Scotts Miracle-Gro Archives - Green Market Report

StaffJune 22, 2022
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5min5860

The Daily Hit is a recap of the top cannabis business stories for June 22, 2022.

ON THE SITE

Supreme Court Just Says No

Two Supreme Courts rejected employee requests to have employers reimburse for medical cannabis costs. On Tuesday, the U.S. Supreme Court said it would not hear an appeal that pits the Controlled Substances Act (CSA) against a state workers’ compensation law requiring employers to reimburse workers for medical cannabis. Like many issues within the cannabis industry, there are competing and conflicting government positions. In this situation, the CSA says cannabis is federally illegal, while state law is saying employers need to reimburse employees for medical costs. Read more here.

Analysts Downgrade Scotts, Cuts Targets on Hydrofarm, GroGen

When Scotts Miracle-Gro (NYSE: SMG) first began telling shareholders that its hydroponic subsidiary Hawthorne was slowing in sales, it seemed like a temporary situation. That might not be the case. A new in-depth report by Wells Fargo analyst Chris Carey based on survey data collected by Cannabiz Media is depressing, to say the least. Reality bites. Carey’s response to the study has promoted him to downgrade shares of Scotts to Equal Weight and roping his price target to $85 (from $115). Read more here.

Greenlane Sells Off Assets to Generate Cash

Greenlane Holdings, Inc.  (NASDAQ: GNLN) has said it has a plan to generate more than $30 million in liquidity. Part of the company’s strategy to achieve this goal includes getting a loan to cover its working capital needs, selling the company’s headquarters building in Boca Raton Florida, and getting rid of non-sore and lower-margin inventory. Greenlane has been through a series of struggles since the company’s salad days of selling Juul vapes. Read more here.

IN OTHER NEWS

High Tide Inc.

High Tide Inc. (Nasdaq: HITI) (TSXV: HITI) (FSE: 2LYA), a retail-focused cannabis company with bricks-and-mortar as well as global e-commerce assets, announced that it has closed a short-term debt financing from an arm’s length credit provider for CAD$5 million. The company has chosen to proceed with a small debt facility at this time as the company’s proposed non-dilutive credit facilities with ConnectFirst Credit Union for CAD$30 million (as previously announced on April 18, 2022) has been delayed until July 2022. Read more here.

Tilray Brands, Inc.

Tilray Brands, Inc. (NASDAQ: TLRY; TSX: TLRY), a global cannabis-lifestyle and consumer packaged goods company, welcomed the Luxembourg Ministry of Health Delegation to the Company’s European campus and facility located in Cantanhede, Portugal. Tilray’s EU-GMP-certified medical cannabis cultivation and manufacturing facility in Portugal provides patients in Luxembourg and across Europe, where permitted by law, with safe and reliable access to high-quality medical cannabis. Read more here.

Ultimate Sports, Inc.

Ultimate Sports, Inc. (OTC: USPS), a men’s health services provider, announces negotiations to acquire Sannabis S.A.S., a Colombian cannabis company. Sannabis, and affiliated companies, hold all four cannabis licenses: Seed Use, THC-Cultivation, Non-THC (Hemp)-Cultivation, and Fabrication/Export. Read more here.

Kiva Sales and Service, Jones Soda Co.

Jones Soda Co. (OTCQB: JSDA) (CSE: JSDA), a craft soda known for its unconventional flavors and user photo-submitted labels, today announced an exclusive partnership with Kiva Sales and Service, a cannabis industry sales and distribution platform, to launch its new line of cannabis-infused beverages, Mary Jones, into the California market. Read more here.

The Valens Company Inc., Coldhaus Distribution

The Valens Company Inc. (TSX: VLNS) (Nasdaq: VLNS)), a manufacturer of branded cannabis products, today announced that it has secured an exclusive cannabis partnership with Coldhaus Distribution to provide integrated logistics solutions for Valens-branded cannabis products across Ontario, Alberta, and British Columbia. Read more here.


Debra BorchardtJune 22, 2022

6min8921

When Scotts Miracle-Gro (NYSE: SMG) first began telling shareholders that its hydroponic subsidiary Hawthorne was slowing in sales, it seemed like a temporary situation. That might not be the case. A new in-depth report by Wells Fargo analyst Chris Carey based on survey data collected by Cannabiz Media is depressing, to say the least. Reality bites.

Carey’s response to the study has promoted him to downgrade shares of Scotts to Equal Weight and roping his price target to $85 (from $115). The stock was lately selling at $75. He also cut his price targets on Hydrofarm (NASDAQ: HYFM) to $4 from $7 and GrowGeneration (NASDAQ: GRWG) to $3.50 from $4.00.

