Scotts Miracle-Gro Maps Profitable Pivot and Buybacks

Scotts Miracle-Gro ((SMG)) has held its Q1 earnings call. Read on for the main highlights of the call.

Scotts Miracle-Gro Earnings Call Signals Turnaround Momentum Despite Near-Term Bumps

Management struck a cautiously optimistic tone on Scotts Miracle-Gro’s latest earnings call, highlighting clear operational and financial progress while acknowledging ongoing challenges. Gross margins improved, leverage and interest expense moved in the right direction, free cash flow strengthened, and e-commerce accelerated, all setting the stage for a new $500 million share repurchase program beginning in late 2026. At the same time, the company is absorbing a large impairment tied to its Hawthorne unit, continues to post first-quarter losses, and faces seasonality and elevated capital spending. Overall, the call framed a story of a business in transition: still cleaning up legacy issues, but increasingly focused, cash-generative, and oriented around high-margin branded growth with ambitious long-term targets into 2030.

Disciplined $500 Million Share Repurchase and Capital Strategy

Scotts’ board has approved a multi-year $500 million share repurchase program slated to begin in late 2026, with a long-term goal of bringing the share count down to roughly 40 million. Crucially for investors concerned about balance sheet risk, management tied buybacks to leverage discipline: repurchases will only start once net debt to adjusted EBITDA is comfortably below 4x and will be funded by free cash flow rather than incremental borrowing. This approach positions the authorization as a capital return lever that will be turned on only after the company has further de-risked its balance sheet and validated its cash generation targets.

Hawthorne Exit Sharpens Focus on Core Lawn & Garden

In a major portfolio move, Scotts has classified its Hawthorne business as a discontinued operation with a pending sale to Vireo Growth, signaling a clean strategic pivot back to its core lawn and garden franchise. The removal of Hawthorne immediately improves the quality of earnings, adding roughly 40 basis points to full-year gross margin. Scotts will retain a minority equity stake in Vireo and maintain commercial ties, but the clear message is that future management attention and investment will center on branded consumer lawn and garden products, where the company sees stronger margins, more predictable demand, and better long-term growth economics.

Top-Line and POS: Stable Overall, Strong in Key Categories

Excluding Hawthorne, Q1 net sales came in at $354.4 million, with U.S. consumer sales of $328.5 million, slightly better than management expected as retailers pulled forward some seasonal load-in. Point-of-sale (POS) overall was modestly weaker in the quarter, down about 1% in both dollars and units versus a strong prior-year Q1, but recast full-year 2025 branded POS was up 2%. Under the surface, several categories stood out: indoor gardening POS grew 7.7% in dollars and 9% in units, while Roundup posted a sharp rebound with POS up 24% in dollars and 27% in units. These pockets of strength support management’s narrative that targeted innovation and brand investment in specific segments can offset broader demand noise.

E-Commerce Growth Becomes a Key Structural Tailwind

Digital channels are becoming a more meaningful driver of Scotts’ growth story. In Q1, branded e-commerce POS dollars rose 12% and units increased 17%, with e-commerce now representing 14% of branded POS—up 150 basis points year over year. Importantly, management emphasized that the margin gap between e-commerce and brick-and-mortar has narrowed to less than about five percentage points, making digital sales increasingly attractive economically. With e-commerce mix rising and logistics efficiency improving, the channel looks set to be a structural tailwind for both top-line growth and profitability over time.

Gross Margin Expansion and Ongoing Cost Efficiencies

Margins were a bright spot in the quarter. GAAP gross margin reached 25.0%, up 90 basis points from a year ago, while non-GAAP adjusted gross margin was 25.4%, also up 90 basis points. Management attributed the improvement to continued supply chain optimization, pricing discipline, and the early benefits of portfolio mix changes like the Hawthorne exit. Looking ahead, Scotts is investing in automation and plant upgrades that it believes will support further margin expansion toward its 2026 targets. The company also sees additional supply chain savings—estimated at around $50 million—still to be captured, suggesting continued room for operational gains.

Leverage, Interest Expense, and Free Cash Flow Moving the Right Way

Scotts made tangible progress on its balance sheet and cash generation. Net debt to adjusted EBITDA improved to 4.03x from 4.52x a year earlier, a reduction of roughly half a turn. Interest expense dropped 20% year over year to $27.2 million, easing earnings pressure and reflecting lower debt levels and better financing terms. Free cash flow was favorable by $78 million in Q1, supporting management’s reiterated goal of generating $275 million in free cash flow by fiscal 2026. The company expects to use this cash primarily to further reduce leverage into the “high threes,” setting the foundation for the eventual launch of its share repurchase program.

Profitability Trajectory and 2026 Earnings Targets

While Q1 remained seasonally unprofitable, the trend is moving in the right direction. Non-GAAP adjusted EBITDA topped internal expectations by $3 million. The GAAP net loss from continuing operations improved to $47.8 million, or $0.83 per share, versus a loss of $66.1 million, or $1.15 per share, a year ago. On a non-GAAP basis, the adjusted loss narrowed to $44.6 million, or $0.77 per share, from $50.2 million, or $0.88 per share. Management’s fiscal 2026 outlook calls for low single-digit U.S. consumer sales growth, a non-GAAP adjusted gross margin of at least 32%, non-GAAP adjusted EPS between $4.15 and $4.35, mid-single-digit EBITDA growth, and $275 million of free cash flow, suggesting a path to materially higher profitability over the next two years.

