The Scotts Miracle-Gro Co. reported a decline in sales and net income for the second quarter ending March 29, 2008, citing wet weather and recent recall woes. “Cold and wet weather in March caused the season to break later than normal in most parts of our business, which adversely affected our sales,” said Jim Hagedorn, Scotts CEO and chairman. “In addition, recent product recalls resulted in a pre-tax charge of $31 million during the quarter. While that charge was excluded from adjusted earnings, the recalls had a significant impact on our reported net income.”
Second-quarter net income was off 30 percent, to $58.0 million ($.88 per diluted share) versus the year-ago $83.4 million ($1.23 per share). Sales were off 4 percent, to $958.0 million from the year-ago $993.3 million. The company’s largest segment, Global Consumer, reported a 6 percent decline to $802 million in sales, due primarily to a 9 percent decline in North America.
Company-wide six-month net income was off 95 percent, to $1.2 million ($.02 per share) on level sales of $1.27 billion, versus the year-ago $24.0 million ($.35 per share) and $1.26 billion, respectively.
“Although consumer purchases increased 24 percent in April – traditionally our most important month of the year – the combination of the slow start to the season and a generally weak consumer environment, combined with lost future sales related to the recalls and continued pressure from commodities, now makes it unlikely that we will achieve our initial full-year outlook,” added Hagedorn.
The company revised its full-year outlook and now expects adjusted earnings to range from $2.00-$2.20 per share. Major reasons include expectations that consumer purchases will be lower than expected on a full-year basis due to a slow start and broader macroeconomic issues; continued pressure from commodity costs; and lost sales and unplanned administrative expenses due to the recalls.
Hagedorn stressed to analysts that despite the recalls, the fundamentals of its business are solid. “I do think that if there’s a year where like everything can go wrong for us, we seem to be in it.”
As for the recall, he said “…you have my commitment speaking for all 6,000 of our associates that we will resolve these issues and get them behind us.” He said the employee who was fired over the incident (GM May 5, p. 12) was guilty of criminal acts that would have been very hard to detect. It was done so via the regulatory maintenance process, and not by a whistle blower.
Regionally, Scotts said its best performance has come in the Northeast and Mid-Atlantic states. The worst performance has been in the Southeast, which is still feeling the effects of the drought. Things were worse in Florida, where general overall economic factors come into play.
Hagedorn also noted the impact of high commodity costs. “Today urea is selling at $600 a ton; a week ago that number was $490 a ton; a month ago it was $370 a ton roughly in line with a year ago.” He said that the majority of its commodity costs were locked in in February.
“So while pricing will clearly be necessary, it’s hard to imagine that we can pass along the entire increase,” said Hagedorn. As for higher urea prices, Hagedorn said to keep the company margin neutral it would have to raise its prices to consumers about 20 percent. Hagedorn said on lawn fertilizers he thinks customers have about had it and are incapable of absorbing a 20 plus percent increase.
Hagedorn said that nobody knows where prices are headed, and that his retail customers are at least accepting of them.
Dave Evans, executive vice president and CFO, told analysts that due to volume changes Scotts will likely produce less fertilizer this summer than in years past. Also, due to urea price volatility it has not bought ahead as far for 2009.
Hagedorn said both the Scotts LawnService and Smith & Hawken units were being stressed by the economy. “The average LawnService customers spend several hundred dollars a year with us on what is clearly a discretionary purchase. So we’re seeing more cancellations related to economic conditions than we have in previous years and clearly more cancels related to the economy than any other reason.” He noted that the company had warned of modest growth targets in the LawnService area back in December.
He said it is “hard poker time for parts of the business that are not pulling their weight.” In the meantime, he said the company has plenty of things in the research and development pipeline in the coming years.
Scotts is also looking for a chief operating officer. Hagedorn told analysts that in light of recent woes a major qualification for the job would be so he would have a shoulder to cry on.