By G C Mays
Management over at The Scotts Miracle-Gro Company (NYSE:SMG) finally conceded something that I have questioned since January when I wrote, "Can Scotts Miracle-Gro Hit Its Lofty 2012 Sales Forecast Or Will It Miss The Target Again?", and that was whether or not the company could meet a lofty revenue forecast of a 6 percent increase in sales after setting the same goal for 2011 and missing by 8 percentage points.
Sales of its products at Home Depot (NYSE:HD), Lowes (NYSE:LOW), and Wal-Mart (NYSE:WMT) are only up 3 percent year-to-date through the end of May. These three companies generate roughly 61 percent of the company's sales. In its fiscal 2012 first quarter, Lowes had comparable store sales increases in its lawn and garden categories. Home Depot comparable store sales for its Indoor and Outdoor garden categories were above the company average in its fiscal first quarter that ended April 29th. Wal-Mart does not break out those numbers.
During the company's Q2 conference call, the company admitted it needed its biggest customers to increase sales of Scotts Miracle-Gro products by 10 to 14 percent in the second half of its fiscal year to reach what was really a towering goal of 6 to 8 percent sales growth, considering the current macroeconomic conditions. It seems that it was depending on the typical mid-to-late May sales peak in the gardening season to get it over the hump, which did not happen due to a return to persistent drought conditions in May. Severe drought also hampered sales a year ago.
In addition to increased advertising, the company was also relying on the La Niña condition that was creating drought conditions in Texas and Florida, two key sales states, to dissipate. When I wrote my Q2 earnings analysis entitled, "Scotts Miracle-Gro Q2 Earnings Fall 28%, Will Company Miss Sales Target Again?", I did not mention drought as a concern because it looked as though conditions were improving during April in Florida, one of the company's key sales regions. Its hope for double-digit sales growth over the last half of the fiscal year was a large enough hurdle in my opinion.
After the announcement, the stock plunged 14.6 percent to $36.75 in after hours trading. I don't think it will, but even if the stock opens at those levels at market open, I see no reason to own these shares. As I wrote in January
I don't see any reason to own these shares at this level aside from the 2.25% dividend yield. In addition to weather patterns the fortunes of this company are closely tied to macro economic factors such as consumer and business confidence & spending, employment levels, housing starts and home ownership levels. The company has begun to miss its own forecasts. The company's board structure may also be affecting its willingness and ability to make the strategic changes necessary to make its growth targets. Rebuilding the Scotts brand that was once synonymous with lawn care through increased advertising is a great start, but most likely won't enable the company to hit the bullseye this year.
That still says it all.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.