Long-Term 2030 Plan: Adding $1 Billion in Sales and EBITDA

Scotts laid out a bold strategic plan to 2030: add about $1 billion in top-line revenue and about $1 billion in EBITDA. To reach these targets, the company is relying on a roughly 5% annual growth algorithm built on several pillars—product innovation, selective pricing, volume growth, expansion of e-commerce, and margin-accretive tuck-in acquisitions. A sharper emphasis on branded, higher-margin products underpins the strategy, as management aims to shift the mix toward categories and channels where Scotts has pricing power, brand loyalty, and superior profitability.

Hawthorne Impairment Highlights Cost of Strategic Reset

As part of the Hawthorne divestiture, Scotts recorded a pretax asset impairment charge of $105 million within loss from discontinued operations, reflecting the difference between Hawthorne’s carrying value and its estimated selling price. Prior results will be recast to reflect Hawthorne as a discontinued operation, and its removal trims roughly $11 million from 2025 adjusted EBITDA. While the impairment underscores the financial cost of exiting the business, management framed it as a necessary step to clean up the portfolio and sharpen the company’s focus on more attractive core categories.

Q1 POS Softness and Seasonal Volatility Remain a Reality

The company stressed that Q1 results should be viewed through the lens of seasonality and timing. Branded POS was down about 1% in dollars and units versus a very strong prior-year Q1, and management cited residual timing issues related to retailer load-in and weather-driven variability that can shift sales between quarters. Given that Q1 represents only a small slice of annual activity for a highly seasonal lawn and garden business, management urged investors to focus more on full-season POS and category trends, rather than over-interpreting short-term fluctuations.

First-Quarter Losses Continue but Are Narrowing

Scotts again posted a loss in its fiscal first quarter, consistent with historical patterns for the business. The GAAP net loss from continuing operations was $47.8 million, or $0.83 per share, while the non-GAAP adjusted loss was $44.6 million, or $0.77 per share. Both figures marked a clear improvement over the prior year, reflecting better gross margins, lower interest expense, and tighter cost controls. Management reiterated that Q1 is typically a loss-making quarter, with the bulk of profits generated during the peak spring and summer seasons.

Leverage Still Above Target, Keeping Pressure on Execution

Despite the progress, leverage remains above management’s comfort zone. At 4.03x net debt to adjusted EBITDA, the company is still above its stated “sweet spot” of 3.0–3.5x. Reaching that range will require continued free cash flow delivery and consistent execution of operational initiatives. Management made clear that getting leverage down is a priority and a prerequisite for more aggressive capital returns; until then, capital allocation will skew toward debt reduction and funding the business transformation.

Elevated CapEx to Fund Automation and Tech Upgrades

Scotts is committing significant capital to modernize its operations and technology. Management expects elevated capital expenditures, particularly around automation, manufacturing plant upgrades, and an ERP/technology transformation, with CapEx projected to run around $130 million in 2027 and beyond. While these outlays keep more cash tied up in the business in the near term, the company views them as critical to achieving sustained margin expansion, better supply chain efficiency, and scalable growth in both traditional and e-commerce channels.

Execution Risk Across Multiple Growth Initiatives

The company’s long-term ambition—to add roughly $1 billion in revenue and $1 billion in EBITDA by 2030—rests on a complex set of initiatives that must work in concert. Success will require continued product innovation, broader household penetration, expansion of e-commerce, capturing the remaining supply chain savings (estimated at about $50 million), and executing on margin-accretive tuck-in M&A. Management also highlighted growth opportunities in emerging areas such as “do it for me” services and professional channels, which are still in pilot or early scaling stages. Collectively, these moving parts introduce execution risk, though leadership argued that the building blocks are already in place and showing early results.

Guidance: Steady 2026 Targets, Deleveraging Before Buybacks

Looking ahead, Scotts reaffirmed its fiscal 2026 guidance, which envisions modest but steady growth and a healthier balance sheet. U.S. consumer net sales are expected to grow in the low single digits, with non-GAAP adjusted gross margin at or above 32%. The company is targeting non-GAAP adjusted earnings from continuing operations of $4.15–$4.35 per share, mid-single-digit growth in adjusted EBITDA, and free cash flow of $275 million. Leverage is projected to fall to the “high threes” by 2026, with management ultimately aiming for a net debt/EBITDA range of 3.0–3.5x. Only once leverage is safely below 4x does Scotts plan to initiate its measured $500 million multi-year share repurchase program, reinforcing a synchronized approach to growth, deleveraging, and capital returns.

In sum, Scotts Miracle-Gro’s earnings call painted a picture of a company that is still in transition but moving decisively in the right direction. The Hawthorne divestiture, improving margins, lower interest costs, and stronger free cash flow all support a more focused, higher-quality earnings profile. At the same time, persistent first-quarter losses, leverage above target, and the need to execute on multiple strategic initiatives leave little room for missteps. For investors, the story hinges on management’s ability to deliver on its 2026 and 2030 goals—if successful, the combination of disciplined deleveraging, structural margin expansion, and eventual buybacks could make the stock increasingly compelling over the medium term.