The report reached out to thousands of growers to ultimately develop a list of ~500 licensed cannabis cultivators responding across 6 states, via online surveys and hours of phone conversations. The study found that “Overall, 62% of cultivators feel “bad” or “terrible” about their current markets vs only 8% that feel “good” or “great”. When asked “what is going well for your business today?” ~20% responded with the equivalent of “nothing.” California was by far the state with the lowest sentiment with 70% of cultivators feeling “terrible” about the market, 16% feeling “bad” and only 5% ‘good’ or ‘great’.” The critical point here is that California has the worst outlook and it accounts for almost a third of the overall cannabis market. 

While other hydroponic companies have stated in earnings releases that they believed the landscape would improve by the end of the year, this report suggests otherwise. “Most growers we surveyed are not expecting things to improve in the near term, with only 14% expecting improvement in 6 months or less. Interestingly, 46% of respondents don’t know when things might improve underscoring the lack of visibility that has plagued the industry. While some capacity exiting is one of the few bright spots for the industry, we would likely need to see a higher level of exits or reduction in production to become more constructive.” When almost half of the growers say they have no idea when their market will improve, it’s not only a bad sign for farmers but the entire industry.

Stress Points

The survey uncovered the issues causing the stress at the beginning of the cannabis food chain. Declining wholesale prices led the way, followed by burdensome compliance requirements, taxes, illicit market competition and lack of distribution. Small growers can’t compete with the cost efficiencies of corporate cannabis and as the prices fall for their products, they are losing money. One grower told the group that they thought they’d sell cannabis anywhere between $1800 and $2200 a pound, but instead it’s going for $400 a pound. A California cultivator said he was selling cannabis at $200 a pound and paying $150 a pound in taxes. 

The survey on prices found that 60% said they were selling cannabis for under $750 a pound. 14% were selling between $751 and $1250, 18% were selling a pound between $1251 and $1500, and the rest (9%) were above $1500. They say they aren’t hitting the cost of production and many are considering selling their licenses or just giving up. 

The respondents seemed mixed on the effects of the illicit market. Some cited it as a major problem with these players flooding the market, while others didn’t think it was as big an issue as the regulatory requirements. Compliance requirements were a major stumbling block with one growing mentioning METRC as a challenge to deal with.

Plowing Ahead

The really sad part of the report was all the comments of cultivators wanting out. With little positive outlook and no idea when things will get better, many expressed the desire to just give up.  37% said that they have thought about leaving the industry but haven’t taken any steps to exit yet. Some are continuing to keep plowing ahead. The report said, “Cultivators indicated intentions to purchase soil (61%) and nutrients (73%) next 6 months, but just 32% have plans to buy lighting.” Only 18% of respondents described plans to decrease cultivation in the next 12 months compared to 35% planning to increase. 

However, in a standard investor philosophy, a correction can ultimately be a good thing. If lots of cultivators leave the industry, that will eventually lead to less supply and higher prices. Yet, a correction like this would take a long time to trickle down, and in the meantime, there is little positive to point to.


Debra BorchardtJune 8, 2022
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The Scotts Miracle-Gro Company (NYSE: SMG) 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. However, a variety of factors are causing Scotts to lower its outlook for both sales and adjusted earnings for fiscal 2022. the stock was sliding over 13% in early trading to $88.50. The 52-week high for the stock was $204.

Adjusted earnings per share are now expected in a range of $4.50 to $5.00. U.S. Consumer sales are expected to decline by 4 to 6%. The hydroponic subsidiary Hawthorne says its sales are now expected to decline 40 to 45% for the year ending September 30, 2022. 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.

“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, chairman and chief executive officer. “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.

Consumer purchases at the company’s largest retail partners were at near-record levels in May, resulting in year-to-date POS that is approximately 6 percent lower in dollars and 9 percent lower in units than a year ago. The year-over-year decline at the end of May was half of what it had been entering the month due to strong results in all major markets in the Midwest and Northeast.

“Also, while it is encouraging that consumers have demonstrated lawn and garden activity remains an important part of their lifestyle, we did not see the replenishment orders we expected from our retailer partners since mid-May. In fact, retailer orders were more than $300 million below our plans for the month in the U.S. Consumer segment alone. 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.”

“The changes we have seen since our last public comments in early May are clearly not what we would have expected,” Hagedorn said. “The revised guidance we are providing is our best estimate of where things currently stand in a fluid and rapidly evolving market. While we are striving to deliver the best outcome for fiscal 2022, our focus is shifting toward the future. We are committed to taking decisive steps to improve our margins and cash flow in fiscal 2023 and get the business back to a level of performance that our shareholders rightfully expect.”

The company also said it is engaged in highly productive discussions with its lenders to obtain a temporary increase in the leverage ratio allowed under a revised credit facility.

