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What Scotts Miracle-Gro Could Gain from Tax Cuts

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SMG’s margins

Overall, Scotts Miracle-Gro (SMG) posted a sales growth of 7%. But let’s see how that translates into margins.

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Margins contract

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.

We could see similar gains for companies (MOO) such as CF Industries (CF), Terra Nitrogen (TNH), and Intrepid Potash (IPI) that operate in the United States.

SMG said it intends to pass on the benefits from tax savings to its employees by increasing salaries and through other programs.

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