The Scotts Miracle-Gro Company (NYSE:SMG) just released its fiscal third quarter financial results today after the markets closed, sending shares rallying over 2% in the after-hours session as of writing this.
Despite the initially bullish market reaction, headwinds facing the company’s cannabis-focused division are tough to ignore.
Scotts Miracle-Gro’s Cannabis-Focused Subsidiary
The Hawthorne Gardening Company is a wholly-owned subsidiary of Scotts Miracle-Gro. As a leading provider of nutrients, grow systems, lighting, and more to the hydroponics industry, Hawthorne derives much of its sales and growth from the rapidly growing cannabis industry.
Despite having grown Hawthorne over the past few years through acquisitions and more, Scotts Miracle-Gro has so much else going on. As Jim Cramer recently pointed out on Mad Money, Scotts has been used by investors as a “pot play” until now, but there’s “real pot plays now.”
SMG Q3 Earnings – The Good
There was some good in SMG’s Q3 earnings announcement, including non-GAAP adjusted earnings of $2.67 per share and noteworthy upticks in U.S. consumer sales.
Even in the Hawthorne Gardening Company, Scotts Miracle-Gro’s cannabis-focused division, strong figures of 2% sales growth to $74.2 million compared with $72.4 million the year prior sounded pretty good on the surface.
SMG Q3 Earnings – The Bad
Following the punchy top-line numbers, there was mention of decreasing margins from 39.4% to 36.1% a year earlier.
While “the difference was primarily attributable to higher-than-expected distribution costs, commodity inflation, increased trade program expense, and product mix primarily related to acquisitions,” this was a red flag for sure.
SMG Q3 Earnings – The Ugly
Although Hawthorne sales increased 2 percent to $74.2 million compared with $72.4 million, those results include the impact of acquisitions, including the recent purchase of Sunlight Supply.
“Excluding the impact of acquisitions, Hawthorne sales declined 37 percent during the quarter.”
Regarding the most recent acquisition, Chairman and CEO Jim Hagedorn noted that “the integration of Sunlight into the Hawthorne operations is moving swiftly.” Meanwhile, the company admits it still has a long way to go to hit the $35 million in anticipated synergies from the deal.
To make matters worse, they blamed the existing and expected downward pressure on Hawthorne revenues on a U.S. cannabis glut.
“While we remain disappointed with sales in the Hawthorne segment, we are pleased to see the rate of decline we’ve seen this year has begun to improve recently,” Hagedorn said. “Due to regulatory changes in California and an over-production of cannabis in that state and others last year, we continue to expect to see pressure on revenue at least through the balance of the calendar year.”
In reality, I’d be willing to bet that the downward pressure is caused by competition from other innovative companies serving cannabis cultivators.
Scotts Miracle-Gro is undoubtedly ” the world’s leading marketer of branded consumer lawn and garden products,” but are they really a pot stock? After a deeper dive into their recent quarter, I’m starting to agree with Cramer that the answer is not anymore…
Disclosure: I/we have no positions in SMG, and no plans to initiate any positions within the next 72 hours.
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