Lawn and garden care firm Scotts Miracle-Gro (NYSE:SMG) recently ended its fiscal year on a sour note and struggled for most of the year, because of strange weather patterns throughout the U.S. Yet despite the unpredictability of Mother Nature and a historic housing bust, consumers are remaining loyal to keeping their lawns green and gardens tidy, which bodes well for Scotts going forward.
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Full Year Recap
Sales fell 2% to $2.8 billion on a 1% drop in fourth quarter sales, that came in at $417 million, or 14.7% of total sales. The bulk of Scotts sales take place during its second and third fiscal quarters, which occur during the key spring and summer planting seasons. The fourth quarter contains the fall garden season, which is less active than the two earlier seasons and was especially troublesome this year, due to Hurricane Irene. Management also cited unusual weather patterns throughout the U.S. for the full year, which resulted in sales that were below internal goals. In its estimates, this hit the domestic consumer business that consists of Miracle-Gro, Ortho brands and Roundup, the last of which is marketed under an agreement with fertilizer giant Monsanto (NYSE:MON). Monsanto markets Roundup to business clients, leaving the consumer selling to Scotts.
Management blamed lower gross margins on the sale of less profitable products, as well as “higher than planned consumer promotion costs, increased commodity cost, and reduced leverage of our fixed manufacturing and warehousing costs.” SG&A costs fell 1% to lag the sales decline, but the lower gross profits still pushed operating profits down 32% to $247 million. Higher interest expense helped send reported net income down 17.7% to $167.9 million, or $2.54 per diluted share. Excluding the sale of its global professional business, earnings from continuing operations fell 38% to $1.84 per diluted share. (For related reading on margins, see Analyzing Operating Margins.)
Analysts currently project sales growth for the coming year to come in at 7.3% and total sales just over $3 billion. On average, they expect earnings of $2.86 per share. The company will provide more detailed earnings guidance during its upcoming analyst day in February.
Sixty percent of sales stem from retail giants Home Depot (NYSE:HD), Lowe’s (NYSE:LOW) and Wal-Mart (NYSE:WMT), but Scotts products generally receive appealing shelf space, given they are highly popular and sell well during the spring and into summer. It remains to be seen the level that sales will grow, now that the company has focused on two primary segments, but it has managed to leverage annual single-digit sales growth into double-digit profit growth on average, over the past five years, which has been a particularly challenging time for homeowners. The forward P/E is reasonable at below 15, but does imply the market expects steady growth levels, for at least the coming five years. (For related reading on the P/E ratio, see How To Use The P/E Ratio And PEG To Tell A Stock’s Future.)
Over the past few years, Scotts has worked to right size its business. It closed down the underperforming Smith & Hawken retail business and the global professional operations that sold products to nurseries and greenhouses. What remains are the market-leading lawn and garden care products, and lawn service business.
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At the time of writing Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.