Based in Marysville, Ohio, Scotts is one of the world’s largest marketers of branded consumer products for lawn and garden care. The Company reports results from three business segments: U.S. Consumer, The Hawthorne Gardening Company (“Hawthorne”), and Other. Throughout the expanded Class Period, the U.S. Consumer and Hawthorne segments generated more than 90% of Scotts’ revenue. After facing surging demand for its products prompted by the COVID-19 pandemic, Scotts significantly increased its inventory for both its U.S. Consumer and Hawthorne segments. However, the Company soon realized it had purchased more inventory than consumers demanded. Rather than write down the excess inventory or disclose the issue to investors, Defendants instead engaged in a scheme to stuff Scotts’ sales channels with more inventory than could be sold to consumers. The revenues generated from the scheme enabled Scotts, which was highly leveraged, to maintain debt-to-earnings ratios at levels that barely met requirements under the Company’s debt covenants.
The Class Action alleges that, during the Class Period, the Defendants made materially false and/or misleading statements and failed to disclose material adverse facts about the Company’s business, operations, and prospects, including that: (1) Scotts had an oversupply of inventory that far exceeded consumer demand prior to the start of the Class Period; (2) Defendants engaged in a channel-stuffing scheme to saturate the Company’s sales channel with more product than those retailers could sell through to consumers; (3) Scotts was only able to satisfy its debt covenants through its channel-stuffing scheme; and (4) as a result of the above, Defendants’ positive statements about the Company’s business, operations, and prospects were materially false and misleading and/or lacked a reasonable basis at all relevant times.
These failures, misrepresentations, and other undisclosed issues were revealed to the market through public disclosures in 2022 and 2023. The truth began to emerge on June 8, 2022, when Scotts issued a press release revealing that replenishment orders from its U.S. retailers were more than $300 million below target in the month of May alone. As a result, Scotts reduced its fiscal 2022 full-year guidance by nearly 50% and planned to take on additional debt to cover restructuring charges in an effort to cut costs. On this news, the price of Scotts common stock shares fell almost 9%, from a closing price of $102.18 per share on June 7, 2022, to a closing price of $93.13 per share on June 8, 2022.
The truth was fully revealed to investors before the markets opened on August 2, 2023 when Scotts issued a press release disclosing that quarterly sales for the fiscal third quarter of 2023 had declined by 6%. The Company also slashed its guidance for fiscal year earnings before interest, taxes, depreciation, and amortization (“EBITDA”) by a staggering 25% and announced a $20 million write-down of “pandemic driven excess inventory.” Finally, the Company revealed that it had to modify its debt covenants. On this news, the price of Scotts common stock shares plummeted 19%, from a closing price of $71.44 per share on August 1, 2023, to a closing price of $57.86 per share on August 2, 2023.
