Lawn and garden care products company Scotts Miracle-Gro's (SMG -0.09%) market value fell 67% last year. However, over the past three months, its shares have climbed back up by around 20%. Bargain hunters may see the stock being worth the risk now, but Scotts' finances are more complicated than that.
Is it time to buy the stock?
A bird's eye view of the performance
Scotts operates in three segments: Hawthorne, Consumer, and Other. Of the three, Hawthorne took the biggest hit last year.
The segment is Scotts' connection to the cannabis business. Hawthorne makes and sells lighting, growing media, nutrients, and other products used by cannabis companies (and others) for hydroponic gardening. Hawthorne's sales volume in fiscal year (FY) 2022, which ended on Sep. 30, was $716.2 million, down 49.7% compared to FY 2021 and down 29.9% compared to fiscal 2020. The company attributed the drop to a glut of cannabis, which led cannabis companies to decrease cultivation efforts.
The downturn, in addition to higher transportation and warehousing costs, has led the Hawthorne segment to reduce expenses, partially by narrowing the grow light brands that it sells. It said that, as of Dec. 31, it was ending its Luxx Lighting brand, focusing instead on AgroLux Wega LED lights and on the company's Gavita brand. It was only a year ago that the company spent $213.2 million to purchase Luxx Lighting.
The company's overall revenue for fiscal 2022 was a little over $3.9 billion, down 20.3% compared to the prior year, but only down 5% compared to fiscal 2020. It registered a net loss of $437.5 million, compared to a net income of $513.4 million in FY 2021. That represents an earnings per share (EPS) loss of $7.88 in earnings per share, compared to EPS of $9.20 in 2021.
Data by YCharts.
The company got a boost with so many people working from home during the beginning of the COVID-19 pandemic, because they had more time for other pursuits, such as gardening. Now that more people have returned to work in person, Scotts' general consumer sales have dropped back to pre-pandemic levels.
The biggest concern is that Scotts' losses, at least as of the fourth quarter, are still increasing. In the quarter, the company posted a net income loss of $220.1 million or an EPS loss of $3.97, after losing $48.7 million and an EPS loss of $0.87 in the same period a year ago. The fourth-quarter losses were also greater than the company's 2022 third-quarter drop of $217.5 million, or $3.91 in EPS.
Scotts' plan to get back to profitability is Project Springboard. The company said the first part of the project saved $100 million in 2022. The next part of the project is expected to save an additional $85 million through layoffs and trimming selling, general, and administrative expenses.
Debt remains a concern
Scotts' debt-to-equity ratio ballooned to 28 in the third quarter, which is concerning. The company had nearly $3 billion in debt as of Sept. 30. That level of debt cuts down on Scotts' flexibility to fund operations because much of its available cash flow will be needed to pay down that debt. It also makes the company more vulnerable to a significant economic downturn and puts the dividend at risk.
The dividend is high, but the payout ratio remains a concern
The company raised its quarterly dividend last year for the 11th consecutive year. In some years, Scotts has added a special dividend, including a $5 per share special dividend in 2020. The company last raised its quarterly dividend by 6% to $0.66 per share, effective the fourth quarter of 2021. Thanks to the stock's decline, the yield on the dividend is now roughly 5.43%. The cash dividend payout ratio is 68.47%. While not dangerously high, the company will likely keep future dividend increases small.
Better to wait a bit
The company is due to report fiscal 2023 first-quarter numbers on Jan. 31. The first quarter has traditionally been Scotts' worst quarter from a revenue standpoint because people don't buy a lot of gardening equipment in the late fall and early winter. While the stock is in the doldrums now, there's a good chance it could fall further once its first-quarter report comes out.
There's plenty of risk because the company's cost-saving efforts don't seem to be making much of a dent. However, if you're not risk-averse, the dividend is generous. But it makes sense to wait until the first-quarter report comes out when the stock might fall further and be a better bargain.
