Good day, and welcome to The Scotts Miracle-Gro Company's fourth quarter earnings conference call. At this time, I would like to turn the call over to Jim King. Please go ahead.
Thank you, operator. Good morning, everyone, and welcome to the Scotts Miracle-Gro fourth quarter conference call. We're going to modify the structure of the call this morning, so let me set your expectations. I'm here today with Jim Hagedorn, our CEO, Randy Coleman, our CFO, as well as President and Chief Operating Officer, Mike Lukemire, Chief Marketing Officer, Josh Peoples, and Hawthorne General Manager, Chris Hagedorn. We've got a lot to cover this morning. Randy will go through the numbers and provide some clarity around the guidance we outlined in this morning's press release. Jim, Josh, and Chris will share their thoughts, mostly about the opportunity we see going forward in fiscal 2021. At that point, we'll open the call for your questions. I respectfully ask that all of you participating in the Q&A ask one question and one follow-up.
I'm glad to set up time later today or tomorrow for anyone who has additional questions. I want to remind everyone that we will be making forward-looking statements this morning, so our actual results could differ materially due to a variety of risk factors. Those risks are highlighted in our press release this morning and explained more extensively in our Form 10-K, which is filed with the Securities and Exchange Commission. I also want to remind you that this call is being recorded. An archived version of the call will be made available on our website, investor.scotts.com. With that, let's get going, and I'll now turn things over to Jim Hagedorn for some opening remarks. Jim?
Thanks, Jim, and good morning, everyone. As you saw in our release, we capped off our record-setting 2020 results with a strong finish across the board in the fourth quarter. For both the quarter and the full year, we saw growth in every category of both the U.S. consumer business and Hawthorne. We also announced this morning our plans to increase our existing 25% financial stake in Bonnie Plants through a 50/50 joint venture with its current owner, Alabama Farmers Co-op. I don't want this news to get lost in the headlines around our financial performance for 2020 and our guidance for next year. We see live goods as an essential part of our long-term strategy, and having a more significant stake in Bonnie is the right place to start. I'll elaborate on this point later in my remarks.
I know most of you want to focus today on our outlook for fiscal 2021. Frankly, that's our focus as well and where I want to spend most of my time. Our EPS guidance, which projects 10%-16% growth in 2021, demonstrates we're in a good place entering the year. We're going to handle things a little different this morning so that my comments have some better context. I'm going to turn the call over to Randy now. He'll walk through a few highlights for 2020 and provide some of the details for our fiscal 2021 outlook. I'll come back and share the remainder of my time with some of my colleagues so you have a better sense of our vision for the business as we enter fiscal 2021.
Thanks, Jim, and hello, everyone. As you know, we essentially pre-released our 2020 results a few weeks back when we said we expected to finish at about $7.25 per share for the year. Given our prior detailed communications earlier this year, I won't be walking through the specifics of the P&L this time as I normally do. However, I do want to share a few thoughts and highlight some key points. Starting with sales, I've never seen growth in my 22 years here like we had in Q4. In the consumer business, POS growth was 38% in the quarter. As Jim said, the growth was everywhere. The other thing that was happening, though, is that retailers were working to rebuild depleted inventory levels, and that is what drove the 90% growth in shipments.
We ended the year with retail inventory about 15% higher than a year ago, also with customers continuing to buy aggressively into October and planning for a big early spring. Full-year sales in U.S. consumer increased 24%, driven by POS growth of a similar number. Gardening was the big driver, leading to a 45% increase in consumer purchases of branded soils and 30% in plant food. Insect control products were up 51%, weed control was up 16%, grass seed 31%, and lawn fertilizer 11%. At Hawthorne, the story was pretty much the same as it has been. Chris is going to share some of the details in a few minutes, I won't go into them right now.
