ScottsMirable-Gro A Multi-Branched Investment
We’ve been interested in the ScottsMiracle-Gro (NYSE: SMG) story for 18 months or so and couldn’t be more encouraged by the FQ2 results. The company was able to build on the momentum gained during the pandemic and grow its results to record levels. Not only is ScottsMiracle-Gro a consumer-focused play on stay-at-home trends, home improvement, and housing but it is also a play on the cannabis market. The company isn’t growing cannabis itself but the acquisition of Hawthorne puts it firmly in the cannabis market. Hawthorne makes, markets, installs, and troubleshoots premium grow facilities and equipment primarily used by the cannabis market. It is the heart of the growth story but not the only source of strength.
“The record level of consumer demand we have seen for our lawn and garden products is greater than we expected and may provide upside to the updated guidance we provided for our U.S. Consumer business in early April,” said Jim Hagedorn, chairman and chief executive officer. “Consumers told us entering the season that they intended to stay engaged with lawn and garden and, so far, that is exactly what they are doing. Retailer support for the category remains strong as we enter a period of challenging year-over-year comparisons.
ScottsMiracle-Gro Has Mixed Quarter But Who Cares
ScottsMiracle-Gro had a mixed quarter in that GAAP earnings missed the consensus by a fair margin, about $0.30. Everything else about the report is more than good and points to robust results for the remainder of the fiscal year, the company’s two strongest quarters. The revenue of $1.82 billion is not only up sequentially but up 32.6% from last year, 550 basis points better than expected, and the highest on record. The takeaway for us isn't that earnings missed, it's that GAAP earnings are up 22% from last year and the company is guiding higher.
Revenue strength was driven by a 66% increase in the Hawthorne segment couple with a 23% increase in the U.S. consumer segment. Hawthorne saw strength in all categories and came in at 20% of revenue while the U.S. consumer segment saw strength in all regions and across all product lines. According to the company’s press release, U.S. consumers said they were going to keep spending on their yards this year and so far they are following through on it. In regards to Hawthorne, the U.S. cannabis market is still in its high-growth phase so its results should not flag for some time.
Moving down to the bottom line, there was some upward price pressure in the margins but not enough to offset the company’s revenue strength. The margin loss is partly due to the mix as well but rising commodity costs and freight are key elements. The GAAP earnings, which include one-time costs, came in at $5.44 and shy of consensus but still up 22% from last year. The adjusted $5.64 is a better comparison, it’s up 25% YOY and came in $0.07 ahead of the consensus.
Guidance Is Leading ScottsMiracle-Gro Higher
ScottsMiracle-Gro offered some guidance that is not only favorable but even offered the possibility of upside surprises. The company upped its expectation for growth at Hawthorne to up 30%-40% with lesser but no less significant growth in the core U.S. consumer business. The U.S. consumer business is expected to grow at a 4% to 6% clip but early indications are already pointing to higher-than-guided results.
Shares of the stock are up more than 3.0% following the news and are likely heading higher. The price action is confirming support at a key level and about to signal a strong buy. The stochastic is already indicating a strong buy, what we’re waiting for is a firm move above the short-term EMA and the complimentary bullish crossover in the MACD. When that scenario unfolds we’ll be looking for a retest of the all-time high and break to new all-times to quickly follow.
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