Scotts Miracle-Gro CFO Matthew Garth said the company still sees promise in the struggling $100 billion cannabis market to which it sells indoor growing and hydroponic equipment.
In the wake of what he called “shifting tectonic plates” and the oversupply issues and legal pressures that have buffeted the emerging sector, Garth said Monday that Scotts is rightsizing its Hawthorne segment that serves the cannabis market.
While there’s not a lot of value in cannabis assets today, players like Scott’s Hawthorne that have strong balance sheets are in a good position to create it, Garth said during a presentation and webcast from this week’s Raymond James Institutional Investors Conference.
“To me it’s a lot like beer and alcohol where you have mass products and then there’s a whole premium end of the market that exists,” Garth said. “The beauty for us is we can play across all those formats...so we’re all over the value spectrum in cannabis and that is a very important part of the Hawthorne offering.”
The over 150-year-old company — better known for its lawn and garden products — has quietly grown to become one of the biggest players in cannabis as it has snapped up hydroponics, lighting and other growing supplier companies, according to a CNN Business report.
Garth, who joined the the Marysville, Ohio-based company late last year, acknowledged that the company has gone through a difficult couple of years.
In addition to the challenges in the cannabis sector, Scotts is also grappling with the normalization of demand and retail inventory reductions on the consumer side after enjoying a tailwind from a surge in gardening interest during the pandemic.
For its fiscal first quarter ended in December, Scotts reported company-wide sales fell 7% from the year-earlier period to $526.6 million. Sales from the cannabis-focused Hawthorne segment fell 31% to $131.5 million due to continued challenges in the hydroponic industry in the quarter while Scotts’ consumer segment sales rose 8% to $369 million year-over-year. For the quarter the company reported a net loss for of $64.7 million compared to $50 million in the year earlier.
In his talk, Garth detailed the company’s turnaround plans, which include cuts and other actions that are expected to realize about $185 million in annualized savings by the end of fiscal 2023. Within Hawthorne, the company is shrinking its warehouse distribution network, with six sites totaling 800,000 square feet set to be closed by year-end, according to materials that accompanied Garth’s talk.
Still, some analysts are skeptical. Moody’s Investors Service on Monday downgraded the company’s corporate family debt rating to Ba3 from Ba2, citing the concern that Scotts’ leverage will remain high over the next two years even as the EBITDA margin and free cash flow improve.
“While Moody’s anticipates the lawn and garden business will improve if weather conditions normalize because the company has taken steps to overcome the increase in input costs, there is continued uncertainty in the recovery of the Hawthorne business given the oversupply conditions in the cannabis market,” the Moody’s report states.