I will tell you that September was our largest sales month ever for Hawthorne, and it was encouraging to see that Hawthorne translated higher-than-expected growth for the year into higher-than-expected profitability rates, too. On the gross margin line, Hawthorne improved 240 basis points due to fixed cost leverage, favorable brand mix, and pricing. The segment margin for Hawthorne improved about 300 basis points to 11% for the full year. This was ahead of our initial expectations, and more importantly, keeps us on track for a segment margin goal of 15% in the next few years. The U.S. consumer business posted an 80 basis point improvement in gross margin rate for a lot of the same reasons that drove the Hawthorne rate higher. You'll notice, though, that the company-wide rate is up only 50 basis points.
That's due to the faster growth at Hawthorne, where the overall gross margin rate is approximately 10 percentage points lower than the corporate average. Nevertheless, we are extremely pleased with what we saw.
SG&A was up 47% in the quarter and 26% for the full year. The biggest driver was variable compensation, which was approximately $80 million higher than a year ago. SG&A also increased due to media, marketing, selling, long-term comp, and charitable giving. Interest expense benefited from lower debt levels and lower interest rates, with $5 million lower in Q4 and $22 million lower for the full year. We finished the year with leverage at two and a half times average net debt to EBITDA. This is about a full turn lower than our target leverage and two turns lower than the maximum permitted under our debt covenants. We enter 2021 with tremendous flexibility to invest in the business while also returning more cash to shareholders.
Turning to cash flow for just a moment, you may recall what I said after Q3, that free cash flow would come in around $400 million for the year because we wanted to build inventory. Instead, product was going out the door as soon as we built it because retailers were looking to replenish their own depleted stock. Our free cash flow came in about $100 million higher than $495 million, meaning we still have work to do in terms of building inventory next year. I'm glad to answer any question you have about Q4 or our full-year results, but I doubt there are many surprises in what we announced today. I want to provide some detail for our 2021 guidance and set the stage for Jim to explain our outlook from a more strategic perspective.
We've always prided ourselves with being transparent with shareholders, so let me just start there. We expect to see enormous sales growth in Q1 from both major segments that will have growth rates similar to Q4 and probably even higher. We will also likely be pacing well above our full-year target through Q2, given how much momentum in U.S. retailer plans for a big spring. However, our visibility is much less clear after Q2 for obvious reasons. In addition, our Q3 and Q4 comps are huge. For example, second half growth for Hawthorne fiscal 2020 was 69%, and from May through September, our POS comp in the U.S. consumer business is 43%. As you'll hear from Jim and Josh Peoples, we believe full-year growth in the U.S. consumer business is still possible even with that reality. I'll let them explain why.
If we simply hold the U.S. consumer number flat and Hawthorne grows at 20%, we would expect to earn roughly $8.40 per share. If the U.S. business were to decline by five points and Hawthorne grew to 15%, earnings would be roughly $8 a share, which would still be a double-digit increase versus 2020. We currently see gross margins declining roughly 50 basis points, which is different from what I indicated in our most recent public comments about two months ago. As we have finalized our plans for the year, however, it became clear that we need to further increase our investment in warehousing for both businesses to get inventory levels to where we want them. Like other companies, we're starting to see the potential in recent weeks for more commodity pressure, especially from resin.
The total company rate decline assumes about flat rates in both businesses, but a negative impact from segment mix, consistent with what happened in 2020 with Hawthorne's dramatic sales growth. Note also that we are hedged on our key commodities, urea, fuel, and resin, at about a 65% level, similar to our normal historic approach. SG&A will likely decline 6%-11%. Our guidance assumes variable compensation will be about $80 million lower for the year, with some of those dollars being offset by a higher level of planned investments in marketing and our direct-to-consumer efforts. Free cash flow, defined as operating cash flow minus capital expenditures, is expected to be about $325 million. We expect a step-up of CapEx in fiscal 2021 to roughly $100 million and perhaps more.
