The Scotts Miracle-Gro Company (SMG) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the UBS Global Consumer and Retail Conference here in Boston. My name is Peter Grom, the U.S. household and personal care analyst here at UBS. And we are very excited to have joining us today from Scotts Miracle-Gro, Cory Miller, Executive VP and Chief Financial Officer; and Jim King, Executive VP and Chief Communications Officer. Thank you for joining us today. In terms of format, I have a number of questions prepared that I plan to run through for the first 30 minutes or so. For those in the audience, you should have received instructions on how to submit our text questions. And if not, I think there's some directions on the tables around the room. And then over the last 15 minutes or so, I would be happy to ask whatever questions come in on your behalf to the team up here. But before we start, I am required to read a legal disclaimer. As a research analyst, I'm required to provide certain disclosures relating to the nature of my own relationship and that of UBS with any company on which I express a view on this call today. These disclosures are available at www.ubs.com/disclosures. Alternatively, please reach out to me, and I can provide them to you after this. So with that, why don't we get started? Let me just sit down here.

So Cory, I know the company lowered guidance yesterday at a different competitor conference. But can you maybe speak to the key drivers? And maybe would you characterize the outlook as conservative or more realistic based on where things stand today?

Yes, the guidance that we have -- had put out for our Hawthorne segment was negative 10% to flat as guidance. We lowered that guidance yesterday to a number that we now think will be a decline of 15% to 25% within the Hawthorne segment.

On the top line.

On the top line, excuse me. Thank you, Jim. So we're looking at that guidance as we have had soft sales over the last several months. We think we've hit the bottom. We expected to see a little bit of an increase in daily sales coming into January and throughout January and February. We didn't see the increase that we had hoped to see. We think that that's going to happen. We haven't gotten any worse. But we think that the time period of this softness is going to extend out a little bit longer. And it's just continuing on with that lower range for a little bit longer than we expected. So we wanted to put guidance out that we felt more comfortable in. And the U.S. consumer business is doing very well. It's -- the range that we have out there, we still feel very comfortable. We think we are seeing results in the marketplace that allow us to remain comfortable too optimistic in the range we have out there. So it's really just the Hawthorne top line that we're concerned about. The -- when that flows down to our earnings, the previous range that we had out in the market was $8.50 a share to $8.90 a share. We lowered the expectation. We think that, that range of $8.50 to $8.90 is going to be harder for us to hit, although we are aiming for an EPS target of above $8. So we're kind of shifting the expectation down a little lower on earnings.

Okay. Maybe building on the U.S. consumer, it's good to see the guidance was reiterated yesterday. But I think the release also mentioned that the current guidance embeds or assumes an 8% drop in units, right? And it's -- I think you mentioned that trends are currently flat. So can you maybe help us frame what guidance would look like or what your earnings performance would look like if the current trend holds?

So the current results that we're seeing. Now again, we're less than 20% through our season. So we have a lot of runway ahead of us. But the guidance that we have out there today is flat sales dollars. We've taken 8% pricing for the year, which equates to about an 8% decline in unit volume. The trends we're seeing today are unit volumes that are about flat. The days are becoming more important. So we kind of bounced between about flat to just slightly below flat from a unit perspective. If that continues on as we get into the peak of our season, will be 8 points above what our guidance is for units. We'll still have the 8% pricing because that's locked in at this point. So we should see significant upside should the trends continue. Again, we're less than 20% to our season today.

Yes. Okay. And maybe building on that obviously, it's just one week in the March, we're still weeks away from the bulk of lawn and garden you just alluded to, but can you just remind us what the path looks like here in terms of comparisons? What was the industry dealing with from a weather perspective a year ago? I think we'll be getting the signal some favorable weather in March? And then obviously, everyone remembers how tough it was back in May or in June. So just -- I think it would be helpful to understand how you're thinking about the phasing of growth for U.S. consumer, particularly considering what you just talked about.

