Keeping the grass green takes a lot of green: seed, fertilizer, weed killer. They all add up. It's not surprising then that Scotts Miracle-Gro (NYSE:SMG) reported an 18% increase in revenues for the third quarter as consumers began the annual ritual of primping the sward of grass that surrounds their home.
On the surface, things look pretty good. Sales in North America shot up 12% year over year, to $656 million, even as the season took a bit longer than expected to get, um, growing because of cooler temperatures. Scotts LawnService reported $59 million in sales, a 20% increase over last quarter. Overall, analysts were expecting revenues of $869 million, and Scotts handily topped them, raking in nearly $911 million for the quarter. Profits, excluding extraordinary charges, were reported as $3.41 per share, well above the $3.19 per share analysts had been anticipating.
Yet dig down a bit, and I think you'll find some grubs eating the roots. Much of the revenues Scotts recorded were the result of its acquisition of Smith & Hawken, a high-end garden supplies retailer Scotts picked up last October. Certainly you want acquisitions to add to your bottom line; after all, that's why you acquire them. Yet with a goodwill-to-assets ratio of 36%, it suggests that the company is growing through acquisitions and the rest of Scotts' businesses haven't been performing nearly as well.
Indeed, the commissions it receives from Roundup herbicides, which it markets for Monsanto (NYSE:MON), were up only 3%, excluding a charge of $46 million related to some deferred payments owed to the specialty chemical company. And international sales were up only 4% over last year, yet if you exclude the effects of currency exchange rates, sales were actually flat. Also according to the company, margins also declined by 80 basis points because of increased costs and an "unfavorable product mix."
Perhaps the biggest area of concern should be in so-called extraordinary or "one-time" charges that reduced Scotts' profits from $117 million down to just $88 million, a 12% decrease from the same period last year. When looking at such one-time charges, investors need to consider whether they are truly extraordinary or have they become so routine that they actually form a part of the company's ongoing business. When I look at Scotts, I see they are more of the latter rather than the former.
One of the biggest write-offs Scotts performs is its restructuring charges. Look at its financial statements for the past couple of years and you can see that the lawn and garden supplier regularly includes such expenses. I would contend that it's become a regular part of Scotts' business and should not be excluded when trying to determine a fair value. So much so that it has only just recently announced yet another "strategic improvement plan" and has hired restructuring consultant Booz Allen Hamilton to come up with new cost-savings plans.
That's not to say that Scotts' performance this quarter wasn't good; the growth in sales was, for the most part, a welcome turn of events and the company will start paying a $0.25 quarterly dividend to return value to shareholders. Just that when you look closely at a company's release, don't accept at face value what a company is saying. It's often trying to put the brightest shade of green of what may very well be a garden patch of weeds.
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Fool contributor Rich Duprey does not own any of the companies mentioned in the article. The Motley Fool has a disclosure policy.
