Scotts Miracle-Gro Q2 Earnings Call Highlights

Key Points

• Scotts closed Q2 with leverage at 3.71x debt-to-EBITDA — the first time below 4x in four years — and completed the Hawthorne divestiture, enabling management to begin a multi-year share repurchase program with a goal to buy back at least one-third of shares.
• SMG 2.0 is a roadmap to 2030 targeting an incremental $1 billion in sales, a gross margin rate approaching 40%, and EBITDA north of $1 billion, with up to $800 million of growth expected from e-commerce and initiatives including SKU rationalization, channel expansion, and AI-driven operational efficiencies.
• Q2 performance showed progress on the plan: net sales rose 5% to $1.46 billion, branded sales +8%, GAAP gross margin improved to 41.8% (up 280 bps), adjusted EBITDA increased to $437.4 million, e-commerce POS grew 22%, and the company reaffirmed fiscal 2026 guidance.

Scotts Miracle-Gro NYSE: SMG said it continued to build on its multi-year financial recovery in fiscal second-quarter 2026, highlighting lower leverage, expanding margins, and the completed divestiture of its Hawthorne business as it pivots toward a new growth plan centered on e-commerce and higher-margin branded products.

Management points to leverage improvement and Hawthorne divestiture

Chairman and CEO Jim Hagedorn opened the call by emphasizing that the company has made progress against “every single one” of its full-year financial priorities through the first six months of the fiscal year. He highlighted two milestones: closing the quarter with leverage at 3.71x debt-to-EBITDA—“the first time in four years that we’re below four times”—and completing the divestiture of Hawthorne.

Hagedorn said gross margin expansion is “on track,” the company’s mix strategy is working, and free cash flow, EBITDA and EPS are “exceeding expectations.” He also reiterated the company’s intention to begin the first tranche of the multi-year share repurchase program announced in the prior quarter now that leverage is “comfortably in the threes,” with an “ultimate goal” to buy back at least a third of shares outstanding. CFO Mark Scheiwer said he will serve as “the gatekeeper” for repurchases, with an emphasis on maintaining leverage in the threes.

SMG 2.0 lays out roadmap to 2030 targets

Hagedorn and President and COO Nate Baxter framed the company’s next phase as “SMG 2.0,” a multi-year plan aimed at reaching 2030 targets that include an incremental $1 billion in sales, a gross margin rate “approaching 40%,” and EBITDA “north of $1 billion.” Hagedorn said the company believes “upwards of $800 million” of the top-line growth under the plan can come from e-commerce, largely through retailers’ online platforms in partnership with Scotts.

Baxter said SMG 2.0 is built around shifts in the consumer base and retail environment as millennials and Gen Z become more important buyers and shopping behavior continues to move online. He described the plan’s “building blocks” as:

• Innovation and SKU rationalization to optimize the portfolio and accelerate speed to market
• Channel expansion, led by e-commerce, along with expanded retail partnerships and entry into professional “Do It For Me” channels
• Category growth by bringing in emerging consumers through new marketing and activation approaches
• Operational efficiencies, including factory automation, enterprise technology upgrades, and AI initiatives

Baxter said the company has introduced 83 new SKUs in fiscal 2026 to date, representing $41 million in revenue, citing examples such as Kentucky 31 grass seed, Turf Builder liquid lawn food, Miracle-Gro indoor plant food, and small-bag soils. He also said the company brought Ortho mosquito and fly traps to market in six months. On portfolio simplification, Baxter said the company has “line of sight to eliminate 30% of our lowest performing SKUs by next fiscal year,” which he said should be margin accretive and reduce complexity.

In addition, Hagedorn said the company is hiring a chief brand officer who will start in June to help lead brands and marketing, particularly as Scotts expands consumer engagement online. He also said Executive Vice President and Chief of Staff Chris Hagedorn, following the Hawthorne divestiture, will devote more time to the core business, with responsibilities including business development, product assortment, government relations, corporate communications, sustainability, and the “strategic application of AI.”

Second-quarter results show sales growth and margin expansion

Scheiwer said results exclude Hawthorne, which was classified as discontinued operations last quarter and divested in early April. In the fiscal second quarter, total company net sales rose 5% to $1.46 billion. For the first six months, net sales increased 3% to $1.81 billion, which Scheiwer said aligned with full-year guidance calling for low single-digit net sales growth in the U.S. consumer business.

Sales of branded products increased 8% through the first half, partially offset by declines in mulch and non-branded products. Scheiwer attributed the quarter’s increase in shipments to retailers to three factors: retailer support for branded initiatives (including growth in branded soils and grass seed), an increase in early-season fertilizer sales versus last year, and early replenishment orders tied to higher-than-expected POS sell-through of controls products due to favorable weather conditions in the West.

