The Scotts Miracle-Gro Co. (SMG) said a sharp revenue drop at its closely watched Hawthorne hydroponics unit appears to have bottomed because of an uptick in California and other positive market factors on the horizon.
The comments failed to lift the company's share price, however, as the stock fell over 4% on Wednesday after being higher on Tuesday.
The fertilizer and garden company's Hawthorne unit, which makes and sells equipment for growing marijuana, is projected to show mid-single digit sales increases next year.
"As we look into 2019, we believe we'll start to see growth again [in Hawthorne]," Scotts Miracle-Gro Co. CEO James Hagedorn said on the company's July 31 analyst call. "We feel like we've hit the bottom. The rate of sales decline improved in Q3 over Q2. And we've seen even more positive signs in July."
However, given the volatility of the market, conditions could change in coming months, he added.
The Hawthorne unit posted a 37% revenue decline in the third quarter ending June 30, excluding the impact of the $450 million acquisition of the Sunlight Supply earlier this year. In the second quarter, Hawthorne revenue fell 29% to $41.8 million. Including Sunlight Supply's business, Hawthorne sales increased 2% to $74.2 million in the third quarter.
Hagedorn said the California market, which comprises more than half of Hawthorne's sales, appears to be moving past a period of cannabis glut and a slower-than-expected issuance of local licenses to grow and sell cannabis for the recently legalized adult use market.
"A major part of what was happening in California was overproduction of products," said CFO Thomas Randal Coleman. "What we're hearing and I mean directly is that a lot of dispensaries are running short of products right now. And so, there is pressure to grow and we're seeing that on the sales side. We're actually seeing evidence that the business is beginning to pick up."
The comments drew a positive response from analyst Eric Bosshard of Cleveland Research Co. LLC
"Relative to 90 days ago, it sounds like California's stabilizing and there's light at the end of the tunnel and your position for where the market is going," Brossard said.
Other encouraging signs in the legal cannabis sector include a push for adult use in New Jersey, and rising interest in the sector from New York and Connecticut, Hagedorn said.
"I feel very confident that [NJ] is going to legislatively deal with cannabis," Hagedorn said. "Based on the trends, you're going to see the same thing in Connecticut and in New York. And I think pretty rapidly personally."
The comments came after recent downgrades of the stock and weakness in the company's share price. Among them, Raymond James cut Scotts Miracle-Gro to "underperform" from "market perform" on June 20 on the view that investor expectations were too lofty in the face of near-term hurdles.