“We have stated for years that our comfort zone for leverage is 3.5 times debt-to-EBITDA and current facility allows for leverage up to 4.5 times,” said Cory Miller, executive vice president, and chief financial officer. “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. 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, the company also said it has moved aggressively to reduce full-year SG&A through a series of organizational changes that created operational and management-level efficiencies.

“The decisive steps we have taken to reduce expenses will result in a year-over-year decline of 12 to 13 percent in SG&A for fiscal 2022,” Miller said. “We would expect to incur restructuring charges in both the third and fourth fiscal quarters as a result of these actions which we would remove from our adjusted earnings for the year, consistent with our long-held practices related to these non-recurring costs.”


Debra BorchardtMay 23, 2022
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Editors note: This interview has been edited.

Green Market Report Executive Editor Debra Borchardt: 

When we look at what’s happening in the hydroponics market, it’s really not just a Hawthorne issue, it’s across the board. All these companies were saying things had slowed down, but that the market was going to get better at the end of the year. We weren’t getting a whole lot of color on what was happening. Is it that certain states were slow to get going? Is it that there was just truly oversupply? There are so many reasons why this slowdown could have happened. What’s happening here?

Chris Hagedorn, Division President of Hawthorne Hydroponics (NYSE: SMG)

It’s not any one specific discrete issue. I think it’s a combination of, and just some really poor timing. So if you look back at the history of cannabis and wholesale cannabis pricing, to the extent that we have a sort of a dependable history on that data, which obviously I think you know is relatively hard to come by in this industry, certainly compared to more normal mainstream and kind of, historically tracked industries

If you look back at the wholesale data, there is kind of a cyclical nature where the wholesale price will get kind of overcooked and that’ll sort of compell a bunch of people to start growing or increase in their capacity that in turn will drive, then you’ll start to see capacity or supply begin to outstrip demand. And then you end up in a trough-like we’re in. So we’re seeing that. hat’s nothing new to the industry.  That’s happened every four or five years, as far as we can tell kind of as far back as we can track it.

If you look back over a 10-year period or so, you see it again. It happens in this kind of wave pattern, which is again, not unusual. I think what’s amplified a bit this year is again, it’s a few things. Part of it is oversupply and that’s at the national level. Also, I think we were tracking growth in Oklahoma over the past few years that was triple or quadruple-digit in our business. 

We’re seeing our business in Oklahoma grow by a thousand percent quarter over quarter. Obviously, that’s not growth that’s sustainable. I think one of the things that we didn’t count on, because we thought the disruption that this industry saw back in 2018, which was largely in our estimation driven by California’s move from prop 215 to prop 64. We sort of told ourselves, that California is by far, the biggest candidate market. Our biggest market at the time as it was over 50% of our business.

What we did not count on was the shift towards Oklahoma, not only for the legal but for illicit growers as well. That was something that we didn’t fully understand. I think it boils down to a few different things. There was the permissibility of the regulatory market there, which is similar to what we saw in places like Oregon and Washington back in 2018, just a really low barrier to entry, so a lot of growers flowing into the state and setting up their operations. What we really didn’t understand and it’s one of those things, like a lot of things that seems kind of intuitively obvious in hindsight, but at the front end was just something we missed, was the scale of the grows in Oklahoma.

I’m talking large outdoor grows in Oklahoma that covers five or 10 acres, whereas illicit grows in California on a hillside up in Humboldt, it’s an acre or two at most. So these grows in Oklahoma, just the scale of them is kind of in the orders of magnitudes larger. So the amount of cannabis that was flowing into the marketplace was causing wholesale prices to trend in a negative direction. Probably about this time last year we started to say, okay, we’re seeing potential storm clouds on the horizon and sure enough kind of those bore out. 

Green Market Report:

So you think that this illicit cannabis was going to all the other markets?

Chris Hagedorn, Hawthorne:

Yeah. I think a ton of that product, whether it was initially grown for the legal market and was diverted, or it was grown from inception for the illicit market, I am firmly a believer that that product has flowed outing nationally and it has crushed the wholesale pricing.

Green Market Report:

We knew a lot of the Oregon illicit product was in New York. That was pretty easy to ask people and was, well anecdotally documented, because that’s the only way you can track any of this is, anecdotally asking people.

Chris Hagedorn, Hawthorne:

T your point, we have the same experience that when one considered hard concrete data is, as I said, hard to come by here, the anecdotal information that we’ve gathered says, “Yeah, the Oklahoma market has been a big source of this.” They’re not alone. California, certainly there were some large newer, large outdoor grows there. California had and we’ve talked about this. I think we’ve talked about it publicly, but if not it’s nothing secret.

Green Market Report:

Well in Oregon, everybody knew Oregon was way oversupplied and they just were selling for pennies on the dollar to just unload product.

