Class Action Lawsuit Against Scotts Miracle-Gro: Investors Allege 'Misleading Information' And 'Artificially Inflated Prices'

Bragar Eagel & Squire, P.C., a stockholder rights law firm, revealed Friday that a class action lawsuit has been filed against Scotts Miracle-Gro Company SMG in the U.S. District Court for the Southern District of Ohio. The lawsuit was submitted on behalf of all persons and entities who purchased or otherwise acquired Scotts securities between Nov. 3, 2021, and August 1, 2023. Investors have until August 2, 2024 to apply to the Court to be appointed as lead plaintiff in the lawsuit.

The Ohio-based gardening giant also has a cannabis-focused subsidiary, The Hawthorne Gardening Company, which focuses on hydroponics for the emerging marijuana growing market. Scott Miracle-Gro, considered the world's largest marketer of branded consumer products for lawn and garden care, sells the majority of its products through third-party distributors.

‘Highly Leveraged’

In the period between Nov. 3, 2021, and August 1, 2023 (class period), the company "was highly leveraged, with its senior secured credit facilities containing various restrictive covenants and cross-default provisions that require the company maintain specific financial ratios," reads theBragar Eagel & Squire, P.C.'s press release.

A breach of any of these convents would enable the company's lenders to declare all outstanding indebtedness immediately due and payable. One of the covenants demanded that Scotts keep a deb-to-EBITDA ratio under 6.25. In 2020 and 2022 (prior to Nov. 3, 2021), the company experienced a rising demand but was unable to answer it due to a lack of inventory which resulted in Scott's missing out on millions of dollars in sales, according to the law firm. That's when the company increased its inventory.

‘Artificially Inflated Prices’

"The complaint alleges that, throughout the class period, defendants made numerous materially false and misleading statements and omissions concerning the company's inventory levels, debt covenant compliance, and financial performance," writes Bragar Eagel & Squire, P.C. The law firm further states that defendants constantly assured investors that the company's inventory levels were solid, sales were strong and that Scotts was having "record" shipment, while at the same time assuaging debt concerns.

As a result of this misleading information, "Scotts commons stock traded at artificially inflated prices," in the call period, writes the law firm.

The complaint also alleges that Scott's leadership conducted a scheme to saturate the company's sales channels, booking sales to its distributors as revenues and keeping earnings to debt ratios just barely above the required by its debt covenants.

In June 2022, Scotts revealed its U.S. retailers were $300 million below target in just one month, and it has also reduced its 2022 full-year guidance, announcing additional debt to cover restructuring expenses in an effort to cut costs.

Then, in August 2023, Scotts reported a net sales decrease of 6% to $1.12 billion from $1.19 billion in the third quarter of 2022. The company also changed its full-year financial outlook, projecting total net sales to decline approximately 10% to 11% and full-year adjusted EBITDA below the prior year by about 25%.

See Also: Scotts Miracle-Gro Reaffirms $1B Cash Flow Target, Reduces EBITDA Earnings Expectations, Cost-Saving On Track

Additionally, Scotts announced it had to take a $20 million write down for pandemic-driven excess inventories, and that it had to modify its debt covenants from 6.25% times the debt-to-EBITDA ratio to 7 times the debt-to-EBITDA ratio, according toBragar Eagel & Squire, P.C. "As a result of these disclosures, the price of Scotts common stock declined precipitously," wrote the law firm, in conclusion

Price Action

The Scotts Miracle-Gro shares traded 0.44% higher at $68.24 per share during Monday's pre-market session.

Join the Benzinga Cannabis Market Spotlight in New Jersey on June 17th! Grow your business, raise money and capitalize on the booming NJ recreational market. Don't miss this must-attend event in New Brunswick. Secure your tickets now. Very few spots are left. Use the code “JAVIER20” for 20% off

Image via Shutterstock