I would expect working capital to be a use of cash during the year as we work to get inventory levels back to where we want them. Finally, we will be paying much larger bonuses based on 2020 results, and this creates another cash headwind in 2021. As you've heard from several other companies, this is a tough environment to provide guidance. Our preference is to continue providing a range of what we see as likely outcomes, but it's not easy. In fact, you can argue that 2021 could be even more volatile than 2020. You'll notice our guidance range for EPS is wider this year to reflect this uncertainty and also the fact that our earnings base is much higher versus history. I'll remind everyone that we had adjusted EPS of $4.47 in 2019.
The low end of our fiscal 2021 range would suggest a roughly 80% increase in earnings and $800 million of free cash flow over a two-year period. In fact, since the start of Project Focus in December 2015, total shareholder return has increased approximately 160%, and we've generated over $1.5 billion of cumulative free cash flow. Regarding our Bonnie announcement, we're not yet including earnings from this transaction in our guidance, but we will update you once the deal is closed. The additional investment in the nature of our LJV will result in different P&L geography than we've used in the past, and we'll provide clarity on this when the time comes. You will hear throughout the balance of the call from Jim and members of the operating team that we're striving to do even better. If that proves to be true, we'll change our guidance.
At this point, trying to estimate the timing and impact of global events on our business is impossible. Regardless, even if our current P&L estimates prove accurate, it will be another year of record results for our shareholders. With that, Jim, back to you.
Thanks, Randy. Before I expand on Randy's comment, I want to provide some of my own thoughts about why I believe our business is so well-positioned right now, and it goes well beyond COVID-19 and the way it changed consumer behavior. During our second quarter call, I told you about a saying that hangs above my office door, something I learned from my dad: Luck is where preparation and opportunity meet. Five years ago, we began a transformation of this company through an effort we call Project Focus. We divested businesses we didn't believe could drive shareholder value. We invested in new categories that had higher growth rate with brands like Tomcat and Bonnie Plants. We also invested in an entirely new business with the creation of Hawthorne.
We just crossed the billion-dollar sales threshold with Hawthorne and have begun to exceed the financial targets we set in our business plan when we started down this path. It has quickly become a business that is critical to our future. The benefit of Project Focus that too often gets overlooked, however, is what we did to improve our core U.S. consumer segment. We dedicated ourselves to ensuring our brands remained relevant in a rapidly evolving marketplace. Without those efforts, the result this year would not have been possible. We changed our approach to R&D, which quickly led in rapid succession to the introduction of our most successful new product launches ever: Miracle-Gro Performance Organics, Scotts Turf Builder Triple Action, and Ortho GroundClear. All of them were new product home runs. We began overhauling our approach to marketing. Spending behind our brands has increased 40% over the past two years.
We also brought new agency partners to the table to help us reimagine our relationship with consumers. Project Focus has been about hard work and preparation, and fiscal 2020 presented us the opportunity to exploit that preparation. Not only did we do so, but we positioned ourselves for continued success. As we look to fiscal 2021, we believe there is more work to do and more growth to capture. While we remain bullish about our strategy and our future, we are taking a prudent approach in setting expectations. I told you on our last call I would be satisfied if we simply held onto the growth of our U.S. consumer business and protected our margins, and that remains the case. The real question is whether we can do better than that. Specifically, do we believe the consumer business can grow in 2021? The answer is yes.
Our marketers believe that. Our sales force believes that. Our direct-to-consumer team believes it, and our retail partners believe it, too. We'll incentivize all of them to deliver that growth. As we demonstrated throughout 2020, we have the ability to lean into higher sales, and we'll be positioned to do so if we see they're achievable. There are legitimate reasons for the optimism. For starters, the momentum we've seen in the second half of the year has yet to slow down. We also know we left sales on the table over the last two quarters, probably $200 million in U.S. consumer and Hawthorne combined, just because we couldn't keep up. The competitive dynamic in the retail market could also be interesting. We expect our smaller national retail partners to fight hard next season to maintain the market share they gained in 2020.