Chris Hagedorn, Hawthorne:

Exactly, trying to move product.  I think there are other things that have amplified the downturn. So there’s this flood of material. When you look at a state like Michigan, which is our second biggest market for Hawthorne by a pretty good margin. The legislature up there was considering changing the caregiver laws pretty dramatically and I think moving the plant count from like 75 down to like 20 or 25, I don’t have the exact numbers. Now that did not end up taking place. But again, the information that we’ve gathered says there was so much momentum and that it still could happen, but there was so much momentum and noise in the state about putting severe restrictions on the caregiver market there, that a lot of folks just pulled back on investments thinking we’re not going to build new cultivation capacity. We’re just going to kind of slow things until we understand how the market for the caregivers is going to shake out in Michigan. That put a damper on investment, which obviously flows back to us for all the infrastructure items we sell, like lights and dehumidifiers and everything.

Then on top of that, there’s obviously the macro overlay of the federal government that just cannot get off its ass and actually move this issue forward. I think everyone expected with the Democrats controlling kind of all three levels between the White House, Senate, and Congress, that they would seize the opportunity to move this thing forward. They haven’t done it, which is extremely frustrating.

For investors, I think it said, “Look, they’re going to lose at least one side of the house, if not both at the midterms.” We shouldn’t have any faith that the Republicans are going to take this, though honestly, as a sort of disillusioned independent, I don’t understand why either party doesn’t just seize this as a political silver bullet, but they haven’t. So I think at the macro level for kind of institutional level investors, there’s just, there’s no enthusiasm right now because the federal government’s not doing anything to help. 

Green Market Report:

Do you think that as New York progresses in its program decision making, there might be opportunities there because I know not so much New Jersey, but definitely New York, they’re trying to really tap into the small grower market. They have these micro licenses that they’re offering, which is kind of appealing to a lot of the smaller people that don’t have big money, like some of these MSOs, some of the legacy people, or do you think that’s just not going to ever really develop into any kind of sizable market?

Chris Hagedorn, Hawthorne:

I do. I think you’re going to see some large-scale cultivators obviously sort of taking a claim for themselves and hopefully doing it right. It’s one of the issues that I’ve had with a lot of kind of large scale. I say this at the risk of upsetting our customers, the large-scale kind of corporate style, MSOs that have not placed an emphasis on quality. So I hope that people kind of learn that lesson and put more of an emphasis on that because I just think it’s better for consumers, and ultimately I think it’ll be better for the businesses and the brands they’re trying to create. As far as the craft scale growers being given an opportunity, I think New York is creating those opportunities not only just for small growers, but specifically for social equity style growers and retailers.

Chris Hagedorn, Hawthorne:

Vermont is another state focused on the small grower. Their mindset is very much supporting smaller craft growers and I think it’s a really great concept they have. Look at a state like Vermont, which is, it’s one of, if not the least populated state, but it punches way above its weight in certain industries, like beer and cheese. Vermont’s got nationally known and kind of beloved and respected beer and cheese brands that you may not be able to buy anywhere outside of Vermont. If you can, it’s only within kind of a few states radius, but they still are kind of nationally renowned. There is an opportunity by clearing a way for smaller, higher-end craft growers to establish that same reputation for cannabis.

I think Massachusetts has actually done a fairly good job. It’s not small growers, but they’ve got some really, really excellent kind of larger-scale in-state operators. So I think there are some states in the Northeast that are doing things right, but it’s such early days.

Green Market Report:

So looking ahead, what do you feel is behind this end-of-year recovery that is being predicted by Hawthorne, and by the other companies that are all kind of saying the same thing?

Chris Hagedorn, Hawthorne:

It’s based on a few things and I hope I continue to tell myself it’s not just based on a sort of desperation, that I need to be true. It’s based on logic and research that, the oversupply because people shut those grows off, that oversupply is only the last so long. We use the beer, the wine analogies a lot. They’re always good in this case. It’s a perishable product and eventually, those kind of backlogs are going to either have to be destroyed. They’ll be sold through, they’ll be converted into concentrates and sold through and eventually, people are going to have to turn their farms on.

So we’re looking at that. We look at just sort of seasonal upticks that we’ve seen on our business historically. You can look at the SMG results to understand even that has been slowed down just by the climate. The weather has just not turned in the way that has implications for our outdoor and even to an extent our greenhouse customers as well. So it’s looking at the oversupply, it’s continuing to talk to retailers, talk to cultivators and just try to keep to the extent that there is a pulse on this industry, kind of one pulse that can tell us how things are. We try to keep our finger on it.

I think we’ve got as much information as anybody in space. The reality is, and this is something I know certainly our analysts and our investors don’t want here. But the reality is that real hard data in this industry is hard to come by. A lot of it’s you mash together anecdote and inference and sort of educated guesses and that’s kind of what we have to operate off of. It’s uncomfortable to operate at this scale and with this much at stake, but that’s kind of where we’re at.

