MW 'Volatile' cannabis business causes Scotts Miracle-Gro to shed hydroponic grow unit

By Steve Gelsi

Fertilizer maker wants to separate its Hawthorne pot-growing-gear business as federal legalization stalls

Back in 2015 when garden-products giant Scotts Miracle-Gro Co. formed its Hawthorne Gardening Company to sell indoor hydroponic plant-growing systems, Colorado had just approved adult-use cannabis. The future for the business seemed bright.

Now, 10 years later, Scotts Miracle-Gro $(SMG)$ is still a fertilizer of choice for growing marijuana and lawns, but the reality of state-by-state cannabis legalization hasn't led to a boom in Hawthorne sales.

While Scotts Miracle-Gro once saw its visibility improved through its exposure to cannabis, now it sees freeing itself of the business as a potential boost to its Wall Street valuation.

Scotts Miracle-Gro plans to separate Hawthorne, the company said recently, as federal legalization stalls, cannabis stocks weaken and competition drives down potential returns in legal states.

"We believe that moving Hawthorne out of Scotts Miracle-Gro is better for everyone," Chief Executive James Hagedorn told analysts last week. "For our shareholders, this would eliminate the volatility of the cannabis sector and generate a significant uplift in gross margin."

Doing so could also expand the stock's price-to-earnings multiple and clarify what the company's equity represents, Hagedorn said.

Stifel analyst W. Andrew Carter on Thursday reiterated a hold rating on Scotts Miracle-Gro, and said its plan for "swift action" with Hawthorne in order to "derisk earnings" is a "key positive" for the stock.

Scotts Miracle-Gro marks at least the third big consumer-products company to step back from cannabis from their early moves into the space compared with others.

Spirits maker Constellation Brands Inc. $(STZ)$ last year terminated its service agreement with Canopy Growth Corp. $(CGC.AU)$ and said it would not put any more money into the company, although it retains a roughly 15% stake.

Constellation had made three investments in Canopy Growth including a $3.8 billion infusion in 2018.

And Molson Coors Beverage Co. $(TAP)$ in 2022 scrapped a CBD drink alliance with Hexo in Colorado. In 2024, Molson Coors also sold its 57.5% equity ownership of Canadian cannabis-drink maker Truss Beverage Co. To Tilray Brads Inc. $(TLRY)$ in order to refocus on alcoholic beverages.

To shed Hawthorne, Scotts Miracle-Gro may seek a deal with an existing cannabis company, a spokesman said in an email to MarketWatch.

Ideally, Hawthorne could still maintain its "strong relationship," with Scott Miracle-Gro's supply chain, as well as the bigger company's research and development capabilities, the spokesperson said.

The structure of any separation remains under study, the company spokesperson told MarketWatch.

Even without Hawthorne, Scotts Miracle-Gro still has some exposure to the cannabis space through its indirect minority ownership of Cansortium Inc. (CNTMF), which acquired Scott Miracle-Gro-backed RIV Capital last year.

When the deal closed in December, the Scotts Miracle-Gro stake in RIV Capital converted into nonvoting exchangeable shares in Cansortium. Scotts Miracle-Gro will account for the stake as an equity method investment. Its share of Cansortium's net profit or losses will be included in its quarterly equity earnings updates starting in its third fiscal quarter.

Scotts Miracle-Gro formed the Hawthorne Collective in 2021 as part of a $150 million debt investment in RIV Capital in the form of a loan.

For its part, Hawthorne has been exiting unprofitable product lines and focusing on higher-margin proprietary products, such as LED lights for indoor growing.

Hawthorne's sales in the company's first fiscal quarter fell 35% to $52 million, but the business is now profitable as it focuses on higher-margin products, the company said Wednesday.

By comparison, companywide Scotts Miracle-Gro sales were $417 million in the first quarter, up from $410 million. The company beat the FactSet consensus estimate for revenue of $392.1 million

For the full fiscal year, Hawthorne sales are expected to fall by mid-single digits, but the business will generate about $20 million in earnings before interest, taxes, depreciation and amortization, the company said.

This isn't the first time Scotts Miracle-Gro studied the separation of Hawthorne.

The company said in July it had decided to hold on to the business after considering a separation.

"We've concluded it's better to keep Hawthorne where it is for now, especially when it's profitable while we create building blocks for a longer-term solution," Chief Executive Hagedorn said at the time.

As of Friday's close Scotts Miracle-Gro stock had risen by 8.4% so far in 2025, while the S&P 500 is up 3.2%.

-Steve Gelsi

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February 03, 2025 07:04 ET (12:04 GMT)

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