We expect some of our larger retail partners to step up their promotional activity in 2021 to claw that share back. Remember, due to COVID, there was little ability by these larger accounts to drive foot traffic into their stores in March, April, and the first half of May. We're optimistic, there's no reason to guide any higher right now. Just as we did throughout 2020, we'll be as transparent as possible when we have greater clarity, and we'll adjust guidance when and if it's necessary. We're not trying to be coy. We're simply being honest. Six months ago, I never would have predicted the state of the world right now. While we have a good line of sight for the next several months, I'm doubtful of anyone who says they can predict what the world will look like next spring and summer.
That leaves an enormous gap between what is possible in 2021 and what is likely. I will tell you we share the same macro view as many other CPG companies. We believe the U.S. economy will remain sluggish for the next several quarters and most consumers will still be in nesting mode next year. That actually should bode well for our consumer business. I want to be clear about my goal for the consumer business in fiscal 2021, and this is a message targeted at our long-term shareholders. I will not define success this year based simply on whether we grow. There is a more important long-term mission here, and that's the focus. The next generation of consumers came knocking on our door in 2020, millions of them.
I'm mostly talking about millennials, the largest generation in American history, who are in the midst of becoming homeowners and gardeners. The goal is not simply to enjoy their company for a short visit, but to keep them with us for the rest of their lives. We will invest heavily to build the strongest relationship with consumers we've ever had. If we also see growth for 2021, great. If we fall back a bit and still keep most of these new consumers engaged, I can live with that, too. How we accomplish that goal is a task that is in the hands of our new Chief Marketing Officer, Josh Peoples. Josh has been here more than 20 years. He's worked his way up from a junior marketeer to run our lawns business and to oversee the work of all the brand teams.
He's one of the most thoughtful and analytical marketers we've had here during my tenure. We're lucky to have retained him this long, and I'm confident he's the right person at the right time to serve as CMO. Josh?
Good morning, everyone. As Jim just mentioned, I've been at Scotts Miracle-Gro for 20 years now in a variety of marketing roles. I believe I've got a good sense of our business, and more importantly, the needs of our consumers. The one thing I've learned for certain over the past two decades is that lawn and garden consumers are different than in other categories. There is an emotional element to this space that is truly unique. Gardening is a form of self-expression that can be deeply personal. Understanding how to tap into that emotion, which by the way, is different for every consumer, is the most critical element between growing and standing still. What we've all learned more recently is that we need to take a different approach if we're going to tap into that emotion and strengthen our relationship with consumers.
We can't talk about ourselves and our products like we used to. Our messages have to be focused on consumers, not us. As Jim said, we had tremendous success bringing new people into the category in 2020. About 30% of participants in edible gardening were new or lapsed users. We estimate about 8 million more people participated in lawn care than in 2019. We not only believe we can keep most of these new users engaged, but bring even more people into the space. Demographics will continue to help us. Millennial homeownership will continue to swell in 2021 and the years that follow. Our research indicates this group is more interested in lawn and garden activity than their parents and equally accepting of our brands. Jim mentioned the importance of innovation. I couldn't agree more.
Our new product strategy has to be driven by consumer needs while being rooted in science. It's not sustainable the other way around. All of the products Jim mentioned, Performance Organics, Triple Action, Ground Clear, speak to the lifestyle of the millennial consumer. They have a great environmental profile and are easy to use. They also happen to deliver outstanding results. The most important innovation for us will be how we communicate. We were forced to throw out most of our marketing plans at the break of the 2020 season and work on the fly. We learned a lot from that experience and got smarter about what works. We enter fiscal 2021 following these three principles. First, to be creative-led. Second, to be always on. Third, to be data-driven. As we saw this past season, none of these focus areas exist in a vacuum.