Yes, if you look at last year and you try to build the comp that we're going up against. If you look at the full year last year, we had POS of about 6% for the full year. Year-to-date, at this point, we had POS of about 28%. So between now and the end of the year, we're going to go from a 28% comp down to a 6% comp. So for the next 5 to 6 weeks, we're going to stay at a comp level that is about what we've seen year-to-date, so call it, 25% to 30% growth. And then we're going to drop pretty dramatically over the back half -- over the busy season in the back half of the year to get down to a 6% comp for the full year. So that's what we're facing in front of us. And again, I just mentioned that year-to-date, we're showing flat units. So what we think is the hardest part of our year, we're showing really good results. A lot of consumer sales ahead of us, but that's -- we want that trend to continue. We want the dollar trends that we're seeing to continue, and that will allow us to be in what we think is a pretty good position as we finish the year. If you think about last year from a weather perspective, you have snowing on Mother's Day, Memorial Day weekend was a historically cold weekend in the Midwest. Father's Day, we had a lot of rain. I'm not saying it was an awful, awful weather year, but it certainly didn't give us any tailwinds. And we think going into this season, we can likely only get better. So it probably cost us 1 point or 2 of volume a year ago. So we're hoping that this year, weather trends become a tailwind to us and can give us a little bit of push to maybe get those 1 or 2 points back.

Okay. And then there seems to be a fair amount of skepticism just around the ability to grow U.S. consumer. It's just been a key debate. Just as you're kind of cycling 2 years of exceptional growth, right? And so I think it's a fair argument. No one really knows it's going to happen, but we were just talking about this earlier before the presentation. A year ago, consumers may have not been back to 2019 in terms of mobility, but it was definitely up versus 2020. So -- and the category still had very strong growth. So how do you think about the sustainability of growing off the space longer term?

If we go back to 2020, we had growth of about 24% in 2020. And as we went into 2021, we expected the world to get a little bit more back to normal, we'd be battling these tough comps. People would be out and about a little more than they were in 2020. And we expect to see a little bit of pullback in consumer activity. We not only didn't see that pull back. We saw another 11% growth. So within those 2 years, we had significant growth on a business that up to that point had been growing at about 2% year in and year out. So as we come into this year, we look at the last 2 years of growth, and we plan for in our guidance, unit decline of about 8%. So we've never seen the growth that we saw in 2020 and 2021, but we've also never guided to a position of being down 8% in units in a year either. We've never seen that kind of decline either. So it feels like we have a pretty conservative unit assumption going into 2022. The pricing that we have in the market was a factor that we wanted to make sure we were accounting for correctly with 8% pricing in the market, the consumer feeling price pressures and everything else that they're buying we. Want to make sure we're certain on how the consumer will react. In the markets where spring has already come into play and people are starting to buy, we're not seeing consumer takeaway that would worry us. We're seeing consumer takeaway is about flat to last year, which again, should be a tailwind if the trend continues. So we don't think pricing is affecting us the way that we thought it might have as we started the season, and we're not seeing consumer activity decline because we grew the last 2 years.

Peter, the other thing if I can elaborate a little bit on that, what we're seeing from our consumer sentiment data coming in preparing for the season is the level of stickiness, if you want to use that term, seems higher now than it has been in the past. Typically, kind of the stickiness of lawn and garden activity is about 80% a year. Consumers are telling us this year, it feels closer to 90%, okay? What we're seeing is kind of what we expected to see more boomers spending at lower levels, moving out of the category, but millennials are moving into the category in a really major way, which is important. And that's been -- that wasn't just a COVID trend. Millennials have been moving into the housing market for a number of years now and are about 45% of the housing market, only half of the millennials currently have houses. So it's going to be more of a tailwind going forward. But the important thing to look at is their participation levels in the category versus the people who are moving out. So boomers are selling their house to millennials. Millennials are participating in the category at a much higher rate than baby boomers were. So I think we're confident that just the tailwinds of demographics are beneficial to us. And then this is a different category, too. It's sticky. If you built a garden in your backyard over the last several years, you still have a garden. Dandy lines didn't get COVID. People are still going to treat their lawns. So just the behavior, I think, is different than other consumer discretionary categories that people are probably legitimately concerned about. But I don't think we have a lot of banks right now that consumers are all of a sudden are going to turn tail and go the other way.

That's really helpful. And I would imagine you kind of both just answered a good chunk of this next question, but I do think it would be helpful to run through. But we're kind of approaching the 1-year anniversary of taking up the growth aspiration for the U.S. consumer to 2% to 4%. So I think, can you maybe just walk us through the drivers behind raising that expectation a year ago. And I know we're still trying to manage through the current year, and there's just a lot of uncertainty out there. But is the expectation that as we look out to fiscal '23, that, that's kind of when we start to see that algorithm?

