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As predicted, The Scotts Miracle-Gro Company (NYSE: SMG) announced its financial results for the fourth quarter that ended September 30, 2022 sales fell by 33% to $493.6 million reflecting decreases in both major business segments. This missed the Yahoo Finance analyst estimates for sales of $519 million. The U.S. Consumer segment sales dropped 18% to $302.1 million, from $369.4 million. The hydroponic division of Hawthorne saw its sales decline by 49% to $168.5 million, compared with $329.1 million during the same period last year.

Scotts reported a loss of $220.1 million, or $3.97 per share, compared with a prior year’s loss of $48.7 million, or a loss of $0.87 per share. The non-GAAP adjusted loss in the quarter, which excluded impairment, restructuring, and other non-recurring items, was $113.3 million, or $2.04 per share, compared with a loss of $45.5 million, or $0.82 per share in 2021. Analysts had estimated earnings of ($1.97).

Full-Year Sales Drop

For the full year, sales on a full-year basis decreased by 20% to $3.92 billion versus $4.93 billion a year ago. Sales in the U.S. Consumer segment decreased by 8% to $2.93 billion. Hawthorne sales decreased 50% to $716.2 million. The company reported a full-year loss from continuing operations of $437.5 million, or $7.88, compared with income of $517.3 million, or $9.03 per diluted share in the prior year. Non-GAAP adjusted earnings, which exclude impairment, restructuring, and other non-recurring items, were $230 million, or $4.10 per diluted share, compared with $527.7 million, or $9.23 per diluted share last year. This was in line with the company’s forecast of earnings between $4.00 and $4.20, however the company had forecast that full-year sales would drop by only 8-9%.

“Our leadership team and associates successfully managed the challenging finish to fiscal 2022 to deliver consolidated sales and earnings results consistent with our expectations,” said CEO Jim Hagedorn. “While we were disappointed with our overall financial performance for the year, we remained within our leverage covenants and established a path forward to return the Company to acceptable levels of profitability.

SG&A decreased 27 percent, to $118.4 million, due to lower accruals for annual incentive compensation and cost-reduction efforts. Free cash flow for 2022 was negative $242.5 million. The negative cash flow was driven by an increase in inventories and a decrease in accounts payable.

“As we look to the year ahead, we are committed to further improving our operating and financial performance by capitalizing on the strengths of the U.S. Consumer business and right-sizing Hawthorne for the realities of today. We will prioritize more profitable product mixes along with front-loading our marketing and promotional activities to drive early consumer traffic in close coordination with our retailer partners. At the same time, we are taking decisive actions across the organization with the goal of effectively managing leverage and creating stronger conditions for the long-term success of our business.”

Cutting Costs

The company has already been on a cost-cutting drive, but it said it plans to ramp that up even more. In its statement, Scotts said that the first phase of this initiative achieved $100 million of annualized savings split between fiscal 2022 and fiscal 2023, primarily realized in headcount and variable SG&A reductions. The company said it has launched the second phase of this initiative, Project Springboard 2.0, targeting an additional $85 million of cost reductions to be realized in fiscal 2023 and fiscal 2024.

Outlook

Scotts provided a forecast for fiscal 2023 that includes the following:

• Low-single-digit percentage growth in adjusted operating income versus fiscal 2022
• Mid-single-digit percentage growth in adjusted EBITDA versus fiscal 2022
• Interest expense increase of $35 million to $40 million
• Effective tax rate of 25 percent to 26 percent
• Free cash flow of $1 billion over the next two years

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