Scotts Miracle-Gro Restructures Hydroponic Brand Hawthorne After Sales Drop

The Scotts Miracle-Gro Company (NYSE: SMG) reported financial results for its fiscal first-quarter with sales dropping as the company had warned weeks ago. The company also announced plans to restructure its hydroponic subsidiary Hawthorne after sales dropped following quarters of huge growth.

Company-wide sales in the quarter dropped 24% to $566 million from last year’s $748 million and Scotts reported a seasonal loss from continuing operations of $0.90 per share. The non-GAAP adjusted loss – which is the basis of the company’s guidance – was $0.88 per share. the net loss was $50 million versus last year’s net income of $25.2 million.

Hawthorne Restructuring

Scotts said it would take a restructuring charge of up to $5 million in the second quarter as a result of its restructuring of the hydroponic subsidiary Hawthorne. The company said it would consolidate the U.S. lighting manufacturing for Hawthorne into a single location and close another recently acquired assembly facility and move those operations to its Santa Rosa, California facility. The charge is expected to be recorded in the second quarter and will be excluded from the company’s full-year adjusted results.

“This consolidation has been under consideration for months and, given the current market conditions and our strong inventory position, we chose to make these moves now with limited impact on the business,” Cory Miller, the chief financial officer said. “As important, the consolidation of our manufacturing footprint is expected to dramatically lower the per-unit price of some of our most important LED lighting fixtures, which we believe will strengthen Hawthorne’s competitive position in the years to come.”

First-quarter sales for the Hawthorne segment decreased 38% to $190.6 million. Scotts attributed the decline, which was against the growth of 71% for the same period a year ago was driven primarily by an over-supply of cannabis grown in state-authorized markets that have led to a temporary decline in commercial cultivation activity. Supply chain disruptions also contributed to the decline. The segment reported a loss of $5.3 million in the quarter compared to an income of $40.4 million a year ago.

“While Hawthorne sales declined due to broader market conditions, we made two important acquisitions during the quarter and took several steps to strengthen the business when growth returns. We have told shareholders for years that our results in this segment could be choppy at times, but our long-term optimism about the industry, and our confidence in the Hawthorne business, is unchanged.”

Consumer Segment

The U.S. Consumer segment sales decreased 16% to $342.4 million. The company said that the decline was better than expected given the 147% revenue growth in the first quarter a year ago. The segment reported an income of $10.7 million, compared with the record result of $45.3 million a year ago. The result marked only the second time the segment has recorded a profit in the first quarter.

“The U.S. Consumer segment continues to exceed our expectations and got off to a good start, especially given the difficult comparison from the 147% growth the segment reported in the first quarter a year ago,” said CEO Jim Hagedorn. “Consumer purchases at our largest retail partners increased 3% in units for the quarter and 9% in dollars against 40% growth for each measure a year ago. The continued level of consumer and retailer support leaves us optimistic about the strength of the segment as we prepare for the upcoming lawn and garden season.”

Raising Prices

Scotts said the better-than-expected result in U.S. Consumer segment, coupled with additional pricing actions that will take effect in the third quarter, is allowing it to increase full-year sales guidance in the segment to a range of plus 2 percent to minus 2 percent. This compares to a previous range of flat to minus 4 percent. The improved guidance does not require the company to adjust its outlook for the balance of the lawn and garden season but allows it to maintain guidance for adjusted earnings per share despite its recently revised reduction in the full-year sales outlook for Hawthorne.

Debra Borchardt

Debra Borchardt is the Co-Founder, and Executive Editor of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Master's degree in Business Journalism from New York University.

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