Yes. We look at the future outlook, we've been saying for about a year that we think the future outlook is 2% to 4%. So the 2% to 4%, there's some pricing baked into there. As we take 8% pricing this year, it makes the dollars a little easier to achieve, assuming that you have unit movement of product. But as Jim touched on, the demographics in this area are a tailwind for us right now. You have millennials buying homes as a group at a higher rate than any other demographic group. They're moving into the category at a rate that's positive to us. They're spending more on the category than the boomers that are aging out, and they're moving to the suburbs, they're moving into homes, they're buying products, and they want those products to work. And we have the products that can make them successful as they're looking to get in their yard. I think we continue to lean on innovation. If you look at the innovation that we have, we get into products that are more organic, we're still focusing on the need for that product to work and organic soil has been a large innovation item for us, and we continue to lean on that. Gardening is a strong category for us right now, both in live goods and in the soil that those live goods go into with the purchase intent on live goods being higher for the millennial group. We think that we can sell a lot of soil along with those plants and have success with those consumers for years to come. And we're trying to talk to those consumers as well. We have a couple of e-commerce brands that are relatively small in the business right now, but they're trying to get us in touch with those consumers in a way that we haven't been in touch with them before, and we want to develop a relationship with those consumers that we can nurture for the next few decades.

That makes sense. So shifting gears, Hawthorne, obviously, the big driver of the earnings cut yesterday. I guess -- and you provided a lot of detail already, you provided a lot of detail yesterday. But it just strikes me in such a material change, right, like for 15 percentage points essentially at kind of at the midpoint. And I guess just listening to your comments before, I mean, it didn't really sound like things got all that much we're all that different, I guess, sequentially, right? I mean it's stabilized, maybe you didn't see as much uptick sequentially. But -- and then I guess the comment yesterday, I think you said it was kind of the category returning to growth. I think it was May you alluded to. And that kind of was the midpoint or so of the ballpark you previously mentioned. So I just -- can you just help us understand the 15% to 25%, what would get you to the high end? What would get you to the low end and kind of what you're expecting in terms of phasing? It sounds like Q2 is quite similar to Q1. But as we think about Q3 and Q4, how are you thinking about that performance there as the comps ease?

Well, I think that's the difference between what we're thinking today and what we were thinking 1.5 months ago when we released guidance before. Q2 is going to look like Q1. From a dollar standpoint, our daily sales are about where they were. From a percentage standpoint and comparing it to last year, the percentage gap has actually grown a little bit because the -- there's normally a seasonality that starts happening mid-January that we didn't see this year as we came through mid -- as we came through January and into February. Our daily sales now in the last 2 to 3 weeks are getting a little higher. And I think that, that improvement is going to be good for us. It's going to continue on a path to get us where we need to be to get to our revised number, but it didn't jump up enough for us to get to our old guidance number. We didn't want to be misleading anyone on where we think the full year can go because as soon as we get into providing results for Q2, it would say that the back half of the year, we'd have to see a lot of growth to get to the guidance that we had previously. The runway on our sales, it doesn't require us to all of a sudden grow dramatically in a week and continue at that high level, it's a slow progression that's going to continue happening moving forward. What gives us confidence about going into next year is that all of this growth in our Hawthorne business is really hinged on the consumer usage of and cannabis products, which has historically grown at 7% a year, and we're looking for that growth to continue into the future at about 7% a year. So if that's our starting point and then we add a little bit more growth on that for us to take share and capitalize on categories where we're a little more strong in today allows us to think about 10% growth as we go into next year and the following years. That would be my target for that business is about 10% growth hinged on those 2 areas.

You mentioned the comp for a second. The comp doesn't get easier for a while. So the June quarter has got about a 60% comp in it. June itself is going to be a pretty aggressive month to comp because last year, we had some promotional activity that we actually talked pretty openly about the fact that it likely pulled sales into the quarter from July. So you could see a little bit of choppiness even within the balance of the year if we start to see a return to growth, where you can have a month -- 1 month up, 1 month down. So June is a tough comp, the September month, the September quarter is easier, but September itself is a tough comp as well. So the numbers don't get materially easier until pretty late in the year.

