Now what
Scotts Miracle-Gro shares are down roughly 70% so far this year, a decline that seems to reflect intense pessimism about how long it will take for the company to return to steady sales growth following a 26% revenue slump in its fiscal third quarter, which ended July 2. The short-term prospects for cash returns, acquisitions, or big growth investments are also weak because management currently is focused on paying down debt.
That's the right priority, especially considering the direction that interest rates are moving. Yet if it has to delay or slow investments into the business in favor of shoring up its balance sheet, that might put Scotts at a disadvantage.
The stock might bounce back if management can report encouraging progress on the restructuring plan. But Wall Street will need to see a return to sales gains before calling this a growth stock again.