They exist together. As recently as just a few years ago, we would have taken months to produce a single TV commercial and ensured that everything was focus group tested. We also would have relied on just 15 or 20 creative assets to support the season. That's not what we're doing today. Instead, we're developing new creative approaches literally every day and creating thousands of them, not dozens in the process. This means we are learning and changing every day. We are responding with real-time data that helps us understand what is resonating with consumers. We are putting increased investment behind what is working, and we are quickly walking away from what is not. Most importantly, quality is not being sacrificed. If anything, it's improved. In 2021, I would expect upwards of 75% of our advertising spend to be on digital.
This will allow us to be much more precise in hitting our target audience. We will be more capable of diversifying our creative to represent different audiences and their values. A millennial couple, for example, living in the same house, planting the same garden, are likely to see two very different approaches, each tailored to their online activity or personal interests, like cooking, entertaining, or home decor. Consumers in Chicago are likely to see different messages from those in San Francisco or Dallas or Boston. The timeliness of our messaging has also improved. If the weather is looking good in a specific city, we'll lean in hard to maximize the weekend. If it's going to be rainy, we'll pull back. If a retailer has a promotional activity we want to support, we can target the exact audience most likely to respond. We know this approach works.
We see it in our data and in our results. Our retail partners are seeing it too. That's why we'll work with all of them in 2021 to drive consumer foot traffic and category growth while also fueling online shopping. You'll see us add to our portfolio of digitally native brands not sold at retail, like Lunarly, Knock Knock, Bark Yard, and Green Digs. You'll also see more focus on indoor gardening and live goods. I am confident our marketing efforts are more impactful now than at any time since I joined the company, and I am confident in our plans for the 2021 season. I agree with Jim about the opportunity in 2021. We have a great opportunity to set up our business for years of future growth. We're not worried about difficult comps and issues beyond our control.
We're focused on the issues within our control, and I'm confident that the steps we'll take in 2021 will benefit Scotts Miracle-Gro for years to come. Jim, let me turn it back to you.
Thanks, Josh. One last point before we turn to Hawthorne. As I've mentioned earlier, we've signed a letter of intent in recent days to acquire a 50% equity stake in Bonnie Plants. This is part of a proposed JV with Alabama Farmers Co-op. Most of you know I'm a big fan of live goods. So is Mike Lukemire. It is what drives the category. Without the plant, there is no gardening. When we announced Project Focus, I said I wanted Scotts Miracle-Gro to evolve from a gardening products company to an actual gardening company, and the best place for that to happen is in edible gardening. That makes the increased stake in Bonnie an obvious choice. Like us, they've been at this for generations. They have the single most powerful brand in the space and an exceptional relationship with retailers, and consumers love them.
Josh mentioned the emotional component of lawn and garden. Nowhere is that more evident than in this space. The shopping experience for fertilizer and growing media is pretty pedestrian, and frankly, not that inspiring. Pick up a bag, put it in the cart, take it home, spread it on the lawn or garden. With edible plants, we're talking tomatoes, peppers, leafy greens, basil, rosemary, and a variety of other herbs and vegetables, consumers are engaged in a far different way. The shopping experience is different, more engaging. They spend far more time at the shelf looking for the perfect plant. They become invested in the purchase process, and then they go home, and they nurture a plant that is going to provide for food for their families. There's an emotional connection we can make in this category, a level of trust that is critical.
We know that connection is especially strong with millennials, which is what makes Bonnie such an important strategic fit. I believe our involvement with Bonnie over the past several years has been a benefit to both companies, and I doubt you'll hear any different from them. In fact, Mike Sutterer, one of our former operators here, is now the CEO of Bonnie. He understands our vision and our goals, and we consider him an outstanding operator. This has the makings of being a great partnership and is critical to our long-term success. We're not going to cover too many details today because we are still several weeks from actually completing the deal, but expect to hear more from us in the quarters ahead. I now want to switch gears and talk about Hawthorne. As I said earlier, we see double-digit growth as a real likelihood again next year.
We have some good tailwinds in the near term and see the long-term outlook to be strong as well. Instead of going into the details myself, let me turn things over to Chris Hagedorn for a few minutes to share his view.