Okay. No, that's helpful.

The calendar year.

I mean I just want to go back to the comments around May and kind of return to category growth. I mean, what gives you confidence in May versus kind of like what are you seeing versus it's not April, it's not July and May is kind of like the right time frame right now?

Well, we're trying to guess the precise timing on this. I think it is probably a range in there. I think it's April to July, somewhere in there. We're kind of pegging May for our forecasting purposes. We are hearing good news from growers that they're starting to engage a little more than they were a few months ago. We're looking at the end price of cannabis. So as the oversupply happened, the price of end cannabis dropped and until that inventory has worked through, the price is going to stay low, and growers are not going to want to grow as effectively to get the margin rates that are a little depressed. So as that cannabis price comes up a little bit, that's also a leading indicator that we could see some growth coming our way for our business. We have seen that over the last 3 to 4 weeks, that there is a little growth in the end price of cannabis. So that's a good leading indicator, talking to growers is a good leading indicator to say that they are getting back into the market a little more than they had been. And in talking to our retail partners, we're hearing that same thing from them. There's just a little more activity happening as growers are ordering from those retailers. So it's starting to get there. We haven't had massive days yet where we can say, yes, everything is back. But the leading indicators are there that those days are coming.

Okay. That's a good segue into kind of what I wanted to discuss around this. But I get a lot of questions or what you often hear from investors on the Hawthorne business is just the lack of visibility, right? And I know the company has kind of said, look, we kind of saw this coming back in June. But there was a comment back in -- I think it was in August that you still felt like 10% to 20% growth was achievable. Obviously, the guidance today is very different from that. And so you kind of alluded to it, but can you help us understand the metrics or data points the company looks at to inform your outlook? How -- and like have you put a greater emphasis on this in terms of trying to get visibility, right, so that we're not in this kind of situation looking longer term. And I guess putting that all together, what you're kind of seeing and what kind of gives you confidence that this is it, I guess, I would say, in terms of the negative guidance revisions in terms of the minus 15% to 25%, just simply because of the recent trend, it's kind of the second cut in 3 or 4 months here.

Yes. If you look at the information around this industry, there's not a lot of information around the industry. There are a lot of conversations that we have with growers and retailers. There's a lot of anecdotal information that we're getting from them that we're trying to piece informational patterns together. We have trends that we see in our products. As you look at those trends and compare it back to the softness we had in 2018, we got into that issue from a different angle, but the softness in how we're coming out of it looks very similar. You start to see these little trends that make you feel confident. Leading up to that point, we had been focused on overall industry growth of end product usage. That didn't come down. So that wasn't a leading indicator for us to feel like we should see something in our business. That's been pretty consistent and remains pretty consistent throughout. So end product demand is not going to be a leading indicator for us. Pricing in the market of end product cannabis is a leading indicator. Unfortunately, the time that it takes to get that information compiled, it's a pretty big lag on it. By the time we saw that information, we'd already seen the potential results coming in our sales. So while it is a leading indicator by the time we get it, it's not leading anymore. It's just an indicator that says, yes, what you saw was supported by some facts in the industry that happened a few months ago. So we look at where we're at today and the call that we have as the best answer. If we say we're down 15% to 25%, if we come in at minus 27%, am I going to be shocked by that? Probably not. We're taking an estimate based on what we think and what we see and the information that we have based on conversations from several people in the industry, but it is a pretty blind industry. I don't know, Jim, if you have any thoughts on that.

The part of the reality today kind of goes without saying, there's a significant part of the reason that we're in the industry is because of the legalization movement. However, the idea of growing cannabis is not new just because of legalization. So there is a significant component of the legacy market or illicit market that just is part of what's dragging prices down, part of what drove the overall production, and there's no way to get good visibility. There's no state regulatory data in California on the illicit market. You can get all kind of data on the legal market. But unfortunately, by the time you get the actual data and the anecdotal information together, as Cory said, it validates what you're seeing, but it's just lagging.

No, that makes sense. Obviously, a lot of the pressures kind of come from California, Oklahoma. Could you maybe just give us a state of the union on kind of what you're seeing in some of your important markets. And just kind of maybe any update on the potential for the new markets in the Northeast? Are you seeing any signs of life there?

