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Morningstar | Scotts Miracle-Gro Is Well-Positioned to Benefit From the Expanding Legalization of Marijuana

Scotts Miracle-Gro is the largest and most recognizable name in the U.S. consumer lawn and gardening market. The company sells a wide array of products aimed at helping consumers grow and maintain their lawns.The U.S. consumer segment, which consists of traditional lawn products, composes about 80% of total revenue. Historically, Scotts has generated healthy margins on its products through effective branding that allows it to maintain favorable product positioning and shelf space in the largest mass-market and home improvement retailers. Over 60% of its sales come from Home Depot, Lowe’s, and Walmart. Scotts has also been able to charge a premium over competitors due to its strong brand equity. While actual product differentiation in the industry is limited, consumers have been willing to pay up for Scotts' products. This has helped the company generate attractive returns on invested capital.Future demand for gardening products will depend on growth in the housing industry, where we expect housing starts to average 1.3 million per year through 2028, up from an average of only 0.8 million from 2010 to 2015. While housing starts alone should increase demand for gardening products, we see some secular trends that will offset the growth. Living preference shifts to smaller lots and urban centers should result in less need for gardening products. Additionally, a greater proportion of gardening products will be sold online. As of 2017, 97% of total sales occur at brick-and-mortar retail. Even if Scotts grows its online sales presence, it may lose some pricing power as many products in the gardening industry shift away from brick-and-mortar retailers to online platforms, where Scotts will likely face more lower-priced competition.The Hawthorne segment, which includes indoor gardening, hydroponics, and lighting, contributed about 15% of revenue in 2017. This segment’s growth is closely tied to the legalization of cannabis in the U.S., as its products are frequently used by licensed growers. Recent acquisitions in the segment should position Scotts to take advantage of growing demand from states and municipalities where cannabis has been recently legalized.