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Investing.com -- S&P Global Ratings revised its outlook on The Scotts Miracle-Gro Co. to positive from stable on Friday, while affirming the company’s existing credit ratings.
The rating agency cited Scotts’ improved profitability and ongoing deleveraging momentum, noting the company is on track to reduce its adjusted leverage below 4x by fiscal 2026. For the nine-month period ending June 28, 2025, S&P estimates the company’s adjusted EBITDA grew by about 11% compared to the same period last year, primarily driven by lower raw material, production, and distribution costs.
Despite weaker consumer sentiment affecting spending in the broader consumer products sector, Scotts has managed to grow its U.S. lawn and garden organic volumes over several quarters. This growth has been supported by higher promotional activity, which has driven strong point of sale trends in the segment with approximately 8% category unit growth for the nine months ended June 28.
The company’s e-commerce business has expanded to about 10% of total U.S. Consumer segment point of sale in 2025, up from roughly 2% before the pandemic. S&P expects this digital growth will partly offset potentially weaker foot traffic in key home improvement retail stores.
S&P views the full separation of the Hawthorne hydroponics business as credit positive, as it reduces earnings volatility and risks associated with the cannabis industry. Management expects to complete the separation by the end of fiscal 2025, following earlier moves to exit its low margin third-party business in April 2024 and the transfer of its wholly owned subsidiary, The Hawthorne Collective Inc., to an independent strategic partner in April 2025.
The rating agency expects Scotts’ gross margin to continue recovering in fiscal 2026, though remaining below pre-pandemic levels. This recovery is supported by cost cuts, better product mix following the Hawthorne sale, and continued productivity improvements. Management estimates $75 million of early-stage supply chain related cost cuts in fiscal 2025 and an additional $75 million cumulative in 2026 and 2027.
Key risks to S&P’s forecasts include higher input cost inflation, particularly on key commodities, and potential impacts from tariffs in fiscal 2026. However, S&P believes Scotts will be able to offset the majority of tariff impacts primarily through pricing actions.
S&P projects Scotts will end fiscal year 2025 with adjusted leverage of about 4.2x, down from 4.6x as of September 30, 2024. The agency expects the company to remain focused on deleveraging, primarily through profit growth and debt reduction, resulting in company-reported net leverage of about 3.9x by the end of fiscal 2026.
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