Scotts Miracle-Gro Earnings: Profits Plunge on Weak Demand as Turnaround Efforts Underway

Scotts Miracle-Gro’s SMG fiscal 2023 third quarter showed small progress in the company’s turnaround efforts to restore profitability. Adjusted EBITDA was down 35% versus the prior-year quarter as the combination of cost inflation, lower volumes, and reduced plant capacity utilization weighed on profits. We’ve lowered our near-term outlook for the U.S. consumer business to account for the slowdown persisting longer than we had anticipated. Separately, we reduced our outlook for Hawthorne, assuming far slower revenue growth and profitability as the business’ smaller operational footprint reduces its long-term growth trajectory.

As a result, we reduced our fair value estimate to $100 per share from $110. We maintained our narrow moat rating. We also changed our Morningstar Uncertainty Rating to Very High from High to reflect a wider range of outcomes given the long-term growth outlook for the Hawthorne business.

Scotts’ shares slid over 20% as of the time of writing as management lowered its full-year outlook. While near-term pressures weigh on both of Scotts’ businesses, we think much of the bad news is already priced into the stock. Shares trade just above our downside scenario, which produces a fair value estimate of $55 per share. In our downside scenario, we assume revenue is flat and margins remain below prepandemic levels. Accordingly, we view the current prices as offering long-term investors a solid margin of safety.

Sales in the U.S. consumer segment rose 1.3% year over year, as pricing initiatives outweighed slowing volumes. The U.S. consumer business is still fighting through a post-COVID-19 hangover, as higher commodity prices are still reflective in inventory levels. We’ve reduced our full-year 2023 outlook for the U.S. consumer top line but remain optimistic on post-2023. Scotts’ brand leadership among the lawn and gardening segment remains intact and the business can return to mid-20% operating margins as management works through higher cost inventory.