Scotts Miracle-Gro Hits Bottom, Reversal In Play

Those who’ve watched the Scotts Miracle-Gro NYSE: SMG saga unfold over the last few years have seen it bottom, gear up for growth, expand into the cannabis equipment market, get boosted by the pandemic, and then see it all come crashing down. The bursting COVID bubble was compounded by issues within the cannabis market that suggest it was played out before it was opened.

All the hype for growth was overblown and Scotts Miracle-Gro, like so many others, got caught up in it. The takeaway today is that it is 4 going on 5 years since all this began and dark times appear to be over. The price action hit a bottom in late 2022, that bottom was confirmed at the end of the year/first of the new year and now a reversal is in play. 

Scotts Miracle-Gro Rebound Is In Play 

A question investors need to ask, however, is if this reversal will lead the stock higher or if it is trapped in a trading range. Reversals all too often take a market from down to sideways before the next uptrend can start. Vee-bottoms are rare, and it does not look like Scotts Miracle-Gro is any different. While the bottom is in, there are still hurdles to cross before a real rally can take hold. 

Among those is a return to profitability, specifically in the Hawthorne (cannabis equipment) segment, which is doing so poorly. The good news is that core business is helping to carry the company, sustain capital returns for shareholders and drive profits for the business on an annualized basis.

The Q1 loss is a bummer but not unexpected given the season; Q1 is always the weakest and usually comes with a loss. Hawthorne made it worse, for sure, but that situation is on the med, and the company’s balance sheet is still in good shape. 

“Record December shipments in the U.S. Consumer business contributed to a strong early season buildout demonstrating confidence in the lawn and garden season. Our focus now is on early consumer engagement, and POS lifts in coordination with retail partners. While Hawthorne continues to manage through a challenging market, we are committed to returning the business to profitability by the end of this fiscal year. Overall, we are in a stable place and are well prepared to execute our full-year plan.”

What is driving the rebound in share prices? Results, operational execution and an outlook for business to improve. In regard to results, the FQ1 revenue and earnings are down versus last year, but both figures are better than expected. The revenue was bolstered by an 8% increase in US consumer sales, the primary business category.

This is great news in light of the forecast for Hawthorne, which suggests profitability could come for it sometime in the now-ish to Q4 period. The company’s aptly-named Project Springboard has it on track to achieve greater than the original $185 million in annual savings, which should get that segment back in the green and boost overall company profitability. 

Scotts Miracle-Gro Guidance Is Mixed 

Scotts Miracle-Gro is giving mixed guidance but guidance consistent with the expectations. The company forecasts a 20% to 30% decline in Hawthorne revenue, offset by growth in the core US consumer business. The gross margin will also contract by low single digits, but one-off costs related to restructuring and growth repositioning are not expected to recur. That will result in better operating margins and EPS growth. 

Turning to the chart, SMG is up more than 4.5% in the wake of the news and now trading firmly above the 150-day EMA. The move suggests a shift in the tide that should keep a firm floor in the price. The near-term outlook has the price action moving up to the $90 level, if it can get above there, a fuller reversal may unfold. If not, this stock may remain range bound at or near current levels until more signs of improvement materialize. Until then, the company is paying a 3.65% dividend which is only 65% of the full-year earnings expectations.