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Why Is Scotts (SMG) Down 1.6% Since Last Earnings Report?

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It has been about a month since the last earnings report for Scotts Miracle-Gro (SMG - Free Report) . Shares have lost about 1.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Scotts due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Scotts Miracle-Gro Beats Q3 Earnings and Sales Estimates

Scotts Miracle-Gro reported net income from continuing operations of $229.8 million or $4.00 per share in third-quarter fiscal 2021 (ended Jul 3, 2021) compared with a net profit of $204.3 million or $3.57 per share in the year-ago quarter.

Barring one-time items, adjusted earnings per share (EPS) were $3.98 per share, up 4.7% year over year. The figure topped the Zacks Consensus Estimate of $3.50.

Net sales went up 7.8% year over year to $1,609.7 million and beat the consensus mark of $1,511.7 million.

Company-wide gross margin rate (as adjusted) was 30.7% compared with 35.3% in the year-ago quarter.

Segment Details

In the third quarter, net sales in the U.S. Consumer division declined 4% year over year to $1,046.2 million. The segment reported profits of $264.4 million, down 16% from a profit of $313.8 million in the prior-year quarter. 

Net sales in the Hawthorne segment surged 48% year over year to $421.9 million in the reported quarter. The segment witnessed record sales in the reported quarter with growth in all categories. The segment’s profits increased 37% year over year to $51.9 million.

Net sales in the Other segment increased 24% year over year to $141.6 million. The segment’s profits increased 86% year over year to $26.8 million.

Balance Sheet

At the end of third quarter, the company had cash and cash equivalents of $58.3 million, up 20.7% year over year. Long-term debt was $2,132 million, up 40.6% year over year.

Outlook

The company continues to expect sales in the Hawthorne segment for fiscal 2021 to rise 40-45%. U.S. Consumer sales growth guidance has also been reaffirmed at 7-9%.

The gross margin rate is now projected to decline 250-275 basis points (bps) year over year. The company also expects adjusted EPS in the range of $9.00-$9.30 for the full year.

The company noted that the continued pressure from commodity prices is likely to result in a lower gross margin rate than what it had expected in its earlier guidance in June. However, the company is evaluating offsets to that pressure, which will help it maintain earnings guidance on a full-year basis.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -166.45% due to these changes.

VGM Scores

Currently, Scotts has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Scotts has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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