Focus on cannabis
Scotts Miracle-Gro (SMG) has been actively participating in the cannabis business. It acquired Hawthorne Gardening, which serves the indoor gardening needs of its customers.
Hawthorne brands and products
The above chart shows the brands under the umbrella of Hawthorne Gardening, which include Botanicare, Gavita, General Hydroponics, Vermicrop Organics, and Can-Filters. These brands serve indoor gardening needs with products such as soil, hydroponic solutions, indoor lighting, nutrients, pesticides, and ventilation systems.
Hawthorne sales decline
Given that the cannabis industry is currently very active, it’s natural to expect the Hawthorne division to report a year-over-year growth in sales. According to Scotts Miracle-Gro, the Hawthorne segment’s sales fell $12 million in 1Q18, excluding acquisitions. With acquisitions, the segment’s sales grew 20% year-over-year to $76.7 million.
According to the company, the decline in sales for the Hawthorne segment came primarily due to delays in issuing licenses to growers and retailers in California. To make matters worse, the company’s chairman and CEO (chief executive officer) James S. Hagedorn added that he doesn’t see a 10% growth in volume for the Hawthorne segment as guided earlier. The company now expects flat or negative year-over-year growth.
Is there hope?
During the 1Q18 earnings call, Hagedorn stated, “When we decided to begin investing in Hawthorne in 2014, we never thought we were chasing a 1- or 2-year fad.”
In our series Must-Knows before Investing in the Marijuana Industry, we discussed the potential of the marijuana business (MJX), especially in Canada with companies such as Canopy Growth (WEED), Aurora Cannabis (ACBFF), and CanniMed Therapeutics (CMED).
So while there is a business opportunity, Scotts Miracle-Gro’s statement on volume growth may indicate pressure from the competition. The company did add that its competition doesn’t have a similar capital structure.