ScottsMiracle-Gro Refines its Cannabis Strategy

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ScottsMiracle-Gro (NYSE: SMG) reported its FY17-Q1 results for the quarter ending 12/31/16 on January 31st, with sales of $247mm in what is a seasonally slow quarter rising 27%. Driving the sales growth was the performance of their “Other” segment, which includes the Hawthorne Gardening Company as well as their Canadian and Asia Pacific businesses, which rose 74% to $97mm. The Hawthorne Gardening Company includes the company’s cannabis operations, consisting of Botanicare, Gavita, General Hydroponics and Vermicrop, all acquired within the past two years, though the portfolio is broader than just the cannabis-focused brands.

On a conference call (transcript), CFO Thomas Coleman indicated that absent the recent acquisitions of Botanicare and Gavita, growth in the Hawthorne Gardening Company was only 6%. He explained the unimpressive growth due to the timing of shipments a year ago for Vermicrop and in Q4 for Botanicare, stating that otherwise “when you look at the normalized organic year-over-year growth at General Hydroponics, Vermicrop, Botanicare and Gavita combined, then sales would have been up 11% on a pro forma basis.” This still represented a slowdown from Q4, when organic sales growth was 24%, which Coleman said was due to the timing of the Botanicare deal closing.

ScottsMiracle-Gro, after closing the Botanicare deal last year, decided to make some changes to the Hawthorne business, pulling out some of the craft brands, like Black Magic, and leaving Hawthorne to focus on the medium to large grower, selling products that require more technical expertise. The move will have a negative impact on the overall operating margins of Hawthorne, which will include AeroGarden, Botanicare, General Hydro and Gavita lines. Hawthorne’s technical and sales operations will be run out of Santa Rosa, CA, where General Hydro is located, while the strategy and branding functions will be run out of the Hawthorne headquarters in Port Washington, NY, all under the leadership of CEO Jim Hagedorn’s son, Chris Hagedorn.

Craft and hydroponics do not represent an either/or choice for us, we have to do both. But as we began to understand the potential size of the prize in hydro, all of us, including the Hawthorne team, realized the smartest approach was to separate the craft and hydro businesses.


Jim Hagedorn, CEO of ScottsMiracle-Gro

We told you that GH, Botanicare and Gavita, all have operating margins of roughly 20%, that remains the case. But depending on exactly what costs get allocated to Hawthorne instead of the corporate P&L, a decision that is still in the works, the operating margin for Hawthorne as a segment could be 13% to 14%.

CEO Hagedorn explained that there are still some gaps in the portfolio and that the opportunity in hydroponics appears to be larger than their original expectations. The company expects to either develop or potentially acquire additional lines. Hagedorn expects that the window for acquisitions will close by the end of 2017.

The company, which kept its forecast for the year intact at $4.10-4.30 EPS and sales growth of 6-7%, is hosting an Analyst & Investor Day later this month in Florida. CEO Hagedorn expects sales at Hawthorne to grow at almost 10% for the full year.

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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