Scotts Miracle-Gro swung to a loss and eliminated 200 jobs at its Hawthorne cannabis grow unit, but it beat Wall Street’s sales target and said it will raise prices to boost its business.
Scotts Miracle-Gro continues to evaluate whether to split off its Hawthorne unit but said it’s not in any hurry to reach a decision. The business reported a 38% drop in sales to $191 million in the first quarter.
Asked by analysts about the potential spinoff, Scotts Miracle-Gro CEO Jim Hagedorn said the company is weighing the benefits of cost savings and contributions from Hawthorne’s management team against the unit’s appeal to investors seeking a stand-alone cannabis company. He said the company could also maintain a minority position in Hawthorne as another potential path.
“We’ll create the most valuable pure cannabis play in the world,” Hagedorn said. “The value creation of creating an entity that we’re talking about here more than offsets the relatively minor dis-synergies that would happen.”
The company’s move into the cannabis market will become more clear in coming weeks, he said. Last August, Scotts Miracle-Gro made an initial investment of $150 million in the form of a six-year convertible note issued to the company by RIV Capital Inc. CNPOF, +2.86% RIV, and created the Hawthorne Collective as a vehicle to invest in the cannabis industry.
Separately, Scotts Miracle-Gro said it would spend about $200 million on acquisitions in its current fiscal year. It plans to repurchase $50 million in stock in the second quarter, down from $125 million in the first quarter.
Scotts Miracle-Gro SMG said it lost $50 million, or 90 cents per share, in its fiscal first quarter, after posting net income of $24.4 million, or 43 cents per share, last year. Its adjusted loss of 88 cents was wider than the consensus of 73 cents a share.
First-quarter sales of $566 million fell from $748.6 million in the year-ago period, and beat the consensus for $561.2 million.
CFO Cory Miller said material costs came in ahead of its original estimates, but it’s planning to raise prices in a move that should keep the company on track to cover increased commodity costs on a full-year basis.
“We have been encouraged in recent weeks to see a decline in several key raw material inputs, which seeds a level of cautious optimism that the pressure we’ve been dealing with for the past year may finally be easing,” Miller said.
The company said the job reductions at Hawthorne will come as it closes one facility to move operations to Santa Rosa, Calif. The company will take a $5 million restructuring charge, and prices of some LED lighting fixtures are expected to fall as a result.
Scotts increased its full-year sales outlook to a range of up 2% to down 2%, compared with previous guidance for a range of flat to down 4%. The FactSet consensus is for sales of $4.797 billion, suggesting a 2.6% decline.
Raymond James analyst Joseph Altobello said Scotts Miracle-Gro’s results came in mostly as expected after the company issued a warning in early January.
“Sales of hydroponics products have suffered from an oversupply of cannabis in a handful of key markets, while Hawthorne also experienced supply chain disruptions in the quarter,” he said. “We concur with management’s view that this is likely to be short-term in nature (largely due to the perishable nature of the product), with growth for the segment expected to resume in 2H.”
In its core garden business, Scotts Miracle-Gro said it continues to track lifestyle choices for millennials and said it remains confident that the market will absorb higher prices.
MarketWatch news editor and retail reporter Tonya Garcia contributed to this report.