Green Market Report:

As far as actual technology in indoor growing, what would you say is really the next big thing? I’ve heard stuff around like timing, the lights and the grows so that they replicate natural sunrise, sunset things like that. I don’t know if that’s just goofy stuff or is that a thing or really what do you see looking ahead is going to be the next big thing or the hottest?

Chris Hagedorn, Hawthorne:

Yeah, I think we’re going to in continue to see sort of a mass migration away from older style lighting, older kind of high-pressure sodium and ceramic metal lighting to LED. The progression toward LEDs are going to continue and we’ve got a bunch of new LED products in our pipeline that continues to kind of refine and iterate on the technology that we’ve launched. So LEDs are going to continue to be a monster and kind of take over the industry and the stuff that you’re talking about, whether it’s lights that turn on and off and sort of dim themselves on and off. You read about those in Brookstone, those alarm clocks that sort of wake you up, like the sun, plants are not dissimilar in that they like to be woken up kind of gradually as well. So lights that have sunrise, and sunset. 

Now we’re also looking at the spectrum that the sun’s thrown off at sunrise when the sun comes up is very different than the spectrum when the sun’s setting or at noon. So lights that where the spectrum shifts throughout the day to mimic what the plants are used to over the course of millions of years of grown in nature. So we’re looking at all those things. I would say at a larger scale, what I’m really excited about and it doesn’t exist in a way that I think it needs to, is just full facility kind of control and sensor packages that really knit things together. I think it’s something without tooting our own horn here too much that we’re kind of uniquely able to provide just because we take such a broad cut at the industry between lights and dehumidification and HVAC and nutrients and everything kind of, we look at the whole picture.

Once you can begin to introduce AI, machine learning to really kind of use data at scale, and there’s a few companies that are starting to do it, but again, they’re doing it in one specific kind of segment of the industry. There’s no one who’s got the breadth to do it all. I think except for us and it’s on us to actually pull that technology together and we’re working on it, but it’s a big undertaking and for us it’s our roots are in bags of dirt and seed and plants.

This is our most ambitious one yet, but I think it’s where the most opportunity is because this is when you start to say, “Hey, we could maybe pull 30, 40% of the energy costs out of these facilities between all the different technologies.” 

Green Market Report:

Do you think that has a lot to do with the fact that you guys have invested a ton into R and D like that’s to your point, some of these smaller companies they’re selling the lights, they’re selling the software package they’re selling, oh, we’ve got these lights that work with these tables. But I haven’t really come across that many companies that have taken some of that money that they’ve made and then turned around and put it into R and D to learn.

Chris Hagedorn, Hawthorne:

We have invested heavily in it. That’s part of the corporate DNA and something I’m really proud of our parent company. And when I say our parent company, it has kind of multiple meanings for me because it’s my grandfather and my old man who really drove that business and continued to, that’s a company that’s always invested pretty heavily in R and D. So getting to grow up both sort of from a literal perspective and in a professional sense around a business, that placed a really high premium, the ability to innovate and understand our products and the plants that our products are used on and what our consumers are looking for. That was always kind of in our DNA.

Which I’m super grateful for and we’ve taken the time. Whether it’s the investment up in British Columbia to build out a cannabis-specific facility or to convert former Scott’s Miracle-Gro kind of turf grass research centers in Oregon to growing hemp so that we can understand because, hemp as a proxy crop for cannabis is about as good as it gets short of optimal cannabis, which we to do in Canada. So yeah, we take it seriously and we’ve been able to draft off the fact that SMG before Hawthorne even existed already had a really deep and experienced R and D capability and team. So we were able to build out our own capabilities for the stuff that’s unique to Hawthorne, that technological stuff that Scott’s never did. Then for all of our nutrients and growing medias, we can depend on the capability that already existed at Scott’s.


Debra BorchardtMay 3, 2022
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The Scotts Miracle-Gro Company (NYSE: SMG) announced record second-quarter sales in its U.S. Consumer segment driven by continued support from its major retail partners. However, Scotts also noted that for the fiscal second-quarter sales dropped 8% to $1.68 billion, from $1.83 billion a year earlier. U.S. Consumer segment sales increased slightly to $1.38 billion. Sales for the Hawthorne segment decreased 44% to $202.6 million. Scotts had previously warned that sales weren’t looking very good for the segment. 
“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 chief executive officer. “Fortunately, consumer purchases have gained considerable ground in recent weeks. For example, key early-breaking markets in the south are down mid-single digits entering May after being down double digits two weeks earlier. The combination of improved weather, strong retailer promotions through Memorial Day, and favorable comparisons for the balance of the season should be tailwinds for the rest of the year. 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.
For the quarter ended April 2, 2022, GAAP earnings from continuing operations were $4.94 per diluted share compared with $5.44 per diluted share in the prior year. Non-GAAP adjusted earnings, which exclude impairment, restructuring and other non-recurring items, and are the basis of the Company’s financial guidance, were $5.03 per diluted share compared with $5.64 a year ago. This beat the Yahoo Finance average analyst estimate for earnings of $4.75. 

