A Florida retirement fund is suing Scotts Miracle-Gro (NYSE: SMG) and some of its executives over poor decisions that caused the value of the shares to fall damaging the group’s pension plan. The Hialeah Employees’ Retirement System is a benefit pension plan based in Hialeah, Florida filed a complaint last week in the Southern District of Ohio outlining the allegations of mismanagement at Scott’s. Scotts maintains its headquarters in Marysville, Ohio, which is situated in this District.
The pension fund claims it bought shares in the company during a period in which the value was inflated as investors were unaware of the true situation with the company’s finances. The market period was defined as between November 3, 2021, and August 1, 2023. They claim that once Scott’s told investors the truth about the financial situation, the shares sold off causing the fund to see its investment fall as well.
Accusations against Scotts
The main allegations against Scotts in the complaint revolve around inventory levels, debt levels, and maintaining a specific covenant of the debt regarding a debt-to-EBITDA ratio.
Stuffing the channels
The first complaint is that Scotts missed out on millions of dollars in sales in 2020 and 2021 due to a lack of inventory as it faced surging demand. The investors accused Scotts of buying too much inventory after having too little and then hiding the problem. They claim that instead of Scotts coming clean with investors over having more inventory than it could sell, it engaged in “stuffing the channels.” The complaint alleges that Scotts sales personnel pressured retailers to purchase more inventory than they wanted or needed. The court document read, “This scheme enabled Scotts to book as revenue the sales to its distributors and maintain earnings to debt ratios that just barely exceeded those required by its debt covenants.”
The investors also pointed to earnings calls in which the Scotts CEO Jim Hagedorn told investors about record shipments, which they say was a false claim.
Debt levels
The investors are also upset that at the beginning of the class period, Scotts held $2.3 billion of debt but by the end, Scotts’ debt had ballooned to $3.1 billion. The problem with the debt levels growing was that Scott’s has to maintain a debt-to-EBITDA ratio under 6.25 in order to remain in good standing on its debt. If the debt goes higher than the earnings by too much it breaches the debt covenants.
They alleged that by claiming the company had higher earnings, it wouldn’t trigger the debt covenants even as the debt was rising. However, quarterly sales were falling forcing the company to move the goalposts on the debt covenants to 7.0 times the debt-to-EBITDA ratio. That way the company could tell investors that it wasn’t in default of its debt covenants.
Had Scotts admitted it was in default, the investors claim the company’s lenders could have declared all outstanding indebtedness immediately due and payable.
Stock selloff
The main issue that caused the lawsuit was that Scott’s common stock plunged in value once the company told investors that it was having difficulties. When Scott’s reported its 2022 full-year earnings, the company cut its projections to roughly half of its prior guidance. The company also announced plans to take on additional debt to cover restructuring charges as it attempted to cut costs. Still, executives were optimistic, which the investor’s claim wasn’t warranted.
Then by the third fiscal quarter of 2023, the company slashed fiscal year EBITDA guidance by a staggering 25% and announced it had to take a $20 million write-down. The market responded with a selloff.
The complaint notes that Scotts had a closing price of $102.18 per share on June 7, 2022, which then fell to a closing price of $93.13 per share on June 8, 2022. As the executives began expressing the problems to the market, shares fell from $71.44 on August 1, 2023, to a closing price of $57.86 per share on August 2, 2023.
News of the investor lawsuit may have triggered more selling. The stock closed on June 7 at $68 and in early trading on Monday, shares fell to $65.
1845000-1845636-https-ecf-ohsd-uscourts-gov-doc1-143110141935
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