• Revenue: $417 million, up from $410 million.
• US Consumer Sales: Increased 11% to $341 million from $307 million.
• Hawthorne Sales: Declined 35% to $52 million from $80 million.
• Gross Margin (GAAP): 22.7%, up from 15.2% in the prior year.
• Gross Margin (Non-GAAP): 24%, up from 13.7% in the prior year.
• SG&A Expenses: $125 million, up 9% from $115 million.
• Adjusted EBITDA: Income of $3.8 million versus a loss of $25.8 million last year.
• Net Loss (GAAP): $69.5 million or $1.21 per share, improved from a loss of $80.5 million or $1.42 per share.
• Net Loss (Non-GAAP): $51 million or $0.89 per share, improved from a loss of $82.2 million or $1.45 per share.
• Free Cash Flow Usage: $475 million, reflecting normal seasonal build of working capital.
• Total Debt Reduction: Lower by $337 million compared to prior year.
• Leverage Ratio: 4.52x net debt to adjusted EBITDA, below the covenant maximum of 5.5x.

• Warning! GuruFocus has detected 6 Warning Signs with SMG.

Release Date: January 29, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• The Scotts Miracle Gro Co (NYSE:SMG) reported strong first-quarter results, exceeding expectations and setting a positive tone for fiscal 2025.
• The company is investing an additional $40 million into brand support and innovation, with a focus on advertising and expanding demographic reach.
• SMG achieved over 750 basis points of improvement in both GAAP and non-GAAP adjusted gross margin rates, driven by lower material costs and improved product mix.
• The company is on track to achieve $75 million in supply chain cost savings for fiscal 2025, contributing to a near 30% gross margin rate target for the full year.
• SMG is focusing on channel expansion, particularly in the e-commerce space, to capture a broader consumer base and drive growth.

Negative Points

• Hawthorne sales declined 35% due to a strategic shift to exit low-margin third-party distribution, impacting overall company sales.
• Despite strong first-quarter results, SMG is maintaining its guidance due to the first quarter representing less than 10% of total POS.
• The company faces challenges in the lawn fertilizer business due to climate change and pricing issues, impacting unit volume.
• There is a need for significant cost savings and transformation efforts to achieve long-term financial goals, which could pose risks if not executed effectively.
• The separation of Hawthorne from SMG is still in progress, with logistical challenges and the need for bank approvals potentially delaying the process.

Q & A Highlights

Q: There was a comment in the press release about strong fall season across all categories and some early retailer load-in for the spring season. Do you envision any timing shifts from the March quarter into the December quarter? Are there any implications for the March quarter? A: The fall went really well, and the country is beginning to come away from a lawn and garden point of view. The numbers continue to look good at the POS level. Retailers are concerned about having enough inventory deployed at the store level, indicating no sensitivity on load issues. We expect the first half and the second half of our fiscal year to have a similar pattern of sales growth, with a return to pre-COVID sales patterns.

Q: On Hawthorne, are you feeling like the logistical side of actually being able to do something with the asset is getting better? Or are you simply saying you remain committed to finding an alternative for this business? A: Both. We believe moving Hawthorne out of Scotts Miracle-Gro is better for everyone. The logistical side was never something we couldn't do; it was more about whether it was worth the hassle. Now that Hawthorne is profitable, we believe it could be more valuable as a pure pot business. We are working on the logistics and expect to start seeing the first steps of this transition soon.

Q: Is there a quantifiable opportunity to expand the number of regular users or the basket size, and which one has more opportunity? A: Both are important. We are focusing on increasing frequency of use, particularly in lawn fertilizer and plant food. We see opportunity in engaging new homeowners and those who have stepped out of the category. Every 1% increase in household penetration is significant for us. Additionally, we are exploring opportunities in the do-it-for-me space.

Q: Can you provide more details on the cadence of gross margin improvement throughout 2025 and thoughts on the 2027 objective of getting back to mid-30s gross margin? A: We expect two-thirds of the $75 million cost savings to come in the first half of the year, with the remainder in the second half. We are confident in reaching our 30% gross margin target for the year. For the longer term, we have plans in place to achieve the mid-30s gross margin by 2027, driven by supply chain savings and potential pricing adjustments.

Q: How do you see innovation, particularly in natural fertilizers and liquids, contributing to the 3% sales growth over the medium term? A: Innovation will focus on ease of use, effectiveness, value, and safety. We are launching a full Miracle-Gro organics line and exploring new form factors like recyclable bags. We aim to offer products that meet consumer preferences, whether they are all-natural or contain active ingredients. We are also engaging with active suppliers to explore more natural ways to improve product performance.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.