Scotts Miracle-Gro Archives - Green Market Report

StaffNovember 2, 2022
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6min9680

The Daily Hit is a recap of cannabis business news for Nov. 2, 2022.

ON THE SITE

Green Thumb Beats on Record Revenue, Circle K Stores Remain in Question

Green Thumb Industries Inc. (CSE: GTII) (OTCQX: GTBIF) posted positive results that beat analysts’ expectations, with record revenue showing the demand for cannabis even as profits shrink industrywide. Green Thumb reported third-quarter revenue of $261.2 million, up 2.7% sequentially and up 11.8% from the prior-year period. This beat the Yahoo Finance average analyst estimate of $257.3 million. Read more here.

The Parent Company Sells Off Extraction Division

In yet another sign that the licensed California cannabis market is struggling, San Jose-based TPCO Holding Corp. (NEO: GRAM) (OTCQX: GRAMF) announced Wednesday that it had sold off its entire extraction division, a subsidiary called SISU Extraction LLC, for an undisclosed sum. Read more here.

Tilray Inks Distribution Deal with Charlotte’s Web Ahead of Health Canada Review

Tilray Brands Inc. (Nasdaq: TLRY) (TSX: TLRY) has inked a partnership with U.S.-based CBD giant Charlotte’s Web Holdings, Inc. (TSX: CWEB) (OTCQX: CWBHF) to sell hemp extract products in Canada. Under the agreement, Charlotte’s Web’s full-spectrum CBD products will be reach dispensary shelves through Tilray’s distribution network. Previously Charlotte’s Web products were only available in Canada to those that qualified for a special access medical exemption through Health Canada for specific need-states. Read more here.

Scotts Sales Drop 33% in Fourth Quarter, More Than Forecast

The Scotts Miracle-Gro Company (NYSE: SMG) announced in its financial results for the fourth quarter that ended Sept. 30, 2022, that sales fell by 33% to $493.6 million reflecting decreases in both major business segments. This missed the Yahoo Finance analyst estimates for sales of $519 million. Read more here.

Treez Acquires Payment Company Swifter

Cannabis cloud commerce platform company Treez is buying the payment solutions company Swifter. The value of the transaction was not disclosed. However, it does follow Treez Series C funding round of $51 million in April 2022. At the time the company said it would use the new funds to expand its footprint, pursue market expansion opportunities, and invest in partnerships that would connect each link in the supply chain. Read more here.

India Globalization Revenue Rises as it Shaves Losses

India Globalization Capital Inc. (NYSE American: IGC) posted rising revenues and cut losses as it reported its second fiscal quarter 2023 financial results. Revenue was roughly $202,000 for the second quarter, versus $56,000 during the same time last year. The company said that the rise in revenue is due mostly to growing sales of its CBD-based products and services, which increased 345% over last year. Read more here.

IN OTHER NEWS

Heritage Cannabis

Heritage Cannabis Holdings Corp. (CSE: CANN) (OTCQX: HERTF) has entered into an equity line of credit agreement with Obsidian Global Partners LLC whereby Obsidian proposes to purchase common shares in the capital of Heritage for the aggregate gross proceeds of up to $20 million by private placement, at Heritage’s discretion. Read more here.

Cansortium Inc.

Cansortium Inc. (CSE: TIUM.U) (OTCQX: CNTMF), a vertically integrated cannabis company operating under the Fluent brand, has agreed with certain of its directors to issue an aggregate of 1,048,386 common shares to such directors in exchange for the cancelling $162,500 of owed director fees. Read more here.


Debra BorchardtAugust 3, 2022
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The Scotts Miracle-Gro Company (NYSE: SMG) saw its shares pop in early trading despite the gardening company’s downbeat earnings. The lawn care and hydroponic company released its results for the third quarter ending July 2, 2022, with sales falling by 26 % on declines in both major business segments to $1.19 billion. This missed the Yahoo Finance average analyst estimate for sales of $1.23 billion.

U.S. Consumer segment sales declined 14 %  to $904.5 million from $1.05 billion. The hydroponic group called Hawthorne said sales decreased 63% to $154.5 million compared with $421.9 million during the same period last year.