Yes. California, as of a year ago is about half of our sales. So when there's softness in California, there's definitely softness in our sales as well. The factors that we've talked about that created the oversupply issue are causing those same growers to kind of hold back, buy a little less. And be less aggressive in their build-out in cultivation activities. California is not the only place where we're seeing the oversupply. So we are feeling it. We think that the oversupply was created in California and is supported by the rapid growth that we've seen in growing in Oklahoma. Oklahoma has grown from a percentage standpoint very significantly for us over the past few years. And those 2 states combined to grow a lot of end product that has slowed down the growth that is happening in many states across the country, but those 2 are the most pronounced when it comes to our products. Michigan is another key state, while it slowed down, it hasn't slowed down as much as California and Oklahoma. So if you think about 3 key states, those are 3 key states. If you look at the East Coast and what's happening with legalization, I'd say they're acting about as we expected. If you look at New York or New Jersey, it's early on. The sales dollars of our products associated with those states are pretty small, but the percentage increases that we're seeing are pretty good percentage increases. It's just multiplying times a small base. So if you think about what we said the last couple of years, there is a lag between a state going legal and the amount of product that we sell into that state. So we're looking for large growth in the East. It just on a time line, we're just not quite there yet. And what's yet to be proven out is, does this period of softness delay that time period or not. We've seen a percentage growth that is about where I'd expect. But I think that the percentage growth that we have will continue to grow in New York, New Jersey and the eastern states until they get to a more significant position within our total portfolio from a dollar perspective.

Okay. And then just rounding out the questions here on Hawthorne. And Cory, I think you mentioned an expectation. I'm not sure if this was just kind of for next year or more longer term of around kind of 10%. And you go back, as I was preparing for this, you go back to the Analyst Day and there was a number of different strong double-digit numbers thrown out there in terms of expectations around Hawthorne and 10% was kind of on the low end of what it might be in 1 year, right? And so I know a lot has changed, but I just -- was that -- are we kind of effectively lowering the target here for Hawthorne looking out longer term? And I guess, what -- why is it now 10% and not kind of this 15% to 20% longer term?

Yes. I think the numbers I put out there, we have kicked around numbers of 10% to 20%, 10% -- sorry, 10% to 12%, 10% to 15%. I'd say a couple of quarters ago, we kind of got talked up to a 20% number, this is in the midst of us growing at 50% to 60% for a couple of years. So for us even to talk about growth of 10% to 15% felt like a pretty big call back of what we had been seeing for a couple of years. And the growth in this -- if you look at our category, the growth has been very spiky. So we've had explosive growth, and then we have a period of softness, explosive growth again, and now we're experiencing a period of softness again. I think we're going to continue seeing that soft tooth pattern to our growth. Overall, when you think about what line you draw in the middle of all those peaks and valleys, I think you're going to get back to something that is between the 7% that we're seeing on cannabis end usage and a number that's just north of that because we are going to continue taking share and competitors that are out there today are feeling this downturn a little more than we are. So we think we can come out of it in a good way. So if I look forward, I'm kind of aiming at that 10%. That, to me, would be good, healthy growth for the category. If it grows back at 60%, I think we'll have short-term wins out of that. But if it's 60%, and we're not taking significant share from other players, we might be foreshadowing another period of softness. So the sawtooth pattern may continue on at that point.

Okay. That's really helpful. I want to talk about -- obviously, in inflation, the commodity-sensitive materials, I think, represent about 20% of your total cost of goods sold or roughly and urea, resin and diesel are kind of key components there. I think back in earnings, you said you're kind of 70% locked on commodities. I think yesterday, the update maybe was around 80%, I'm not sure if that's right. But could you maybe give us an update on kind of what you're seeing across those key inputs? Where are you locked in on items such as urea? And I guess, how does that inform your view on kind of gross margin performance relative to your guidance? So I think it's down 100 to 150 basis points.