The company also provided an update on point-of-sale trends using expanded branded-only POS data from its 15 largest customers, including e-commerce. Scheiwer said branded POS dollars were up 4% year to date, and e-commerce POS dollars were up 22%, with growth across categories and customers. Regionally, he said POS dollars in the West were up nearly 15% year to date.

Gross margin improvements remained a central theme. Scheiwer said year-to-date gross margin improved by more than 200 basis points versus the prior year, driven by favorable mix, supply chain savings, and pricing actions early in the year. In the quarter, GAAP gross margin was 41.8%, a 280-basis-point improvement year over year, and the first-half GAAP gross margin rate was 38.5%, up 260 basis points.

SG&A rose as marketing investment increased. SG&A expense increased 12% in the quarter to $199.2 million and was up 5% year to date to $305.1 million, which Scheiwer said was expected due to higher media and marketing spending to drive branded product sell-through. He said SG&A remained on track for a full-year target of about 17% to 18% of sales.

Non-GAAP adjusted EBITDA was $437.4 million in the quarter, up from $401.6 million a year earlier, and year-to-date adjusted EBITDA rose nearly $38 million to $440.2 million. Interest expense declined due to lower debt balances and lower rates. GAAP net income from continuing operations was $263.3 million, or $4.46 per share, compared with $220.7 million, or $3.78 per share, in the year-ago quarter. Adjusted non-GAAP net income from continuing operations was $267.8 million, or $4.53 per share, compared with $233.7 million, or $4.00 per share, last year.

E-commerce growth, product mix, and AI initiatives highlighted in Q&A

During the Q&A, Baxter said shipments “remain strong” into the first part of the fiscal third quarter and that he was “not concerned” about inventory levels, describing them as “slightly elevated versus this time last year” in a way that supports retailers’ bullishness on the category. On e-commerce, Baxter said the company is up double digits, has gained market share, and is seeing adoption of innovation introduced “through e-com first.”

John Sass, general manager of the lawns business, described an ongoing shift from selling a “product program to a portfolio” approach, emphasizing a four-step solution for consumers. He said the company introduced a new Turf Builder lawn food product “safe for kids and pets,” and he pointed to early-season results, including sell-through of Halts “over 20%,” as an indicator heading into the season.

On controls, Mike Davitt, vice president of Home Depot BDT, said consumer searches have shifted toward more specific solutions. He said Scotts has launched products for “mosquito, with ant, with specific weed products,” adding that the company is bringing those solutions to market “in dot com first.” Baxter called controls “the biggest opportunity” for market share gains.

On operations and technology, Baxter said the company is pursuing a “dual track” approach to AI: building a modern data foundation, including a data lake and SAP S/4HANA implementation, while simultaneously redesigning processes “with an AI first lens.” He said Scotts is working on about 40 AI use cases and cited an example in which the company developed three commercials using AI in the past quarter, saving “about a half a million dollars in production costs.” Baxter said the company is targeting supply chain savings of at least 1% annually, or around $35 million per year.

Commodities and pricing posture for fiscal 2027

Management addressed commodity volatility tied to the Iran war, saying fiscal 2026 impacts are largely mitigated. Scheiwer said “most of our cost of goods sold are locked” for the current fiscal year due to purchasing, production planning, and hedging, along with contingency plans.

Looking to fiscal 2027, executives repeatedly said it is too early to quantify the full impact, but emphasized they intend to protect margin goals. Scheiwer said the company expects to manage impacts while continuing to invest in growth initiatives, noting urea is “less than 10%” of cost of goods sold. Baxter said the company plans to “delay purchases a bit this year relative to how we’ve done it in the past” for certain inputs such as urea, citing flexibility at the Marysville chemical plant.

Hagedorn said the company “will not sacrifice our margin goals” and expects to take pricing in fiscal 2027 if necessary, describing pricing as a tool the company is prepared to use during normal line review timing rather than mid-season changes. He told analysts the company has not taken additional pricing since the last established line review.

The company reaffirmed its fiscal 2026 guidance and said it expects to provide a seasonal update in early June at the William Blair Annual Growth Stock Conference, followed by a deeper discussion of SMG 2.0 at its Investor Day on Aug. 4 at the New York Stock Exchange.

About Scotts Miracle-Gro NYSE: SMG

Scotts Miracle-Gro Company is a leading developer, manufacturer and distributor of consumer lawn and garden products. The firm serves both retail and professional customers through an array of branded offerings that include lawn fertilizers, grass seed, pest and disease control solutions, plant foods and specialty products for indoor and outdoor gardening. Its portfolio spans well-known names such as Scotts®, Miracle-Gro®, Ortho® and various hydroponic and specialty garden brands.

Headquartered in Marysville, Ohio, the company traces its roots to O.M.

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