Scotts Miracle-Gro Company (The) (SMG)

SMG 
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The Scotts Miracle-Gro (SMG)

Q2 2013 Earnings Call

May 06, 2013 4:30 pm ET

Executives

Jim King - Chief Communications Officer and Senior Vice President

James Hagedorn - Executive Chairman and Chief Executive Officer

Barry W. Sanders - President and Chief Operating Officer

Lawrence A. Hilsheimer - Chief Financial Officer and Executive Vice President

Randy Coleman - Senior Vice President of Global Operating Finance

James R. Lyski - Chief Marketing Officer and Executive Vice President

Brian Kura - President of Midwest Region

Analysts

Jon Andersen - William Blair & Company L.L.C., Research Division

Olivia Tong - BofA Merrill Lynch, Research Division

Jason M. Gere - RBC Capital Markets, LLC, Research Division

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Alice Beebe Longley - The Buckingham Research Group Incorporated

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Constance Marie Maneaty - BMO Capital Markets U.S.

Eric Bosshard - Cleveland Research Company

James Barrett - CL King & Associates, Inc., Research Division

Presentation

Operator

Good afternoon. My name is Ryan, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2013 quarterly earnings call. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Jim King.

Jim King

Thanks, Ryan. Good afternoon, everyone, and welcome to The Scotts Miracle-Gro Second Quarter Conference Call. With me today here in Marysville are Jim Hagedorn, our Chairman and CEO; Barry Sanders, our President and Chief Operating Officer; as well as Larry Hilsheimer, our new CFO. Jim and Barry will provide an overview of the current state of the business, both in the context of our Q2 results as well as our overall progress, and then Larry will walk through the financials and our outlook for the balance of year. After their prepared remarks, we'll open the call to your questions.

Also with us today for the Q&A session are Jim Lyski, our Chief Marketing Officer; Randy Coleman, our Head of Global Operating Finance; and several other members of the management team. [Operator Instructions] If there are questions that we don't address, we're glad to handle those with you offline. In fact, we'll be staying late this evening and try to handle as many of the follow-up questions as we can before we leave.

With that, I want to move on to today's call and remind everyone that our comments will contain forward-looking statements. As such, actual results may differ materially from what we discuss. Due to that risk, Scotts Miracle-Gro encourages investors to review the risk factors outlined in our Form 10-K, which is filed with the Securities and Exchange Commission, or our most recent 10-Q, which also was filed earlier today.

With that, let me turn the call over to Jim Hagedorn to discuss our performance. Jim?

James Hagedorn

Thanks, Jim, and good afternoon, everyone. As most of you know, we seldom have late-day conference calls and earnings releases, but we needed to adjust our schedule this quarter to accommodate both our upcoming board meeting as well as participation in the National Hardware Show. So I appreciate your understanding and given the hour, we'll try to keep things as brief as possible.

I'm going to share my time equally this afternoon with Barry. I want to spend some time discussing the implications of today's release and our full year outlook, and then Barry will explain in more detail what we're actually seeing in the marketplace right now.

Clearly, the second quarter results were short of what we expected and what Wall Street expected. But I'm also saying that today's results should not be overanalyzed. As you'll hear from Barry, momentum is on our side. After an extremely slow start to the season due to weather, we had a strong April in all categories and geographies. The first weekend in May was equally encouraging.

Consumer engagement has been outstanding whenever the weather's been good, and that's been true going all the way back to February. Typically, Florida and Texas are good bellwethers for us to read the season, but this year it was California, where POS was up 43% in the second quarter. In fact, the entire West Coast was strong. But the common denominator was good weather. And when we saw what was happening, we were cautiously optimistic that it would play out the same across the rest of the country and so far, that's exactly what's happening.

So I won't steal too much of Barry's thunder other than to say that POS in the United States is up 19% so far in the third quarter, and that data includes this past weekend which was up 23%. In terms of dollars, we had nearly $130 million worth of consumer purchases at our largest customers last week alone, making it the fourth largest week in the company's history.

I've not been shy about my conservative view of the United States consumer. But right now, consumers seem to be encouraged by record stock prices and a resurgence in home prices. Gasoline is stable, and even the dialogue in Washington is a bit more civil. This time a year ago, every one of those factors was weighing negatively on the consumer, and they disengaged.

Before you ask, let me say that my view of the consumer hasn't changed. They're still on edge. I'd like to see consumer sentiment remain strong even in the face of some bad news here and there before I change my long-term view.

But my near-term view is good. In this environment, as long as the weather holds, the consumer is engaged. Entering April, POS in the United States was down more than 25% on a year-to-date basis. After this past weekend, that deficit is now in single digits, a number that we believe is manageable given our modest sales assumptions for the year, the comps we have for the rest of May and June, as well as the long-term weather forecast in the United States over that same period of time.

So as you saw in the press release, we're confidently reaffirming our guidance. Larry will share some of the details in a moment that will help you better understand the timing of some critical line items, especially gross margin rate, so you can make sense of your financial models.

And so if I had to summarize our mindset in a single word, I'd say confident. We still have some work to do to make up lost ground, but the team understands what they need to do with and they're executing the business extremely well right now. Of course, Barry is the one leading that effort right now, so let me give the floor to him so he can share some more detail on the trends we've been seeing as of late. Barry?

Barry W. Sanders

Thanks, Jim, and hello, everyone. I'll start where Jim left off. I, too, feel comfortable with the guidance that we've given you and with the current trends we're seeing in the business. All of the conservative planning in the world could not have predicted such awful weather in March. We still have major markets like Denver and Minneapolis where the season still has not broken.

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