Executive Summary / Key Takeaways

• Scotts Miracle-Gro has successfully navigated a challenging post-COVID period, significantly improving its financial health by cutting costs, reducing inventory, generating strong free cash flow, and lowering debt, positioning it for a focused growth phase.
• The company's core U.S. Consumer segment demonstrates resilience and market dominance, driving double-digit POS unit growth and substantial market share gains in fiscal 2024 and early fiscal 2025, supported by increased brand investment and strategic retailer partnerships.
• Significant gross margin recovery is underway, driven by cost reduction initiatives, favorable mix, and lower material costs, with the company on track to recover two-thirds of its margin loss by the end of fiscal 2025 and targeting a return to the mid-30% range by fiscal 2027.
• The planned divestiture of the Hawthorne segment is expected to simplify the business, improve overall gross margin, reduce volatility associated with the cannabis market, and enhance the clarity of the core consumer equity.
• Management has reaffirmed its fiscal 2025 guidance, projecting Adjusted EBITDA of $570 million to $590 million, underpinned by confidence in continued operational improvements, cost savings realization, and sustained consumer engagement, while setting ambitious mid-term targets for fiscal 2027 including 3%+ sales growth and $700 million EBITDA.

The Resilience of an Iconic Franchise

The Scotts Miracle-Gro Company (NYSE: SMG) stands as a nearly 160-year-old American institution, deeply embedded in the fabric of consumer lawn and garden care. Its history is marked by periods of robust growth, demonstrating the inherent resilience of its core business, notably evidenced by strong performance even during economic downturns like the Great Recession and the unique surge experienced during the COVID-19 pandemic. This long-standing presence has cultivated a portfolio of iconic brands – including Scotts, Miracle-Gro, Ortho, and Tomcat – that command significant consumer trust and market leadership in North America.

SMG operates primarily through three segments: U.S. Consumer, its dominant force; Hawthorne, focused on indoor and hydroponic gardening; and Other, encompassing its Canadian consumer business. The U.S. Consumer segment is highly seasonal, with the bulk of sales concentrated in the spring and summer months (over 75% in Q2 and Q3), a dynamic that heavily influences the company's operational and financial cadence.

In the competitive landscape, SMG occupies a leading position, particularly in the U.S. consumer lawn and garden market. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, SMG's management highlights capturing nearly 700 basis points of share at its biggest retailers in fiscal 2024, spanning its entire portfolio, and still significant gains (300+ bps) excluding mulch. This indicates a strong competitive stance against rivals like Spectrum Brands (SPB) and Central Garden and Pet (CENT), who also operate in consumer home and garden spaces, and agricultural input giants like Nutrien (NTR) with some overlap in fertilizers. SMG's competitive edge is rooted in its powerful brands, extensive distribution network (including deep relationships with major home and garden retailers), a dedicated in-store sales force, and a commitment to innovation. These "superpowers," as management refers to them, enable SMG to drive foot traffic for retailers and secure valuable shelf space and promotional opportunities.

SMG's technological differentiation lies not just in product formulation but also in its operational capabilities and emerging digital platforms. The company is investing in automation and technology within its supply chain to become a lower-cost manufacturer, aiming for greater efficiency and responsiveness. In product innovation, initiatives like the expanded Miracle-Gro organic line and the new OM Scott natural line reflect a focus on evolving consumer preferences. The company is also reimagining its lawns portfolio for fiscal 2026 and 2027, exploring new formulations, including natural fertilizers and liquids, and adapting packaging and sizing, partly driven by insights into consumer usage patterns and the impact of weather volatility. Furthermore, SMG is actively pursuing channel expansion in e-commerce, aiming to turbocharge POS at retailer.com channels and developing its own direct-to-consumer functionality through a refreshed website, leveraging technology to engage younger, digitally native consumers and expand subscription and loyalty programs. While specific quantifiable benefits of all these technological efforts are not uniformly detailed, the strategic intent is clear: to enhance product effectiveness, improve manufacturing efficiency, broaden market reach, and strengthen the competitive moat against both traditional and emerging players, including private label offerings which SMG currently sees little pressure from due to its promotional strategies.