Hawthorne Drys Up

Sales for the Hawthorne segment decreased 42% to $393.2 million year-to-date. In addition to delivering the sobering news about the segment’s plunge in sales, Scotts also announced that Hawthorne was buying Australia-based Cyco, for $34 million plus contingent consideration of up to $10 million. The transaction marks the fifth Hawthorne acquisition in the past year.

Cyco is a leading brand of premium nutrients, additives, and growing media products that are used by growers of all sizes in the hydroponic market. Hawthorne has been the exclusive U.S. distributor of Cyco products, which also are sold primarily in Canada and Australia through select retailers and distributors.
Although the acquisition is small, with roughly $15 million in annualized sales, Cyco is a strategic move to expand Hawthorne’s Signature line of high-quality and high-performing nutrients and growing media, including General Hydroponics, Botanicare, Terpinator and Mother Earth. Hawthorne intends to expand the availability of the Cyco brand in North America and, through an arrangement with the current Australian distributor, will make other Hawthorne products available to hydroponic growers in that market.
“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. 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.”

Late Spring Start

 
On a fiscal year-to-date basis entering May, consumer purchases of the company’s lawn and garden products at its largest four retailers in the U.S. are down 12% from the same period a year ago. The company said the category gained significant momentum in recent weeks after a late break to spring and planned delays of promotional activity until after the Easter holiday.

Forecast Was Too Rosy

Scotts said its previous guidance of $8 or more of non-GAAP adjusted earnings per share is likely unattainable. Management said it currently expects to provide an update to the investment community the week of June 6, 2022.
 
“A combination of external factors that evolved over the past two months now make it unlikely for us to meet our previous earnings target,” said Cory Miller, executive vice president and chief financial officer. “However, with one-quarter of our annual POS expected in the next six weeks, any updated earnings target we developed right now would be based on a set of hypothetical assumptions. So, we are best served to be patient and provide a more informed update a few weeks from now.”
 

Debra BorchardtMarch 30, 2022
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Etain, the New York cannabis market’s only women-owned and -operated business and one of the state’s original five medical cannabis license holders has been sold to RIV Capital, Inc. (CSE: RIV) (OTC: CNPOF) for $247 million. RIV Capital will acquire ownership and control of the Etain companies once it gets regulatory approvals, including from the New York Cannabis Control Board and the New York State Office of Cannabis Management.

At one point in New York, there was a restriction that a minority-owned cannabis company could only sell to another minority-owned company so it remains to be seen if this will be enforced. RIV Capital is funded by Scotts Miracle-Gro (NYSE: SMG), so essentially Scotts is buying a cannabis company. RIV is paying $212 million in cash and $35 million in stock.

Etain COO, Hillary Peckham said, “This agreement marks the most significant transaction for a women-owned business in cannabis history. While the Peckham family will be stepping back from control of the company, we will be actively partnered with RIV Capital on preserving the ethos of the Etain brand and utilizing our combined efforts to continually find and make new spaces for women in cannabis. RIV Capital clearly recognized the potential for women-led brands to flourish in the cannabis industry, and we are proud that our work at Etain has led us to this point in time.”

Etain is one of only 10 approved vertically integrated operators in the state of New York. It was also the only New York operator with a female CEO and that has ended too. Mark Sims was named President and CEO of RIV Capital, to lead the company’s formal entry into the U.S. market and expansion into licensed adult-use operations in New York. Mr. Sims is a current director of RIV Capital, a role he will retain, and most recently was Senior Vice President of Strategy and M&A for The Scotts Miracle-Gro Company (NYSE: SMG), where he also previously served as its CIO and head of the business transformation. He replaces Narbé Alexandrian, who departs RIV Capital to pursue other opportunities.

“The pending acquisition of the Etain business is the first step in the execution of the RIV Capital strategy, shifting from an investor in the cannabis value chain to a full-fledged operator of licensed cannabis cultivation and dispensary facilities in the U.S.,” Mr. Sims said. “By capitalizing on growth opportunities in New York’s emerging market and building upon Etain’s foundation in the medical space, we intend to accelerate our strategy and continue to deliver value for shareholders.”

Etain was founded by members of the Peckham family in Chestertown, N.Y., where the business is undergoing a significant expansion in growing and manufacturing space. Etain has four operating dispensaries, including its Manhattan flagship store and locations in Kingston, Syracuse, and Westchester. The company also had a robust wholesale business in the state.

