S&P revises Scotts Miracle-Gro outlook to positive on deleveraging progress

S&P Global Ratings revised Scotts Miracle-Gro Co.'s outlook to positive from stable, affirming existing credit ratings, citing improved profitability and ongoing deleveraging momentum. This positive shift is driven by an estimated 11% adjusted EBITDA growth for the nine months ending June 28, 2025, fueled by lower costs, strong U.S. lawn and garden organic volume growth, and significant e-commerce expansion. S&P also views the planned separation of the Hawthorne hydroponics business as credit positive, reducing earnings volatility, with projections for adjusted leverage to fall below 4x by fiscal 2026.

Analysis

S&P Global Ratings has revised its outlook on The Scotts Miracle-Gro Co. (SMG) to positive from stable, signaling strengthening credit fundamentals. This change is predicated on improved profitability and a clear deleveraging trajectory, with S&P forecasting adjusted leverage to decline from 4.6x in fiscal 2024 to below 4.0x by fiscal 2026. Operationally, the company has demonstrated resilience despite broader consumer weakness, achieving approximately 8% category unit growth in its U.S. lawn and garden segment for the nine months ended June 28, fueled by promotional activity. Adjusted EBITDA for the same period is estimated to have grown by 11%, benefiting from lower raw material and distribution costs. A key strategic development is the impending separation of the Hawthorne hydroponics business, expected by the end of fiscal 2025, which S&P views as a credit positive that will materially reduce earnings volatility associated with the cannabis industry. Furthermore, the company's digital transformation is gaining traction, with e-commerce now accounting for 10% of U.S. consumer sales, up from 2% pre-pandemic, providing a partial hedge against weaker retail foot traffic. While gross margins are recovering, supported by significant cost-cutting programs totaling a projected $150 million through 2027, they are expected to remain below pre-pandemic levels. Key forward-looking risks include input cost inflation and potential tariffs, though S&P anticipates the company can mitigate most tariff impacts through pricing actions.

Key Decisions for Investors

• The positive credit outlook revision, driven by successful operational improvements and a clear deleveraging path, strengthens the bull case for SMG and may warrant a re-evaluation of the company's risk profile.
• Investors should closely track the execution of the Hawthorne business separation by the end of fiscal 2025, as its completion is a primary catalyst for reducing earnings volatility and simplifying the business model.
• While the top-line and cost-saving measures are encouraging, it is critical to monitor gross margin performance against the risks of commodity inflation and future tariffs, as the company's ability to pass on costs through pricing will be key to meeting profitability targets.