A Textbook Reversal For Scotts Miracle-Gro Shareholders

A Classic Entry Signal For Scotts Miracle-Gro 

Scotts Miracle-Gro NYSE: SMG reported a double-digit decline in YOY sales but that is the only negative thing we can say about the report. The company beat on all other metrics and indicated strong demand for products would carry through into next year. What investors need to keep in perspective is that the Q4 period is traditionally weak because of seasonal factors and losses are usually expected. Factor in the strong comps during last year’s stay-at-home and home-improvement phases of the pandemic and the 17% decline in sales is nothing. On a full-year basis, the company’s sales are up double-digits and on top of last year’s 25% increase. The takeaway for investors new and prospective alike is that results were so strong they are confirming a classic reversal in share prices of the stock. 

“The continued engagement by consumers throughout the lawn and garden season drove full-year U.S. Consumer sales 11 percent higher on a full-year basis on top of last year’s 25 percent growth,” said Jim Hagedorn, chairman, and chief executive officer. “Consumer purchases of our products at our largest retail partners – as measured in units – were up 6 percent for the full year, with growth in every major product category. When compared

to 2019, consumer purchases are up 21 percent and suggest a level of consumer enthusiasm that we expect to carry into the 2022 lawn and garden season.”

A Strong Quarter For Scotts Miracle-Gro 

Scotts Miracle-Gro produced revenue of $737.8 million in the fiscal 4th quarter or down 17.1% from last year. The 17.1% decline isn’t pretty to see but is against last year’s comp of up 79% so still a strong figure in terms of revenue. On a two-year basis, the revenue is up 48% which is an equally strong figure for investors to chew on. The best news is that revenue beat the Marketbeat.com consensus by 600 basis points and reveals the stickiness of trends sparked by the pandemic. On a segment basis, the consumer segment fell 28% YOY but is up 11% for the year while the Hawthorne segment fell a smaller 2.0% for the quarter and is still up 39% for the year. 

Moving down the report, the company did experience some margin pressures but has plans to mitigate that in the first quarter of the year. Gross margins shrank nearly 700 basis points under the influence of higher costs for commodities, freight, and labor but were offset to some degree by decreased promotional activity and price increases. The good news is that higher costs were not enough to completely offset the revenue strength and the company is planning to raise prices again. On the bottom line, the company’s GAAP loss (seasonally expected) came in at $0.87 and beat the consensus by $0.02 while the adjusted loss of $0.84 beat by $0.04. 

Turning to the guidance, the company is expecting demand to hold up over the next year and possibly grow. Revenue is expected in the range of up 0% to 3% and we see upside risk in the numbers. As for earnings, the company is expecting adjusted EPS in the range of $8.50 to $8.90 compared to the Marketbeat.com consensus of $8.54. 

New Repurchase Plan Helps Lift Scotts Miracle-Gro 

Scotts Miracle-Gro took on quite a bit of debt with the acquisition of Hawthorne but that effort has been paying off. While net debt is still high in relation to cash, cash flow, and free cash flow all metrics are improved to the point execs have decided to begin repurchasing shares. The new allotment is worth $300 million or about 3.6% of the market cap and will begin in the first quarter of the year. 

Turning to the charts, shares of Scotts Miracle-Gro are up more than 12% on the news and look ready to move higher. Not only is price action confirming support at the short-term moving average but the indicators are firing strong entry signals as well. With such a strong set-up in play, we expect to see this stock continue moving in the near, mid, and long terms with periodic sell-offs that should be viewed as buying opportunities.