Shares of Scotts Miracle-Gro Co. sank to a nine-month low Wednesday, as the garden and lawn-care company beat earnings expectations for the fiscal third quarter but didn’t raise its full-year outlook, as inflationary pressures were expected to erode profit.
Chief Executive Jim Hagedorn said that the cost pressures Scotts Miracle-Gro and other consumer companies are seeing, which are “starting to feel unrelenting,” doesn’t just hurt profit margins:
Hagedorn expressed his frustration, saying that although the company has already raised prices, and is “near certain” to raise them again to help alleviate the hit to earnings as costs keep rising, the company was “trying to be responsible” about pricing, unlike others.
“I am sensitive to the fact, that I don’t understand why some people are pricing the way they are, meaning commodities, where they’re doing it because they can,” Hagedorn said on a conference call to discuss quarterly results with analysts. “And I think it’s, to some extent, irresponsible.”
The stock /zigman2/quotes/200553749/composite SMG -0.79% dropped 6.9% to $164.56, the lowest close since Nov. 11, 2020. It also marked the first time the stock sold off on the day earnings were reported in three years, snapping an 11-quarter streak of upbeat reports.
The company reported before the opening bell net income for the quarter to July 3 rose to $225.9 million, or $3.94 a share, from $202. 8 million, or $3.55 a share, in the same period a year ago. Excluding nonrecurring items, adjusted earnings per share came in a $3.98, up from $3.80 last year and well above the FactSet consensus of $3.52.
Sales grew 7.8% to $1.61 billion, surpassing the FactSet consensus of $1.50 billion.
But as cost of sales increased 16.8%, gross profit fell 6.1%, to lower the gross margin rate by 540 basis points (5.4 percentage points) to 30.7%.
Chief Financial Officer Cory Miller said on the conference call that he expects “another significant decline” in the gross margin rate in the fourth quarter as demand has kept some commodities prices “stubbornly elevated,” and pricing pressures are now being seen in grass seed and sphagnum peat moss.
So even though the company beat third-quarter EPS expectations by a wide margin, the fiscal 2021 adjusted EPS guidance range was left at $9.00 to $9.30, as the full-year gross margin rate is now expected to decline by 250 to 275 basis points, compared with previous guidance for a 175-to-225 basis point decline.
CEO Hagedorn said that while history has suggested the business is “very sticky,” in that it’s less affected by macroeconomic pressures, “we’re probably not completely immune” from a broad rise in consumer prices:
“[I]f prices do go up double digits, do I think demand could be impacted? I think less than other people, but I think the answer is probably yes.”
After soaring a yearly record 87.6% in 2020, as the company benefited from the stay-at-home trend resulting from the COVID-19 pandemic, the stock has slumped 17.4% so far this year. In comparison, the SPDR Consumer Staples Select Sector exchange-traded fund /zigman2/quotes/200697959/composite XLP +0.04% has gained 4.7% year to date and the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.15% has advanced 17.2%.