From Crisis to Recovery: A Pivotal Turn

The period immediately following the COVID-19 pandemic presented Scotts Miracle-Gro with significant financial headwinds. The surge in demand during lockdowns led to a cost structure and inventory levels built for an unsustainable peak. The company found itself strapped for cash, burdened by high debt, and facing a severely elevated leverage ratio. This challenging environment served as a catalyst, prompting a necessary shift from crisis management to a focused organizational transformation.

Decisive actions were taken to right-size the business. The company implemented aggressive cost-cutting measures, eliminating over $400 million in operating expenses while strategically reinvesting $100 million back into its core "superpowers." A major focus was placed on reducing excess inventory, a goal successfully met by drawing down levels below $600 million in fiscal 2024. Simultaneously, the company prioritized debt reduction, leading to a significant improvement in its leverage ratio, falling from over 7 times to 4.86 times by the end of fiscal 2024. These efforts culminated in generating over $1 billion in free cash flow over fiscal years 2023 and 2024.

Fiscal year 2024 marked a pivotal moment in this journey. It was the year the company transitioned from navigating financial distress to establishing a solid foundation for future growth. Despite a challenging lawn and garden season impacted by unfavorable weather, particularly in the Northeast and Midwest, the U.S. Consumer business achieved 6% top-line growth and nearly 9% POS unit growth across the portfolio. This performance was significantly bolstered by strategic trade-offs made with retailers, where the company exchanged pricing flexibility for increased promotional activity, listings, and shelf space, resulting in substantial market share gains. The Hawthorne segment also showed signs of recovery, posting its first profitable quarters in two years after a strategic pivot to focus solely on its higher-margin owned brands and discontinuing third-party distribution.

Building Momentum: Recent Performance and Strategic Shifts

The positive trajectory established in fiscal 2024 has carried into fiscal 2025, reinforcing management's confidence in the ongoing recovery. For the three months ended March 29, 2025 (Q2 FY25), consolidated net sales were $1,421.0 million, a decrease from $1,525.4 million in the prior year period. For the six months ended March 29, 2025, consolidated net sales were $1,837.8 million, down from $1,935.8 million in the prior year. This decrease was primarily driven by lower sales volume in both the U.S. Consumer and Hawthorne segments, nonrecurring sales from fiscal 2024 (including AeroGarden and bulk materials in U.S. Consumer, and discontinued third-party products in Hawthorne), and decreased pricing due to increased consumer activation activities.

Despite the slight decline in reported net sales, the underlying performance metrics signal strength. U.S. Consumer net sales were $1,311.5 million in Q2 FY25 and $1,652.4 million year-to-date Q2 FY25. Excluding the non-repeating fiscal 2024 sales, U.S. Consumer sales were essentially flat year-over-year, demonstrating stability in the core business. Point-of-sale (POS) data remains a key indicator of consumer engagement, with POS units up 12.1% through Q2 FY25, driven by strong performance in mulch, soils, fertilizer, grass seed, and controls. Excluding mulch, POS units were still up 4.4%. While POS dollars were only up 1.5% through Q2, the difference reflects a strategic decision to increase promotional activity, often matched by retailers, to drive volume and market share in a competitive environment. This momentum in unit growth continued into April 2025.

Profitability has seen significant improvement. Gross margin rate increased substantially, reaching 38.6% in Q2 FY25 (GAAP) and 35.0% year-to-date Q2 FY25 (GAAP), compared to 30.4% and 27.2% respectively in the prior year periods. This recovery is primarily attributable to lower material costs (especially in U.S. Consumer), a favorable product and segment mix, reduced manufacturing and distribution costs, and a decrease in impairment and restructuring charges. The company is on track to realize over $75 million in supply chain cost savings in fiscal 2025, part of a larger $150 million target by fiscal 2027, and expects to recover two-thirds of its pre-pandemic margin loss by the end of fiscal 2025.

The Hawthorne segment, while still facing decreased sales volume (down 51% in Q2 FY25), particularly due to the oversupply of cannabis impacting the hydroponic market, has achieved consecutive quarters of positive EBITDA and earned approximately $4 million in adjusted EBITDA year-to-date Q2 FY25. This reflects the impact of its strategic shift to focus on higher-margin Signature brands and operational optimizations.

