Scotts Soars to Record as Marijuana Sales Spur Improved Outlook

(Bloomberg) -- Scotts Miracle-Gro Co. surged to a record after raising its profit forecast and reporting booming sales from a marijuana business that's spreading its roots from California into the Midwest and East Coast.

Changing laws have spurred new markets in Ohio, Michigan, Florida and Massachusetts, the gardening-products maker said in a statement Wednesday as it reported earnings. That's bolstering a robust business in California for the company's pot-focused Hawthorne Gardening subsidiary.

Hawthorne, which supplies specialty fertilizers and hydroponics equipment used for growing marijuana, posted its third straight quarter of rising sales. That's reversing a slump from last year, which was stoked by concerns that states weren't acting as quickly as expected to loosen laws restricting marijuana crops and sales.

“We see today's results as a validation of the strategy we initially laid out in 2015,” Scotts Chief Executive Officer Jim Hagedorn said on a conference call. “It's confirmation that the challenges that drove our conversation on this call a year ago are now in the rear-view mirror.”

The shares rose 8.9% to $112.33 at 11:01 a.m. in New York, after advancing as much as 9.8% to a record intraday high. Scotts rallied 68% this year through Tuesday, largely on renewed optimism about Hawthorne's future.

Buoyed by the strong momentum in marijuana-focused sales, Scotts raised its 2019 forecast for both sales and profit. It now expects a 90% rise in sales at its pot business, up from a June outlook of 80%. That's expected to lift total revenue as much as 17%.

The company predicted adjusted earnings for the fiscal year of $4.35 to $4.50 a share, compared with the $4.20 to $4.40 it projected earlier.

Scotts was one of the first public companies to enter the marijuana business when it purchased a hydroponics supplier in 2015. Performance has been volatile since then. After sales were slow to take off in California's highly regulated legal marijuana market, Scotts cut its sales forecast in January 2018, which kicked off a 43% sell-off for the year.

Still, the company doubled down with acquisitions and now claims to be the largest hydroponics supplier in North America. In the quarter ending June 29, Hawthorne's sales more than doubled, bolstered by the purchase of a major hydroponics distributor. Even after adjusting for the effects of the acquisition, sales climbed 49%.

‘Best Positioned'

“It's maybe taking a little longer than people thought at first, but Hawthorne is the best positioned company to capitalize on increasing market size,” Seth Goldstein, an analyst with Morningstar, said ahead of the earnings release. “So far, the bet is paying off.”

Scotts' performance is an indicator of the changing landscape in the U.S. for legal marijuana. Michigan and Massachusetts are among the latest states to make recreational use legal, and Florida legalized medical marijuana for the first time this year. Nearly 25% of the U.S. population lives in the 10 states where recreational use is now legal.

The company cautioned that impressive growth this year is in part because of easy comparisons against last year's poor performance. Hagedorn said to expect high single-digit sales growth for Scotts in 2020.

“When you consider the radical disruption we had last year, it's hard to compare growth because of how down things were,” Chris Hagedorn, the CEO's son who runs Hawthorne, said on the call.

Hawthorne is spending big on marketing this year in pursuit of growth and market share. Operating profit margin has hovered around 8% as a result. The company plans more disciplined spending and cost cuts next year to increase the margin to double digits, rising to 15% in three years, Chief Financial Officer Randy Coleman said.

Scotts also said it negotiated an improved deal to distribute Roundup weedkiller for manufacturer Monsanto, a unit of Bayer AG. Scotts will take a higher share of the profits from sales of the herbicide, which has been marred by litigation and accusations that it causes cancer. Despite the bad publicity, Roundup sales have risen in 2019 thanks to increased advertising, Scotts said.

Adjusted earnings rose to $3.11 a share in the fiscal third quarter, the company said. That surpassed the highest analyst estimate compiled by Bloomberg. Sales climbed 18% to $1.17 billion, also beating the highest estimate.

To contact the reporter on this story: Jack Pitcher in New York at jpitcher2@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Susan Warren

©2019 Bloomberg L.P.