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Scotts Miracle-Gro Delivers Transformational Quarter

The Scotts Miracle-Gro (NYSE:SMG) story is a rare one in today’s market but not entirely unique. The company had begun a major transformation years before the pandemic that 1) had it growing at a strong double-digit and 2) set it up for the stay-at-home/play-at-home/home-improvement shift that erupted over the last year. The two primary drivers of growth, aside from the pandemic, were a strategic aquisition, an expansion strategy, and cannabis.

Together these forces had the company growing at a 15% to 20% CAGR for nearly two years and the pandemic only accelerated that growth. The fiscal 4th/calendar 3rd quarter saw revenue fall sequentially as was seasonally expected but YOY growth accelerated from 27% to 78%. It may have been right to expect Scotts Miracle-Gro revenue to fall sequentially in the fiscal 1st it was wrong to expect growth to slow.

Scotts Miracle-Gro, Wow Says It All

To say that Scotts Miracle-Gro was well-positioned for the pandemic and rebound is an enormous understatement. The company’s revenue not only grew by double digits in the wake of the shut-downs but growth is still accelerating. The company reported a first-quarter record of $748.6 million in revenue to beat the consensus by 2000 basis points and grow nearly 105% over the same quarter last year.

The company saw strength in both the retail and Hawthorne segments, Hawthorne being that strategic acquisition we mentioned and Scotts Miracle-Gro’s exposure to the cannabis market. Hawthorne manufactures, markets, and services a wide range of grow equipment and dedicated grow-room environments. Hawthorne is about 40% of sales and growing.

Moving down the report things only get better. The company reported a surprise profit for the quarter and the first profit ever recorded due the seasonal nature of operations. On a GAAP basis the EPS of $0.43 beat by $1.11 while the adjusted $0.39 beat by $1.07. Now, there were an extra five days in the 2021 Q1 period and it did have a positive impact to earnings. The takeaway, however, is that those 5 days accounted for about $43 million or 5.6% of sales. When adjusted for those days the company still produced a stunning 92% increase in sales and a profitable quarter.

Scotts Miracle-Gro Rises On Cautious Guidance

Scotts Miracle-Gro raised its guidance due to the Q1 strength but only to be inline with the consensus estimates. What investors need to be aware of is that guidance was only raised for the Hawthorne segment. Management says that it is still too early to predict what the American consumer is going to do this year but we think that is a little cautious at best. Based on the Q1 results, strength in housing markets, and an expectation for at least some distancing habits to stick, the -1% to -5% forecast for retail sales and 1% to 5% YOY revenue growth is very weak indeed. But we understand their caution.

“Our strong start gives us renewed confidence in our full-year outlook although we remain sensitive to the challenges in the second half of the fiscal year against historic comparisons. We now believe we have enough visibility, however, to raise our full-year sales growth outlook for Hawthorne to a range of 20 to 30 percent, compared with our previous outlook of 15 to 20 percent. Despite the historically strong start in U.S. Consumer, it remains too early in the season to adjust our outlook for that business.”

The Technical Outlook: Scotts Miracle-Gro Sprouts New All-Time High

Scotts Miracle-Gro has been in a strong and strengthening uptrend ever since the Hawthorne acquisition began to bear fruit. The 2021 Q1 results have that trend accelerating again with shares up nearly 5% and trading at a new all-time high in the premarket session. Investors are warned not to chase prices but wait for pullbacks and price weakness to buy in. And don’t forget, Scotts Miracle-Gro pays a safe 1.0% yield and has a high expectation for an aggressive increase this year. Last year the company paid an unexpected, special dividend of $5 that was worth 1.7% in yield.