Scotts reported a GAAP net loss per share of $8.01, which includes pre-tax impairment and restructuring charges of $724.2 million. Non-GAAP adjusted earnings per share, which is the basis of the Company’s guidance, was $1.98. On a positive note, SG&A decreased 30% to $135.8 million due to lower accruals for annual incentive compensation and cost-reduction efforts.

CEO Jim Hagedorn said, “While consumer purchases are down 8 percent in units year-to-date, that performance is in line with the guidance we laid out at the beginning of the year. We are extremely encouraged that consumer purchases in May and June were at near-record levels, once again showing the resiliency of the category. Unfortunately, shipments to our retailer partners did not keep pace with consumer demand, as retailers in all channels took steps to lower their own inventory levels.”

He added, “The lower-than-expected sales in our U.S. Consumer segment, combined with continued pressure on Hawthorne sales due to oversupply issues in the cannabis industry, leave us unsatisfied with our financial results and with higher leverage than we want to maintain. That is why we have launched the business transformation effort we are calling Project Springboard, which includes a series of aggressive steps to return the business to an appropriate level of performance.

GAAP loss from continuing operations was $217.5 million, or $3.91 per share, compared with income of $566.0 million, or $9.90 per share, in the prior year. Non-GAAP adjusted earnings, which exclude impairment, restructuring, and other non-recurring items, were $343.3 million, or $6.11 per diluted share, compared with $573.1 million, or $10.04 per diluted share last year.

Hawthorne

Hawthorne segment sales decreased 63 percent to $154.5 million compared with $421.9 million during the same period last year. Year-to-date Hawthorne sales decreased 50% to $547.7 million. Some of the company’s losses stemmed from Hawthorne, which saw impairment charges of $632.4 million related to goodwill and certain intangible assets in the segment. Scotts said it took inventory write-down charges of $45.9 million with its decision to discontinue and exit the market for certain lighting products and brands.

Looking Ahead

Scotts dropped its full-year sales guidance in the U.S. Consumer segment due to lower-than-expected replenishment orders from retail partners. The company said it now expects sales to decline 8 to 9%. The company also said it expects further SG&A favorability and is now guiding full-year SG&A down 15%. As a result of these changes, the full-year adjusted EPS outlook is now expected to be $4.00 to $4.20.

“Our guidance in early June accounted for the reduction in May replenishment orders that we saw at our largest customers,” Miller said. “However, retail inventory reduction efforts have accelerated throughout June and July, driving a larger decline in our full-year sales expectation. The outlook for SG&A has improved from the previous guidance we communicated in June. The Project Springboard team achieved the initial cost savings target and identified additional opportunities to reduce spending across the business.”


Debra BorchardtAugust 1, 2022
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Cannabis companies are just starting to roll out the earnings season and with some big names on deck this week, Stifel analysts Andrew Carter and Christopher Growe published an earnings preview report. Once darlings of the cannabis industry, hydroponics are fading fast as the market for Scotts Miracle-Gro (NYSE: SMG) and GrowGeneration (NASDAQ: GRWG) have slowed to a crawl. He wrote, “The 2021/2022 hydroponics recession has been deeper and longer than we originally anticipated with a significantly greater impact to our covered companies than we originally anticipated. But, we contend the hydroponics category will at minimum regress to underlying demand for cannabis (HSD) with an improvement in durables demand eventually taking hold.” The coverage for Canopy Growth (NASDAQ: CGC) basically said that the company’s cash burn is destroying the company’s value. 

Scotts Miracle Grow

The analyst is being super cautious on his numbers and estimates that the third fiscal quarter earnings will be $1.55 for Scotts. This is a 60% drop from last year and according to Carter,  well below consensus ($1.74). “We believe consensus estimates do not fully appreciate the magnitude of the challenges impacting F3Q22 outlined with the June update: adverse April weather impacting U.S. Consumer purchases of higher margin lawn care products, retailer inventory reductions, Hawthorne underlying revenue decline accelerating, fixed cost deleverage, and inflation not fully offset by pricing.,” he wrote. “We estimate total revenue will decline 26% with the gross margin down 830 bps. We estimate U.S. Consumer F3Q22 revenue will decline 15% with volume down 25%. We estimate Hawthorne revenue will decline 59% with the underlying revenue decline accelerating to -63% (-48% F2Q22).”  He said he is keeping his full-year estimate of $4.76, which is roughly in between the company’s guidance range of $4.50 – $5.00.

