Shares of Scotts Miracle-Gro (SMG) crashed on Wednesday as hurdles in California's legal marijuana market continued to hurt its hydroponics business, and the company's CEO urged Washington to give states more power to handle their weed on their own.
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"I would urge Congress not just to provide President Trump with legislation that makes this a states' rights issue once and for all, but also a solution that allows the players in the space to have adequate access to banking and to pay a fair tax rate like other businesses," CEO Jim Hagedorn said during the company's fiscal Q2 earnings conference call Tuesday.
Hagedorn's remarks come amid mixed signals from lawmakers. President Trump has indicated that he would back the protection of states that have legalized cannabis, although Attorney General Jeff Sessions in January rescinded Obama-era guidance that helped clear the path for state cannabis legalization. Sen. Chuck Schumer wants to decriminalize marijuana on a federal level. Former House Speaker John Boehner, meanwhile, has joined the advisory board of a cannabis company.
Hagedorn, in a statement before the call, said sales this year for its hydroponics business, the Hawthorne Gardening Co., would "likely be, at best, flat in 2018" due to difficulties in California's marijuana market.
Sales of the company's Hawthorne segment slid 29% during the quarter. Overall first-quarter earnings per share and revenue missed analyst expectations, and the company said the start to the lawn and garden season "has been delayed to a greater extent than we have seen in recent memory," as winter hangs on in some parts of the country.
Shares of Scotts sank 8.4% to 77.50 in the stock market today, hitting the lowest level since August 2016, after rising 1.2% Tuesday when results were first announced. The stock also sank during the company's last round of earnings, in January, after a similar warning on its hydroponics business.
Hydroponics Business
Scotts Miracle-Gro formed Hawthorne in 2014. Last month, Scotts agreed to acquire Sunlight Supply, a large hydroponic distributor in the U.S., a move intended to "create a direct distribution model" for Hawthorne that would serve nearly 2,000 U.S. hydroponic retail customers.
Hydroponics, or the practice of growing plants without soil, is often used for growing marijuana plants.
Recreational sales became legal in California this year. But Hagedorn said the state "continues to struggle with the transition from a large and loosely regulated market for medical marijuana to an even larger but strictly regulated recreational marijuana market."
He said that he supported California's efforts, but said its approach to legalization was "overly complex" and created too heavy of a tax burden.
He said that only a fraction of the state's counties are handing out licenses to growers and dispensaries. While he said the state was making progress, that progress was slower than he had hoped. And he said that standards for legalization would differ from community to community — from zoning to licensing to regulations.
And as that industry groans to life in California, he said the pot market "probably got ahead of itself" last year, and that there may have been more marijuana grown at that time than the market needed.
Bigger Marijuana Players May Benefit
Those developments, he said, might not bode well for smaller cannabis businesses.
"The combination of the slow approval process and the excess inventory is likely to result in fewer players once everything shakes out," he said. The survivors, he said, would likely be those with greater resources.
Some of those deeper-pocketed players live to the north, in Canada, where recreational legalization is set to kick in later this year. Cronos Group (CRON) in February became the first pure-play cannabis company to list on the Nasdaq, and the company recently worked out a cross-border partnership with MedMen, a cannabis retail chain with locations in California, New York and Nevada.
During Cronos' earnings call to discuss its fourth-quarter results, the company said it would take a "fewer, bigger, better" approach to building MedMen stores in Canada, focusing on a few large locations to drive traffic.
During the fourth quarter, Cronos' sales spiked 274%. For the full year, they were up 636%.
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The post This CEO Calls For 'States' Rights' On Marijuana Industry appeared first on Investor's Business Daily.
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