Rating Upgrade Overview
S&P Global Ratings upgraded The Scotts Miracle‑Gro Co. (NYSE:SMG) on Tuesday, raising its long‑term issuer rating to BB‑ from B+ and its senior unsecured notes rating to B+ from B‑. The agency also improved the recovery rating to 5 from 6, indicating an expected modest recovery of 10%‑30% in a default scenario.
Credit Metrics and Leverage Targets
S&P expects the company to reduce its adjusted net leverage to 3.7x by 30 September 2026, aligning with Scotts’ internal target range of 3.0x‑3.5x. The outlook remains stable, with leverage projected to stay below 4x at fiscal‑year end and interest coverage anticipated to be at least 3x throughout the year, even during peak borrowing periods.
Recent Operating Performance
For the twelve months ended 28 March 2026, adjusted EBITDA increased 13% to $704 million, driven by a mix shift toward higher‑margin branded U.S. consumer products, supply‑chain savings, and solid sell‑through trends. Point‑of‑sale grew 4% through March, supported by stronger e‑commerce sales following heightened marketing and advertising spend.
FY 2026 Forecasts
S&P forecasts FY 2026 adjusted EBITDA to decline slightly to about $691 million at year‑end, citing moderate commodity headwinds, weaker point‑of‑sale trends in the second half of the year due to unfavorable spring weather, and higher cash costs from vendor payments that were previously settled with equity. Free operating cash flow is projected around $275 million for 2026, as the company manages cash costs while increasing capital expenditures to drive growth.
Strategic Divestiture
The April 2026 divestiture of the Hawthorne business to Vireo Growth Inc. is expected to expand margins and reduce earnings volatility associated with the cannabis segment.
Sales and Margin Outlook
Net sales are projected to grow approximately 1.5% in 2026, with an anticipated 100 basis‑point expansion in gross margin and about 200 basis‑points improvement in EBITDA margin for the fiscal year.
Outlook for FY 2027
S&P notes that profitability may be pressured in fiscal 2027 because of inflationary pressures on key inputs such as fertilizers and energy, linked to the ongoing war in the Middle East. Nevertheless, adjusted leverage is expected to remain below 4x, and EBITDA interest coverage is forecast to stay comfortably above 3x during the year.