Carter went on to point out that investors will have a hard time finding anything to motivate them to buy shares for a while. The company could finish the year at 6X debt/EBITDA, not too appealing for investors. He suggested spinning out the Hawthorn division, but then also said the chance to do so has probably passed.

“We have written positively about a potential separation of the two segments (core Consumer, Hawthorne), potentially as a source of unlocking value, but also necessary with capital allocation increasingly inefficient,” said the report. “But we believe this is no longer a viable option with the current structure’s inefficiencies for capital allocation and investor interest an ongoing headwind. We view the RIV Capital investment as a poor use of capital with the strategy articulated by the company undifferentiated and misguided (in our view) with the pursuit highlighting the corporate ownership structure’s risks.” He is maintaining a share target price of $93 and the stock was lately selling at approximately $86 a share.

GrowGeneration

Carter’s estimate for GrowGen’s second-quarter revenue is $85 million, which is a drop of -32% over last year and just above consensus. “Our outlook includes a 41% decline in organic revenue growth: 50% same-store sales decline, a 20% decline for the combined e-commerce platform, +20% underlying growth from distributed products, incremental contributions from new stores and expanded locations,” the report said. Having said that, the analyst was more favorable to GrowGen than to Scotts. He thinks that the company’s cost savings plan will help it in the back half of 2022. He also noted that his estimates didn’t include benefits from reduced inventory levels, and he thinks rightsizing the inventory will be a tailwind for cash flow aiding the company’s efforts to achieve break-even cash flow while investing behind the organization.

Carter even went on to write that he thinks his 2023 outlook will prove to be conservative, however, he walked that back a little saying, “but proof points for a recovery have yet to take hold even as we start to anniversary softer category trends from one year ago.” He is maintaining his Hold rating and believes it will take time for enthusiasm to return to the sector of hydroponics. He did point out that GrowGen has $60 million in cash and is making the right investments, it’s just that investors won’t see that return for some time. His target price is $5.50 and the stock was lately trading at $4.74. 

Canopy Growth

The rare Wall Street sell rating is given to Canopy Growth by Carter, who has also lowered his price target to C$2.90. The stock recently closed at C$3.29. The report said, “We approach our estimate for a C$80 million adjusted EBITDA loss cautiously; our estimates suggest modest underlying improvement y/y driven by cost savings/synergy realization against sales declines include higher margin C3 sales against the C$64 million 1Q22 loss (included C$20 million COVID subsidies). We estimate a total cash burn of C$130 million.” He believes revenue will fall 4.5% in the fiscal year 2023 and was very focused on the company’s cash burn. He estimated the company will burn through $630 million by the fiscal year 2024. 

He went on to write, “We believe the magnitude of the ongoing losses and risks associated with liabilities remain underappreciated with all non-Constellation shareholders bearing outsized risk. The recent early conversion of C$263 million of convertible debt provided additional flexibility reducing liabilities, but at a significant cost to equity holders with the shares down 35% following the announcement (S&P 500 +1%) through final pricing.” He thinks the company may retire even more convertible debt that could further dilute shares by as much as 21%. He finished with a quick analysis of the parts writing, which suggested no value for the global cannabis businesses given the significant losses; C$17 million for the Canadian retail network; C$450 million of value to Canopy for Biosteel, Storz and Bickel, and This Works; and C$982 million for investments in U.S. with the options valued at 50% of capitalized value not including Jetty.”  However, he did note that there could be a quicker improvement in the company’s fundamental performance, platform innovation could quickly gain traction and maybe there could be creative actions by Constellation Brands that could drive value. 

 


StaffJune 22, 2022
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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

6min3381

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
scotts.jpg?fit=652%2C367&ssl=1

6min1750
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.”
 

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