The Scotts Miracle-Gro Company Q3 FY2026 earnings call

CEO Transition & Organizational Restructuring

• A seamless leadership transition is complete, with new CEO Nate Baxter fully in place and aligned with the board and leadership team on the SMG 2.0 multiyear growth strategy.
• The COO role will not be backfilled; a new chief innovation officer and chief information officer will be hired to support increased investment in brands, AI, automation, technology, and data analytics.
• A full talent assessment is underway to align roles with strategic goals and build a leadership pipeline.

SMG 2.0 Strategy Progress

• Portfolio Optimization: The company has intentionally exited ~$100 million in low-margin commodity sales to expand high-margin branded offerings. Year-to-date, branded product sales are up 4.5%, and 2026 fiscal year innovation has contributed $75 million in gross sales. Innovation launched in the last three years has generated $278 million in YTD gross sales. The company is two-thirds of the way to its goal of removing 30% of the lowest-performing SKUs by the end of fiscal 2027. New products are now first launched via e-commerce to test demand and gather consumer insights before moving to brick-and-mortar shelf listings.
• Channel Expansion: E-commerce penetration has increased 300 bps YoY to 13% of total POS. The company has expanded presence in historically underpenetrated retail channels (club, hardware, rural farm and fleet), with double-digit POS growth at many retailers in these segments. Media investment mix has shifted to 80% digital (from 68% last year), including social media, streaming, and search, with 20% allocated to traditional media.
• Category Growth & Consumer Engagement: 74% of surveyed consumers view lawn and garden care as a necessity, and 82% view pest control as a necessity, supporting sustained category demand. The company is gaining market share in targeted subcategories (grass seed, fertilizer) and has achieved double-digit POS growth online across its portfolio. A new Chief Brand Officer is in place to drive household penetration growth.
• Operational Efficiency: The company is on track to deliver net supply chain savings equal to roughly 1% of sales by the end of fiscal 2026, offsetting commodity volatility and supporting gross margin expansion. Capital investments are focused on IT transformation, plant automation, and facility upgrades for growing media and fertilizer production.

Capital Allocation Update

• Long-term targets of $1 billion in net sales growth and $1 billion in EBITDA remain unchanged, but the timeline for achievement may be extended beyond 2030 as the company prioritizes consistent quality earnings growth and margin expansion in the near term.
• A key near-term priority is reducing the leverage ratio below 3.12x. Full details on updated capital allocation and share repurchase strategy will be presented at the upcoming Investor Day.

Scotts Miracle-Gro reports only one core reportable segment, the U.S. Consumer business: Q3 2026 total company net sales increased 1% year-over-year to $1.17 billion, with year-to-date (YTD) total net sales up 2% to $2.99 billion. Within the U.S. Consumer segment, YTD net sales increased 2% to $2.74 billion, in line with low-single-digit full year growth guidance. Branded product sales contributed 4.5% of YTD U.S. Consumer growth, offset by expected declines in low-margin nonbranded/commodity sales (including the intentional exit of ~$100 million in low-margin mulch and soil volume). By product category within U.S. Consumer: Ortho control products sales are up 15% YTD, Scotts grass seed is up 11%, and soils are up 7%. The e-commerce channel now represents 13% of total point-of-sale (POS) dollars, a 300 basis point increase year-over-year, with YTD e-commerce POS up 27% across all categories and customers. YTD GAAP gross margin is 35.7% (130 basis point improvement YoY), non-GAAP gross margin is 35.8% (110 basis point improvement YoY). YTD non-GAAP adjusted EBITDA is $686.6 million, a 5% ($31 million) improvement YoY. Leverage ratio as of Q3 is 3.78x, down 0.37x from 4.15x YoY.

• Full year 2026 net sales guidance for the U.S. Consumer segment is reaffirmed at low-single-digit growth, with full year sales now expected to land at the lower end of the range due to temporarily elevated retail inventory entering Q4.
• Non-GAAP adjusted EPS from continuing operations guidance is upwardly revised to $4.30 to $4.45 per share, up from the prior range of $4.15 to $4.35 per share.
• For fiscal 2027, management expects continued gross margin expansion driven by a combination of planned pricing actions, cost-out initiatives, favorable mix shift to higher-margin branded products, and higher-margin new innovation. The company expects to return to sales growth trending toward its 3% consistent long-term growth target in 2027.
• The $15 million year-over-year increase in commodity costs related to the Iran conflict is already fully reflected in fiscal 2026 projections, with no additional commodity impacts expected for the remainder of the fiscal year as nearly all cost of goods is locked in via hedging and pre-purchasing.

• Commodity and freight cost volatility driven by the ongoing Iran conflict has increased fiscal 2026 commodity costs by $15 million above initial plans, and negatively impacted Q3 2026 gross margins. Continued geopolitical volatility creates uncertainty for 2027 raw material costs.
• Unfavorable weather in key regions in early May 2026 led to soft POS demand, leaving retailer inventories slightly elevated (up high-single-digit percentages) entering Q4, which is expected to slow retail purchasing activity in Q4 2026.
• Longer-term, the company faces execution risk in rolling out its restructured organizational model, new innovation launch process, and portfolio transformation to prioritize high-margin branded products.

Q: With elevated retail inventories entering Q4, what are the company's forecasts for year-end inventory levels and what joint activities are planned with retailers to drive sell-through? How is capital allocation strategy being revised? / A: Management noted that soft early-May weather led to the inventory build, despite a record-breaking strong June. The Q4 sales forecast is set conservatively, and the company is working with retailers on joint late summer/early fall consumer activation programs to drive sell-through. For capital allocation, the strategy will remain balanced: the quarterly dividend will stay a core priority, continued reinvestment in advertising, R&D and cost-saving CapEx will be maintained, and the newly authorized share repurchase program will launch with a measured near-term approach to preserve focus on reducing leverage. Full details will be shared at Investor Day.

Q: How does the new e-commerce-first innovation launch model change the pace of new product launches versus the prior brick-and-mortar led process? / A: The new model allows faster innovation launch pacing than the legacy process, which relied on waiting for periodic brick-and-mortar line reviews. Launching first via digital channels lets the company test market demand, gather consumer insights, and build buzz before securing retail shelf space. The model was validated by the successful launch of Ortho Mosquito Kill and Prevent, which generated strong e-commerce demand and out-of-stocks that led to broad brick-and-mortar distribution the following year. All retail partners are supportive of this new approach.

Q: What is the expected contribution of pricing to 2027 sales growth, and are retailers seeing more pushback on pricing than usual? When will the company return to its 3% consistent annual sales growth target? / A: Pricing discussions with retailers are ongoing, and management noted pushback is no greater than typical, as retailers are aware of broader market cost dynamics. The combination of pricing actions and cost-out will deliver committed margin expansion, with more details to share in Q4. Management expects growth to rebound toward the 3% long-term target in 2027, supported by new innovation, new partnerships like the recently announced Black Kow deal, and expanded retail programs. Full long-term growth projections will be presented at Investor Day.

Q: Does the combination of pricing and cost savings for 2027 mean gross margins will be maintained or expanded next year? What is the expected cost inflation range for 2027 after opportunistic urea hedging? / A: Management confirmed that gross margin expansion is expected for fiscal 2027. Expansion will be driven by four levers: pricing actions, cost-out initiatives, higher margins from new innovation, and continued mix shift away from low-margin commodity products to higher-margin branded goods. Management noted that cost inflation dynamics are still evolving, and current quarterly cost levels can serve as a general backdrop for 2027, with more details to be shared later as plans are finalized.