Yes. So if you back up a couple of weeks ago before the events in Russia and Ukraine started, the cost increases that we were seeing were fully covered by the pricing that we've put in market and have sold in 2 -- 1 last price increase is going to come in April. So the pricing that we've taken is going to offset the dollars that we've seen from a commodity standpoint. The commodity-driven costs right now because of the increase in commodities is probably getting closer to 30% of our total cost structure, probably 25% to 30% would be the range. I'd look at that. So it's growing. Commodity costs are going up. We've taken pricing to offset it. We're offsetting the dollars. The difference in the rate is about the 100 basis point difference that you mentioned. That's what we think we'll see in rate this year related to those costs. And I think we're in a really good position on what we could price and our consumers' reaction to that price in the markets that have broken this early in the year. If you now fast forward to what we've seen in the last couple of weeks, commodities, while they asserted to ease before the conflict in the Ukraine, they've jumped back up now. Urea has jumped back up. We were at $800 a ton. We had fallen down to about $550 a ton. Now we're back over $800 a ton. You hear in the last kind of week -- and obviously, we're all hearing a lot about fuel and diesel. So if you look at the cost we would incur should we have to buy everything that we need to buy for the remainder of this year today, we could see pressure of $0.10 to $0.15 a share because we don't think there's enough time left in the season to implement a fourth price increase for this year. So we'll probably end up eating that a little bit. But that's if we buy everything today. There's a lot of uncertainty. We're not looking to buy the remainder of our inputs today. But if that were to happen, that's kind of the magnitude. And I'd say from a percentage that's either purchased already or hedged and locked, we're just under 80% today. The 2 main components that are driving cost increases today are urea. We're hedged at about 85% of our urea right now. So we continue to watch that market to see what type of exposure we'll have. Should we have to buy with the higher rates. If we had to buy it today, that would be about half of our $0.10 to $0.15. The other large mover is in the diesel market. Again, diesel would be the other half of that $0.10 to $0.15 change if we bought it all today, but we'll continue to watch that. We're about 60% hedged on diesel. So there is a little bit more -- there's a little bit more risk should diesel continue the way it is on the diesel front because we're at a lower percent hedged.

Okay. And just to be clear, that would -- that's not -- that $0.10 to $0.15 is not included in the above $8 or it is, it assumes that it current holds?

That is not. And if you look across all of our commodities, the rest of them, there's so ups and downs are pretty minor, but urea and diesel would be the ones that would drive any variance if there is one.

Great. I just want to remind anyone if you do have questions and you want to submit them, please feel free to text them through. If you want, you can also raise your hand and we can call on you as well. But I actually think it would be really helpful, Cory, to kind of go for -- to help investors understand a bit more the granular how inflation typically works its way through the P&L. And what I'm trying to really ask about is kind of the lag, right, impact. When the inflation hits and kind of when it flows through to gross margin. So I guess, when do you start purchasing inputs for the year ahead? If urea continues to move higher or current spot rates hold, you kind of made it clear yesterday, and this would be more of a fiscal '23 issue potentially. But I just think it would be helpful to go -- to get more detail or understanding that how the -- given how these commodities continue to move.

Yes. So if you look at this year and you assume that everything today is the market for all of next year as we're buying. You look at that and say, we don't have that covered. We'd have to take some incremental pricing to cover that. The incremental pricing, we'll continue to look at the numbers. It bounces around a lot, but it's kind of low single-digit pricing that we would have to take in order to cover the commodity cost increases that we've seen as of today, if they extend out all of next year because remember, we're starting on a pretty high base because commodities have gone up a lot already. If you think about how it flows through the P&L, there is a lag between the period of time where we're buying an input. We have that input come in. We produce the finished good that, that input is used in. We house that finished good inventory for a period of time and then we sell it out during the peak season. When we sell it out, so we'll say kind of right now is peak shipping season. So we're generating a lot of our sales for the year kind of in this period for the next several months. That is when we'll see the cost of these input increases flow through the P&L. Until you see that, it really just sits in our inventory. So it's really matched up to the time period of when the product is produced versus when the product is sold. So inputs that we're buying now, a lot of what we would be buying now could be a fall product. If we are buying inputs 2 to 3 months from now, we're most likely using those inputs in a product that will be sold next year at this time. So we call that capitalizing the cost. And any price increase that we see that was above our standard cost would be a capped variance, and that capped variance drives up the cost of inventory that we carry on the balance sheet at the end of the year. So commodities flow into all of our products. We've been on a moving scale the whole period of this year. We think that cost us about $150 million of increase that we have an inventory as of a couple of months ago, and we plan on selling out. That increase is still going to happen as we're buying products, and we're producing for things that we're selling this year. But when you get into our Q4, most of what you're buying is going to go into '23. It's going to be part of the inventory base that we're selling out. And that's when we sell that product out is when it will flow through to the P&L.