“I am excited for the future of RIV Capital and our mission of providing the highest-quality products for consumers. Our plan is to grow the Etain brand while creating a platform to bring successful, authentic West Coast brands to New York,” Mr. Sims continued. “We are thrilled to make New York the foundational cornerstone of our platform, and believe that its outsized cultural influence, limited license program, and pending implementation of adult-use sales make it a uniquely attractive state.”

RIV Capital said it plans to invest additional capital and resources into four new dispensaries, and to support the construction of a new state-of-the-art flagship indoor cultivation facility, tailored to specifically address the premium New York market.

“We’re fully supportive of RIV Capital’s strategy and plans to grow Etain,” said Hawthorne Collective President Chris Hagedorn. “This is a significant step forward for both. Just as importantly, it will establish an important foundation upon which The Hawthorne Collective and, therefore, ScottsMiracle-Gro, can participate in the larger marketplace as the legal and regulatory environment evolves.”


StaffMarch 8, 2022
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The Scotts Miracle-Gro Company (NYSE: SMG) stock was dropping 6% on news that the company lowered its full-year sales guidance for its hydroponic Hawthorne division. In addition, Scotts said the reduction would likely lead to adjusted earnings per share that are lower than previously expected. Shares were lately selling at $119, a big drop from the year’s high of $254.

Speaking at the Raymond James 43rd Annual Institutional Investors Conference, CFO Cory Miller said the Company now expects Hawthorne sales to decline 15% to 25%, including the benefit of acquisitions. The company noted that sales in the segment have been challenged for several months due to an oversupply of cannabis, which is leading to a slowdown in both indoor and outdoor cultivation.

“We believe Hawthorne sales have found the bottom in terms of average daily volume,” Miller explained. “However, there is a seasonal element to the business that would normally be in play by now that has not materialized to the extent we anticipated. While sales volume has begun to improve recently, the year-over-year rate of decline has expanded and that trend appears likely to carry through March.”

The revised Hawthorne sales outlook means ScottsMiracle-Gro is unlikely to reach the low end of its guidance for non-GAAP adjusted earnings per share. Miller said management remains optimistic about the continued strength of the U.S. Consumer segment and is working to moderate the earnings gap from the shortfall in Hawthorne sales with a goal of achieving non-GAAP adjusted earnings per share of at least $8.00.

“The midpoint for our sales guidance for our U.S. Consumer business continues to assume an 8-point decline in unit volume on a full-year basis and the business continues to significantly outperform against that plan,” Miller said. “Consumer purchases, in units, entering March are essentially flat from year-ago levels and shipments to retailers through five months are at record levels. Still, it is too early in the season to adjust our outlook for the business. However, we and our retail partners remain encouraged by the level of consumer participation we continue to see as we prepare for the peak weeks of the season.”

During his presentation to investors, Miller also said the company no longer expects a significant acquisition in fiscal 2022 to bolster its presence in the live goods category. ScottsMiracle-Gro had been actively pursuing such an opportunity over the past year but has ended those discussions.

“We see live goods as critical to our future with growth in this category through M&A remaining a major component of our strategic plan,” Miller said. “However, our M&A strategy has been successful over the last several years because we have remained disciplined in our approach and been willing to step away when the economics or other factors no longer make sense.”

Scotts said expects to provide a further update on May 3, 2022, when it releases its second-quarter results.


Debra BorchardtFebruary 1, 2022
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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 BorchardtJanuary 7, 2022
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Despite the sales warning, Hydroponic company Hydrofarm Holdings Group, Inc. (Nasdaq: HYFM) reaffirmed its net sales and adjusted its EBITDA outlook for the full fiscal year 2021. Hydrofarm has forecast net sales of approximately $470.0 million to $490.0 million, representing growth of 37% to 43% versus fiscal 2020. However, Hydrofarm also noted that its fourth-quarter 2021 net sales will be attributed to M&A and partially offset by a decline in organic sales. The company estimated that the organic sales decline experienced in the fourth quarter was in the low-to-mid teens, driven by a sales mix that is primarily consumable products as opposed to durable products.

Hydrofarm also said it would provide a detailed financial outlook for 2022 as part of its fourth-quarter earnings report. “However, at this time, management continues to expect 8% to 10% organic top line growth for the full calendar year of 2022, which will likely be weighted toward the back half of 2022 as the industry laps strong comps in the first half of this year and several states that have recently enacted pro-cannabis legislation build momentum through 2022. In addition, management expects to benefit from the full year of ownership in 2022 of the five businesses acquired during 2021.”

The company has estimated that adjusted EBITDA will range between $47.0 million to $53.0 million. This implies full-year organic growth of approximately 18% to 23% and M&A growth of approximately 19% to 20%. The company said it would release its earnings in March 2022.

