Trimming Scotts' FVE to $115 on Lower Near-Term Outlook; Shares Materially Undervalued

Scotts Miracle Gro reported fiscal fourth-quarter results that showed continued challenges in both the U.S. consumer and Hawthorne businesses which were consistent with 2022. Full-year sales declined 20% as many consumers who turned to gardening during the pandemic resumed pre-pandemic activities, while Hawthorne saw oversupply conditions. Management introduced new cost-saving initiatives and structural changes to account for a muted recovery outlook fiscal in 2023, calling for mid-single-digit adjusted EBITDA growth. Given Scotts' elevated debt levels, the company is focusing on cutting costs and reducing inventory as a way to focus on debt repayment. We have slightly reduced our near-term outlook to account for a slower Hawthorne recovery. As a result, we reduce our fair value estimate to $115 per share from $120. Our narrow moat rating is unchanged.