Business context and reporting period
The Scotts Miracle-Gro Company’s unaudited first quarter of fiscal 2021 ended January 2, 2021; the comparable quarter ended December 28, 2019. The company sells consumer lawn and garden products and indoor/hydroponic gardening products through U.S. Consumer, Hawthorne and Other segments. The business is seasonal, with more than 75% of annual North American consumer lawn and garden sales typically occurring in the second and third fiscal quarters. Fiscal 2021’s first quarter had five additional days versus the prior-year quarter; management estimates this added approximately $43 million of sales and $0.12 of diluted earnings per share.
Financial results and key metrics
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $748.6 | $365.8 |
| Gross profit / margin | $190.8 / 25.5% | $54.2 / 14.8% |
| Operating income (loss) | $34.0 | ($62.6) |
| Net income (loss) | $25.2 | ($71.3) |
| Net income (loss) attributable to controlling interest | $24.4 | ($71.4) |
| Diluted EPS | $0.43 | ($1.28) |
| Interest expense | $16.1 | $20.0 |
| Net cash used in operating activities | ($420.7) | ($318.2) |
| Net cash used in investing activities | ($148.2) | ($25.7) |
Sales increased 104.6%, driven mainly by volume (99.2 percentage points), with contributions from pricing and foreign exchange. Management cited increased consumer demand, including pandemic-related demand. Gross margin improved 10.7 percentage points, reflecting sales mix, fixed-cost leverage, pricing and Roundup agreement income, partly offset by higher materials costs and special charges. SG&A rose 30.8% to $156.7, including higher advertising, incentive compensation, selling expense and technology investment.
Segment sales and profit (the company’s non-GAAP segment measure): U.S. Consumer sales were $408.2 and segment profit $45.3, versus sales of $165.5 and a $40.1 loss; Hawthorne sales were $309.4 and profit $40.4, versus $180.7 and $12.5; Other sales were $31.0 and segment profit was zero, versus $19.6 and a $3.5 loss. AeroGrow was reclassified from Hawthorne to U.S. Consumer, with prior-period segment data recast.
Liquidity, debt and capital allocation
At January 2, 2021, cash was $21.5; total debt was $2,177.2, including $188.0 current and $1,979.8 long-term debt. Total debt was $1,531.2 at September 30, 2020 and $2,074.5 at the prior-year quarter end. Current assets were $1,679.5 and current liabilities $1,054.5. Cash and operating cash flow are highly seasonal: the quarter’s operating outflow was driven principally by a $442.8 increase in inventories, alongside other working-capital needs.
The company reported $880.6 of borrowing availability under its $1.5 billion revolving facility. Its leverage ratio was 2.26 against a maximum of 4.50; interest coverage was 11.84 against a minimum of 3.00, and the company reported covenant compliance. It expected to remain compliant in fiscal 2021 under current assumptions, while noting that earnings shortfalls or higher debt could affect compliance. The receivables facility had $136.0 outstanding and expires August 20, 2021; management expected renewal. The quarterly dividend was $0.62 per share; the company repurchased approximately 0.2 million shares for $38.0.
Developments, outlook and risks
- On December 31, 2020, the company acquired a 50% interest in Bonnie Plants, LLC for $100.7 cash, along with forgiveness of its AFC loan and surrender of options. The investment was recorded at an initial fair value of $202.9. A $12.5 gain from revaluing the AFC loan contributed to non-operating income of $15.2 for the quarter.
- Management reported continued elevated demand in the quarter but said future pandemic effects remain uncertain and could change customer orders, consumer behavior and seasonality. COVID-related costs were $9.3 in the quarter; the company expected incremental costs to continue through fiscal 2021.
- No quantified full-year earnings or sales guidance is provided in the supplied filing text. Management said operating cash flows and borrowing capacity were expected to meet foreseeable debt-service, capital-expenditure and working-capital needs, subject to business and pandemic uncertainties.
- The company declined on January 15, 2021 to exercise its option to terminate the Roundup marketing agreement for convenience. The agreement includes specified termination rights and potential termination payments; Roundup-related sales were $17.2 in the quarter.
- The company agreed to acquire AeroGrow’s remaining shares for approximately $20.1, subject to approval and other conditions, with closing expected in fiscal Q2 2021. Separately, the CFO departed effective January 5, 2021; the company expected to record a $3.3 charge in Q2, and Cory Miller became interim CFO.
- For the prior International Business sale, contingent consideration remains subject to determination of performance criteria; if criteria were not met, the company said a charge of approximately $18.7 could be required. Environmental, product-liability and other legal contingencies remain; management said recorded accruals were adequate but outcomes are uncertain. The filing reports no material change in risk factors from the 2020 annual report.
Most important facts for investors to verify
- How much of the exceptional sales and earnings growth persists after adjusting for the five extra fiscal-quarter days, pandemic-related demand and seasonality.
- Inventory build, seasonal cash use, debt levels and borrowing availability as the company enters its peak selling period.
- Bonnie Plants’ subsequent contribution to earnings and cash flow, and the final outcome of the AFC-related valuation and International Business contingent consideration.
- Renewal of the receivables facility, covenant headroom, and the company’s ability to sustain dividends and repurchases amid higher debt.
- Progress and final terms of the AeroGrow transaction, the CFO transition, and the continuing effects of COVID-19 and Roundup agreement risks.