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Why Is Scotts (SMG) Down 22.1% Since Last Earnings Report?

·4 min read

A month has gone by since the last earnings report for Scotts Miracle-Gro (SMG). Shares have lost about 22.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Scotts due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Scotts Miracle-Gro’s Q3 Earnings Beat Estimates, Sales Miss

Scotts Miracle-Gro reported loss from continuing operations of $443.9 million or $8.01 per share in third-quarter fiscal 2022 (ended Jul 2, 2022) compared with a profit of $229.8 million or $4.00 per share in the year-ago quarter.

Barring one-time items, the adjusted earnings were $1.98 per share, down from $3.98 a year ago. The figure topped the Zacks Consensus Estimate of $1.70.

Net sales fell around 26% year over year to $1,186.1 million and missed the consensus mark of $1,199.8 million. The company witnessed lower sales across its major segments in the quarter. It saw lower-than-expected sales in the U.S. Consumer segment and sustained pressure on sales in the Hawthorne unit due to oversupply issues in the cannabis industry.

Company-wide gross margin rate (as adjusted) was 25.5% compared with 30.8% in the year-ago quarter. The decline in gross margin is attributable to unfavorable fixed cost leverage related to volume, increased commodity costs and unfavorable distribution costs. These were partly offset by price increases and favorable segment mix.

Segment Details

In the third quarter, net sales in the U.S. Consumer division were down 14% year over year to $904.5 million. The segment delivered a profit of $181.1 million, down 32% year over year.

Net sales in the Hawthorne segment tumbled 63% year over year to $154.5 million in the reported quarter. The segment reported a profit of $4.1 million, down 92% year over year.

Net sales in the Other segment fell 10% year over year to $127.1 million. The segment reported a profit of $10.9 million, down 59% year over year.

Balance Sheet

At the end of the quarter, the company had cash and cash equivalents of $27.8 million, down around 52% year over year. Long-term debt was $3,155.6 million, up around 48% year over year.

Outlook

The company anticipates a similar or greater decline in sales in the U.S. Consumer division in the fiscal fourth quarter. For the full year, it now expects sales to decline 8-9%. It also expects full-year adjusted earnings per share to be $4.00-$4.20.

Scotts Miracle-Gro also announced “Project Springboard”, aimed at boosting margins, improving cash flow and strengthening the balance sheet to provide a strong foundation for sustainable shareholder value creation.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

The consensus estimate has shifted -77.26% due to these changes.

VGM Scores

At this time, Scotts has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Scotts has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.

Performance of an Industry Player

Scotts is part of the Zacks Fertilizers industry. Over the past month, CF Industries (CF), a stock from the same industry, has gained 3.4%. The company reported its results for the quarter ended June 2022 more than a month ago.

CF reported revenues of $3.39 billion in the last reported quarter, representing a year-over-year change of +113.4%. EPS of $6.19 for the same period compares with $1.14 a year ago.

CF is expected to post earnings of $3.48 per share for the current quarter, representing a year-over-year change of +262.5%. Over the last 30 days, the Zacks Consensus Estimate has changed -6.6%.

CF has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of A.


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