Okay. And then it's still obviously very early, but should that hold, right? And you have to go back for another round of price increases just given what we've seen already. I mean, can you maybe speak to the retail receptivity to that?

I think the retailers have seen pricing across every aspect of their business. Us taking 3 rounds of pricing is very unheard of. I don't think we've ever taken 2 rounds of pricing. Maybe once, we took 2 rounds of pricing. This year, we broke the record and took 3. We don't want to take 3 next year. We think that the 3 rounds of pricing that we took this year set us up pretty well for next year. But again, if prices stay the way they are today, we might have lower single-digit pricing that we need to bake in just to cover those costs. And we have to -- we're going to understand a lot between now and the time period that we'd sell that pricing into the retailers about how the consumer reacts to the pricing we've already taken. What's happened this year that's a little different than in previous years is that the consumer is seeing pricing on everything that they buy. In the past, it would be our products that might have a large price increase, but nothing else in their basket was seeing a price increase. This year, it's everything. It's gas, it's food, it's everything they do. So we're going to learn together over the next couple of months, what that's doing to the consumer. Does that make the consumer decide to not buy our products? Or does it keep them home and create increased demand for them to buy our products and stay at home and make their yard beautiful. We'll look at that information, along with the actual cost that we see between now and the time period where we have to purchase it and make some decisions on what we would do going into the market of next year. And I'd say that if the cost increase stay, I'll look and take the worst scenario. If the cost increase stay, but we don't feel like we can take any pricing, what would we do? One, we're going to feel margin pressure; and two, we're going to work hard to offset that margin pressure with cost reductions in other areas to close that gap completely, if not a large portion of it.

Okay. And maybe putting all this together, right, and I don't have a crystal ball, but it just seems like a lot of uncertainty out there, the Russian-Ukraine situation, the inflation that you were just talking about, still kind of dealing with a global pandemic here. But maybe how has your business performed during -- historically during times of economic uncertainty? It's hard to say that maybe lawn and garden is essential as maybe like toothpaste, but -- and it probably gets viewed more as a discretionary item. But just any thoughts or anything you can share around how this business has performed during maybe past recessions would be helpful.

Jim is our historian, but I'll start off by saying, historically, we've performed really well in times of uncertainty because the consumer tends to stay home. They stay home a little bit more. They may travel less. They may do a staycation instead of a vacation. And when they're at home on that staycation, they either use that time to improve their yard and feel comfortable about the area of the earth that surrounds them a little bit or they know they're going to stay home in order to prep for that staycation. They improve their yard and they feel more comfortable in their home. But...

If you go back and you look at historical data decades, just about every recessionary period of time or stressful time in the economy, the category has outperformed other CPG categories and we've outperformed category. A couple of things. Although it feels like a discretionary category, I'd submit it's more of a staple category in most of the channels of retail where we sell. If you look at home centers, if you look at garden centers, by definition, exists for this reason, right? Hardware, former fleet. The consumer who shows up there shows up there because of lawn and garden. It's a destination category. We have the destination brands within the categories and the retailers continue to lead with our brands. We've seen historically, though, in more mass merchant categories where that is a more discretionary consumer at times that we have seen some pullback during difficult economic times with those consumers. But that channel of retail is less than 10% of the entire business and not all of it is discretionary there. So I think we feel pretty good about the overall category. And to Cory's point, nesting is kind of what transpires when people aren't doing other things. There are projects that I wouldn't want to be selling during a recession. I wouldn't want to be selling big home improvement products or projects, but lawn and garden is a really cheap inexpensive way to improve your home. You can go out and buy 20 bags moss make your lawn look fantastic for $3 a bag. Paint is another category that tends to do pretty well during recessionary times for the same reasons. So I think we're actually pretty well positioned to deal with it if we see some more economic uncertainty down the road.

Okay. Well, why don't we leave it there? Cory, Jim, thank you for joining us. We wish you the best of luck moving forward.

Thank you.