Financially, the balance sheet continues to strengthen. Debt reduction efforts have lowered total debt, contributing to a decrease in interest expense (down 17% in Q2 FY25, 19% year-to-date Q2 FY25). The leverage ratio improved significantly to 4.41x net debt to adjusted EBITDA at the end of Q2 FY25, comfortably below the covenant maximum of 5.25x and on track to reach the low 4s by fiscal year-end.

A key strategic initiative moving forward is the planned divestiture of the Hawthorne businesses, targeted by fiscal year-end. This move is intended to improve the company's overall gross margin profile, reduce the volatility associated with the cannabis sector, and provide greater clarity on the value of the core U.S. Consumer business for investors. Hawthorne Gardening, now profitable, is seen as offering value-creating benefits to a dedicated cannabis company, including a debt-free balance sheet and tax benefits. SMG plans to maintain a strategic relationship for R&D and supply chain support and retain an option to recapture future value based on federal cannabis reforms.

Outlook and Future Trajectory

Scotts Miracle-Gro has reaffirmed its full fiscal year 2025 guidance, projecting Adjusted EBITDA in the range of $570 million to $590 million. This guidance is underpinned by confidence in the continued momentum observed in the first half of the year, expected strong retailer replenishment in the peak third quarter (which accounts for approximately 60% of total annual POS), and the realization of planned cost savings. The U.S. Consumer segment is expected to achieve low single-digit core growth (excluding non-repeating items), driven by continued strong POS unit performance, market share gains, and strategic investments in brands and retailer promotions. The Hawthorne segment is projected to see a mid-single-digit sales decline but contribute approximately $20 million in EBITDA for the full year, reflecting its narrower focus on profitable owned brands.

Looking further ahead, the company has outlined ambitious mid-term financial targets for the end of fiscal 2027. These include achieving sustained annual sales growth of at least 3%, expanding the adjusted gross margin rate to north of 35%, delivering Adjusted EBITDA approaching $700 million, and reducing the leverage ratio to approximately 3 times (with management challenging the team to reach below 3x). Fiscal 2025 is viewed as a crucial "down payment" year on these longer-term goals, with significant progress expected in margin recovery and balance sheet strength.

The strategy to achieve these targets involves a multi-pronged approach: driving incremental volume through continued investment in brands and retailer partnerships, leveraging innovation to introduce higher-margin products and expand into new channels like e-commerce, realizing substantial supply chain and operational efficiencies through transformation initiatives, and potentially pursuing bolt-on M&A opportunities in adjacent lawn and garden categories. The return to a multi-bag strategy for lawns, supported by marketing and potential future price adjustments, is aimed at revitalizing unit volume in a key category.

While the path forward is clear, risks remain. Macroeconomic conditions, including elevated interest rates and inflationary pressures on consumers, could impact discretionary spending, although the company's research suggests lawn and garden care is viewed as a necessity by a large portion of its consumer base. Weather volatility continues to be a factor, capable of shifting seasonal demand. Execution risk exists in fully realizing planned cost savings and successfully divesting the Hawthorne segment. Competitive pressures, including from private label and potential new entrants, require continuous vigilance and investment in brand defense. Furthermore, the company's debt levels, while improving, necessitate careful management to remain in compliance with covenants, and potential adverse outcomes from ongoing legal proceedings, although not currently expected to be material, could impact financial results.

Conclusion

Scotts Miracle-Gro has demonstrated significant progress in its recovery journey, successfully navigating a challenging period to emerge as a leaner, more focused, and financially stronger company. The core U.S. Consumer business remains robust, driven by iconic brands, strategic retailer partnerships, and a renewed focus on driving unit volume and market share through targeted investments and promotions. The planned divestiture of Hawthorne is a strategic move aimed at simplifying the business and enhancing the value proposition of the core consumer equity.

With a clear roadmap for fiscal 2025 and ambitious mid-term targets for fiscal 2027, Scotts Miracle-Gro is sowing the seeds for sustained growth and improved profitability. The company's ability to execute on its transformation initiatives, realize planned cost savings, continue its gross margin recovery, and effectively leverage its technological capabilities and brand strength will be critical in achieving its financial goals and delivering enhanced shareholder value. While macroeconomic and seasonal risks persist, the company's demonstrated resilience and strategic focus position it favorably to cultivate future success in the dynamic lawn and garden market.