Scotts Miracle-Grow Co. shares tumbled as much as 12% on June 8, according to Bloomberg, after the maker of lawn and garden products said retailer “replenishment orders” were more than $300 million below its plans for May in the U.S. Consumer segment alone.
While Scotts said consumer purchases of its core lawn and garden brands surged in May, with unit volume now trending towards the company’s original assumptions for the season, a variety of factors prompted the company to lower its outlook for both sales and adjusted earnings for fiscal 2022.
“The recent improvement in consumer engagement has POS units trending toward our initial expectations, and we expect further gains as the year continues,” said Jim Hagedorn, Scotts Chairman and CEO. “POS dollars, however, will likely fall short of our initial assumption of flat from 2021 levels, due primarily to above average declines in lawn fertilizer and grass seed, which command higher prices and margins, but also tend to be more susceptible to poor spring weather. While there remains enough time in the year to see continued improvement in our controls and gardening categories, that is not likely to be the case with most of the products in our lawn care portfolio.
“This surprising trend has put significantly greater pressure on our fixed cost structure that, when coupled with the commodity cost increases we have experienced since the start of the war in Ukraine, will cause us to fall well short of the revised financial targets we established in March,” said Hagedorn.
Adjusted earnings per share are now expected in a range of $4.50-$5.00, compared to the $8.00 still thought to be achievable in March (GM March 11, p. 27). U.S. Consumer sales are expected to decline 4-6%.
Hawthorne sales are now expected to decline 40-45% for the year ending Sept. 30, 2022, compared to the March guidance of a 15-25% decline. Entering May, Hawthorne sales had begun to show signs of strengthening, but momentum in the business slowed again during the month as expected improvement in outdoor cultivation has been slow to materialize.
Scotts also said it is engaged in highly productive discussions with its lenders to obtain a temporary increase in the leverage ratio allowed. “Given the external factors currently impacting the business, we are seeking to adjust our debt covenants to allow for up to two additional turns of leverage in the near-term to maintain the appropriate level of flexibility in navigating the current market conditions,” added Hagedorn. “Obviously, we are focused on implementing aggressive plans to improve cash flow, reduce debt, and return leverage to our target levels as quickly as possible.”
Over the past month, Scotts said it has moved aggressively to reduce full-year SG&A through a series of organizational changes that created operational and management-level efficiencies. As a result, the company expects a year-over-year decline of 12-13% in SG&A for fiscal 2022. The company expects to incur restructuring charges in both the third and fourth fiscal quarters as a result.