Overall, Scotts Miracle-Gro (SMG) posted a sales growth of 7%. But let’s see how that translates into margins.
Scotts Miracle-Gro’s gross margins contracted in 1Q18 to 15.3% from 17.7% in 1Q17. The margin contraction of 2.4% was more than the company expected at 0.5%–1%. According to the company, the additional margin contraction came from the Hawthorne Gardening business, which struggled in 1Q18, as we saw in the previous part.
The company’s expectation of 0.5%–1% margin contraction was also based on higher commodity prices, lower pricing, and the impact from its merger and acquisition activities.
Its operating margins were -32%, which compares to -29% a year ago. Net margins improved to -9% from -28% due to benefits from taxes.
Gains from tax cuts
Most US companies will benefit from the recent change in the US corporate tax rate. Scotts Miracle-Gro stated that its tax rate will decline 7%–8%. Consequently, it revised its 2018 EPS (earnings per share) guidance upward to $4.60–$4.80 from $4.15–$4.35.
SMG said it intends to pass on the benefits from tax savings to its employees by increasing salaries and through other programs.