Hydrofarm said in a statement that its 2021 outlook includes the following assumptions:

  • Partial period contributions from the following acquisitions:
    • Heavy 16 – net sales and EBITDA contribution for May through December 2021
    • House & Garden – net sales and EBITDA contribution for June through December 2021
    • Aurora Innovations – net sales and EBITDA contribution for July through December 2021
    • Greenstar – net sales and EBITDA contributions for August through December 2021
    • IGE – net sales and EBITDA contributions for November through December 2021

The warning comes on the heels of Scotts Miracle-Gro (NYSE: SMG) also stating that its hydroponic business Hawthorne was seeing a decline in sales.  Scotts said the decline in sales was caused by a slowdown in the cannabis market as well as supply chain disruptions that have delayed the sale of certain product lines. However, the company said it was maintaining its full-year company-wide outlook for adjusted earnings per share.

 

 


Debra BorchardtJanuary 4, 2022
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The Scotts Miracle-Gro Company (NYSE: SMG) announced two acquisitions, but at the same time warned that sales in its hydroponic division Hawthorne were expected to drop by 40% for the fiscal first quarter that ends at the end of January. Scotts said the decline in sales was caused by a slowdown in the cannabis market as well as supply chain disruptions that have delayed the sale of certain product lines. However, the company said it was maintaining its full-year company-wide outlook for adjusted earnings per share.

“We are optimistic the supply chain disruptions we’ve experienced will be corrected by the end of January and we’ll be able to meet the continued demand we’re seeing for our industry-leading signature products,” said Cory Miller, chief financial officer. “We’re also encouraged by the year-over-year increase we’ve been experiencing in pre-orders for growing media products for delivery to commercial growers in the second and third quarters. However, the decline we’ve seen in the first quarter, against a 71 percent growth comparison a year ago, is greater than we had anticipated. Based on our current view of the market, we are lowering our full-year sales guidance for Hawthorne to a range of 0 to minus 10 percent on a year-over-year basis, including the expected benefit from Luxx. This range assumes a return to growth during the second half of the year.”

Acquisitions

Scotts announced that it was buying Luxx Lighting in a deal valued at $215 million. Scotts said in a statement that the acquisition, which closed December 30, 2021, adds approximately $100 million in sales and $20 million in operating income to Hawthorne on an annualized basis. While approximately $75 million of revenue from Luxx is expected in the remainder of fiscal 2022, the transaction is expected to be neutral to earnings for the year due to the impact of purchase accounting and one-time deal costs.

Scotts also said it has purchased True Liberty Bags in a deal valued at $10 million. , the industry’s leading provider of liners and storage solutions to dry and cure plant products. Hawthorne has been the primary U.S. provider of True Liberty brands, which expands Hawthorne’s harvest portfolio.

“These strategic acquisitions reinforce our commitment to provide commercial cannabis cultivators in state-authorized markets with a complete set of solutions driven by insight and innovation,” said Chris Hagedorn, division president of Hawthorne. “While the cannabis market continues to see near-term challenges from an over-production in recent months, we see the current reality as an opportunity to further distance ourselves from the competition and strengthen our business for long-term success.

Hawthorne, which previously did not distribute Luxx, will expand the marketing and distribution of the brand in emerging markets, including the East Coast. that significantly strengthens The Hawthorne Gardening Company’s industry-leading lighting portfolio.

These deals follow the August 2021 acquisitions of HydroLogic Purification Systems, which moved Hawthorne into the water reclamation and purification category, and Rhizoflora, whose industry-leading Terpinator and Purpinator brands expanded Hawthorne’s nutrient offering.

Retail Sales

Despite the troubles at Hawthorne, Scotts said that its U.S. Consumer segment continues to perform well with POS growth in both dollars and units in every major product category and continued support in all retail channels. U.S. Consumer segment sales in the first quarter are expected to decline less than 20%, which is better than it originally anticipated.

“Consumer purchases, in units, were up 3 percent in the quarter against a 40 percent growth comparison a year earlier, and POS dollars increased 9 percent in the quarter,” Miller said. “Retail inventory levels are appropriate for this time of the year, and we remain optimistic about the potential for the segment as we prepare for the upcoming lawn and garden season.”

“While it’s too early to raise our guidance for this segment, the current trends and our continued optimism about the upcoming season, coupled with a focus on expense control in both Hawthorne and U.S. Consumer, allow us to maintain our guidance for adjusted earnings in a range of $8.50 to $8.90 per share,” Miller said.


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The Green Market Report focuses on the financial news of the rapidly growing cannabis industry. Our target approach filters out the daily noise and does a deep dive into the financial, business and economic side of the cannabis industry. Our team is cultivating the industry’s critical news into one source and providing open source insights and data analysis


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