Scotts Miracle-Gro Co., Maryville, Ohio, reported net income for the second quarter ending April 2 of $276.5 million ($4.94 per diluted share) on sales of $1.68 billion, down from the year-ago $310.2 million ($5.43 per share) and $1.83 billion, respectively. Adjusted EBITDA was $429.6 million, down from $478.9 million.
The company reported record second-quarter U.S. Consumer sales, though this was offset by an expected decline in Hawthorne Group sales, leading to company-wide sales that were 8% lower than the same period a year ago. As a result, the company has adjusted its total sales outlook to the lower end of guidance.
It said its previous guidance of $8 or more of non-GAAP adjusted earnings per share is likely unattainable. Scotts plans to further update the investment community the week of June 6.
“Spring weather, frankly, has been lousy in most markets and the season broke about two to three weeks later than normal,” said Jim Hagedorn, Chairman and CEO. “Still, we now believe the low end of our sales guidance range for U.S. Consumer of plus-or-minus 2% from last year’s performance is our most likely outcome.”
“At Hawthorne, while organic sales in the second quarter were in line with what we expected, recent trends also lead us to conclude the low end of our sales guidance range is a best-case outcome for this business,” he added. “We are taking steps to proactively reduce costs within the Hawthorne operation, with a focus on returning the business to at least its previous level of profitability as quickly as possible.” This includes shrinking the size of its supply chain network and reducing staffing levels.
Company-wide, Scotts plans to pull back on some discretionary spending and hiring decisions for the rest of the year.
Hagedorn added that over the last two years, the continued pressure from commodity prices has led to a significant margin decline despite multiple pricing actions. The company expects to boost prices again in the fourth quarter, which will be the fourth increase within a year. The company said a surge in commodity prices is expected to pressure earnings per share (EPS) in the second half.
On May 3, the company told analysts that it has about 80% of its raw materials costs locked in for the year, 90% on urea. It said diesel and pallets are the largest area of exposure. “Even if commodity prices start to ease, it will take a few years to claw back the margin we’ve lost,” added Hagedorn.
“If we sit back and wait for the commodity market to give our margins back, we could be waiting a while. So we are not going to wait. We’re going to swiftly move to make changes and better positon us for success.”
The company is currently forecasting commodities to represent 32% of cost of goods sold (COGS) this year, up from 19% in 2020.
Another problem for the company is swollen inventories, estimated at $600 million, with half of that in U.S. Consumer and half in Hawthorne. Two-thirds of that is units, and one-third cost. Hawthorne hopes to move some of that to Australia via its recent Cyco acquisition (see related story).
Hagedorn, citing Scotts own economists, is preparing for a recession, but said while not recession-proof the company is recession-resistant, noting that it has a lot of experience coming through recessions.
Six-month net income was $226.4 million ($4.02 per share) on sales of $2.24 billion, down from the year-ago $335.3 million ($5.87 per share) and $2.58 billion, respectively. Adjusted EBITDA was $421.1 million, down from $554.3 million.
| 2Q-22 | 2Q-21 | 1H-22 | 1H-21 | |
| Net Sales ($/millions) | ||||
| US Consumer | 1,379.8 | 1,374 | 1,722.2 | 1,782.2 |
| Hawthorne | 202.6 | 363.8 | 393.2 | 673.2 |
| Profit ($/millions) | ||||
| US Consumer | 428.9 | 435.9 | 439.6 | 481.2 |
| Hawthorne | 3.3 | 41.4 | (2.0) | 81.8 |