SCOTTS MIRACLE-GRO CO (SMG)·Q1 2025 Earnings Summary

Executive Summary

• Solid seasonal start: Q1 revenue grew 2% to $416.8M with sharp gross margin recovery (GAAP 22.7%, +750 bps YoY; adj. 24.0%, +1,030 bps) and positive adjusted EBITDA, while GAAP/adj. EPS losses narrowed meaningfully .
• Guidance intact, financing improved: Management reaffirmed FY25 outlook (U.S. Consumer LSD growth; Hawthorne MSD decline; adj. gross margin ≈30%; adj. EBITDA $570–$590M) and cut interest expense outlook to $15–$20M below prior year (prior: -$10M) as leverage fell to 4.52x .
• POS momentum and retailer support: Q1 POS rose 12% in dollars and 13% in units; U.S. Consumer net sales +11% on strong fall engagement and early spring load-in, while Hawthorne declined as expected on the exit from third‑party distribution but was EBITDA positive .
• Strategic catalysts: Management emphasized transformation cost-outs (≥$75M supply chain savings in FY25) and indicated intent to separate Hawthorne over time to lift core margins and reduce cannabis volatility exposure .

What Went Well and What Went Wrong

• What Went Well

  • Margin recovery and cost execution: “We achieved over 750 basis points of improvement” in GAAP gross margin (22.7%) and adj. margin (24.0%) on lower input, better mix, and distribution savings; tracking to ~30% for FY25 .
  • U.S. Consumer momentum: Net sales +11% to $340.9M on strong fall campaigns and early retailer load-ins; POS up double‑digits; segment profit swung to +$10.0M from -$15.5M .
  • Balance sheet progress: Interest expense -21% YoY to $33.7M; leverage improved to 4.52x, with management targeting low 4s by year-end .

• What Went Wrong

  • Hawthorne top-line pressure continues: Sales fell 35% to $52.1M (in-line with strategy to exit third‑party distribution) despite profitability improvement .
  • Higher SG&A as investment cycle ramps: SG&A +9% YoY to $124.8M on media, marketing, innovation, and people costs, partially offsetting gross margin gains .
  • Non-recurring charges: $21.7M of impairment/restructuring (severance and RIV Capital/Cansortium items) plus $5.1M cost of sales restructuring weighed on GAAP results .

Financial Results

Segment performance (Q1 YoY):

Select KPIs and balance sheet:

Note: Q1 typically represents <15% of FY sales; Q1 POS typically <10% of FY POS .

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• CEO: “We’re off to a very good start... delivered on the metrics that form the foundation of our fiscal ’25 plan... retailers are just as bullish... gives us great confidence in our fiscal ’25 EBITDA guidance and our outlook through fiscal ’27.” .
• Transformation and investment: “In fiscal ’25, we’ll take at least $75 million out of our supply chain... CapEx will increase by $25 million to $100 million this year.” .
• Hawthorne: “We believe that moving Hawthorne out of Scotts Miracle‑Gro is better for everyone... would eliminate the volatility of the cannabis sector and generate a significant uplift in gross margin.” .
• CFO: “Strong first quarter results are well ahead of expectations... we are maintaining our guidance, especially since the first quarter represents less than 10% of our total POS.” .

Q&A Highlights

• Load-in timing and seasonal cadence: Management expects similar low‑single‑digit U.S. Consumer growth pattern in first and second halves; sales phasing normalizing to pre‑COVID 55% H1/45% H2 .
• Hawthorne separation logistics: Leadership aligned; working toward necessary approvals; could see initial steps within 1–2 months, aiming for clear equity narrative and margin uplift .
• Gross margin cadence: ~2/3 of FY25 GM improvement front‑half via commodities and network closures; additional benefit in Q4 as company laps prior write‑offs; long‑term path to mid‑30s reiterated .
• E‑commerce underpenetration: DIY brick‑and‑mortar unit share ~40%; e‑comm “barely in the double digits,” highlighting a large opportunity with tailored form factors and D2C .
• Promotions/private label: Elevated retailer promotions narrowing gaps; management views private label as part of good-better-best and not a structural threat as brand activation drives traffic .

Estimates Context

• Wall Street consensus (S&P Global) for Q1 2025 revenue/EPS/EBITDA was unavailable due to API limits at retrieval time; therefore, we cannot provide beat/miss analysis versus S&P Global consensus for this quarter. Management reaffirmed FY25 adj. EBITDA of $570–$590M and ~30% adj. gross margin .

Key Takeaways for Investors

• Margin recovery on track; front‑half execution de‑risks FY25 30% gross margin target, with additional tailwind as AeroGarden write‑offs lapse in Q4 .
• U.S. Consumer momentum and double‑digit POS underpin LSD growth guidance despite colder seasonal start; early load‑ins signal retailer confidence .
• Strategic separation of Hawthorne, if executed, could simplify the equity story, reduce volatility, and potentially lift consolidated margins over time .
• Elevated brand and in‑store activation investments are driving share and unit growth; watch pricing/mix and promo intensity as levers to maintain margins .
• Balance sheet trajectory improving (interest down, leverage 4.52x), enabling greater financial flexibility; interest expense outlook cut to -$15–$20M YoY .
• Seasonality remains key (Q2–Q3 largest); weather remains a swing factor, though inventory positioning and supply chain efficiency provide cushions .
• Dividend continuity (Q1: $0.66) signals confidence while transformation focuses on cost-outs and automation to fund growth and potential shareholder returns .

Appendix: Additional Data Points

• Q1 details: Net sales $416.8M; GAAP net loss $(69.5)M; adj. net loss $(51.0)M; interest expense $33.7M; SG&A $124.8M; adj. EBITDA $3.8M .
• Mix drivers: Company cited lower material costs, favorable fixed cost leverage, lower distribution costs from FY24 warehouse closures, improved Hawthorne mix (less third‑party) .
• Dividend: $0.66 per share payable Mar 7, 2025 (record Feb 21, 2025) .