Scotts Miracle Gro Earnings: Turnaround Efforts Point to Improving Near-Term Operations

Scotts Miracle Gro’s SMG fiscal 2023 fourth quarter showed progress on the company’s strategy to sell excess inventory and run its plants at lower capacity as a way to pay down debt. Having updated our model to incorporate the results, we maintain our $100 per share fair value estimate. Our narrow moat rating is also unchanged.

Scotts’ shares traded up nearly 21% at the time of writing on management’s guidance for sales growth, double-digit operating margins, and further deleveraging. However, at current prices, we view Scotts shares as materially undervalued with the stock trading at a little less than half of our fair value estimate. Shares trade just below our downside scenario, which produces a fair value estimate of $55 per share. Our downside scenario assumes slow revenue growth and lower profit margins versus our base case, with profits remaining well below the peak in fiscal 2021. Accordingly, we think a lot of the bad news remains priced into the stock.

The U.S. Consumer business declined nearly 3% year over year and 34% in the fourth quarter, in line with management guidance. We think the business should return to growth moving forward, as volumes grow after cost inflation likely led to some consumers reducing spending on gardening products. As prices and costs normalize, we expect U.S. consumer segment profits will rebound to the low- to mid-20% range, in line with prepandemic levels.

In the Hawthorne segment, sales declined 35% and operating margins clocked in at negative 10% for the year. The oversupplied cannabis supplies segment continues to weigh on segment profitability. However, after Hawthorne cut costs, we expect the business to stabilize in fiscal 2024 and generate a small profit.