Hey, everyone. Chris here. I'll start by simply saying that 2020 was obviously a huge year. Crossing the billion-dollar mark was a big deal for the team. It felt even better knowing that we didn't have to do anything crazy to drive that number. Honestly, I think we could've added another $100 million or so to the top line this year. Our supply chain was so stressed out at times that we left some money on the table. We've been making investments to ensure that those stresses don't emerge again in the future. If you look at 2020, it was a great story everywhere. Within our North American hydro business, we doubled our lighting business during the year, driven by about $100 million worth of LED lights.
This was a category that didn't even exist for us two years ago, and it's looking like we underestimated how significant it would turn out to be. LED sales were more than 100% higher than we expected going into the year, and we're selling our fixtures as fast as we can build them right now. Consumables in North America saw 49% growth in nutrients and 64% in growing media. Geographically, we saw growth in literally every market. California, our single largest market, was up 78%, but newer markets like Michigan and Oklahoma were up 133% and 203% respectively. I also want to give a nod to the team because we finished the year with a second margin of 11%. I expect that number to move up again next year. We're doing a good job of striking the balance of driving growth, market share, and improving our profitability.
Some of you asked me on the last call if we're worried about too much inventory in the channel or some degree of overcapacity. We're not seeing any signs of that right now. In fact, we expect the growth rate in the first quarter of 2021 to look a lot like what we saw in Q4. There's also good reason to be optimistic in Q2. The forecasting gets a little less predictable later in the year, though, and obviously, the comps that we face in the second half will be tough. The head start we get should allow us to deliver the 15%-20% growth that Jim referenced earlier. The other great news for Hawthorne is what we expect from yesterday's election. Look, people are still counting votes. I don't want to get too far ahead of myself.
We expect New Jersey to approve recreational adult use of cannabis, and there's a good chance Arizona will do the same. Going into the election, there was also good polling in South Dakota, Montana, and Mississippi. On top of that, the governors of New York and Pennsylvania have said in recent weeks that they'll look to legalization to help them make up some of the budget deficits that have been caused by COVID-related issues. Who knows what's going to happen in D.C.? We're increasingly optimistic that the federal rules will change as well, though the timeline there is likely to be longer. What's become clearer than ever this year is that we built something pretty special at Hawthorne. It's hard not to feel good about the prospect in both the near term and the long term.
I do want to be clear, guys, we've seen up and downs in this industry over the past few years, we're not taking anything for granted. We clearly have the best product line in the industry and the best service and supply chain too, even with our challenges this year. Earlier this month, we finally opened our R&D facility in British Columbia, the first of its kind in the world. When we combine what we're doing there related to cannabis cultivation with our current R&D work on hemp in the U.S., I feel confident in saying we'll also have the best innovation program in the industry, too. The outlook for next year is a pretty good one for Hawthorne, and we look forward to keeping you all updated as the year comes together. With that, Jim, I'll hand it back to you.
Thanks, Chris. One last thought on Hawthorne. These guys have done a tremendous job in getting the business to where we thought it could be. They've clearly established themselves as a leader in the industry, they've shown the ability to manage complexity like the implementation this year of SAP. I want to congratulate them on how far they've come in this short period. Before we end, I just want to say one more thing. 2020 was beyond anything we could have ever expected, I'd be remiss if I didn't take the time to thank our associates. I want to start with our field sales force as well as our manufacturing and distribution folks. These people didn't get the luxury of working from home when COVID hit.
They still went to work every day, and I'd be dishonest if I didn't acknowledge they put themselves and their families at risk for the company. We provided them with premium pay and provided bonuses and additional 401(k) contributions. That's what a good company would do. I'm not sure we can ever really thank them enough. I'm inspired by the things I've seen this year and humbled now to be entering my 20th year as CEO of this company. It feels a bit trite to say I've never felt better about where we stand, but it's true. We're in the midst of introducing an entirely new generation of consumers to our core business. We're enjoying continued success in a fast-growing category with Hawthorne.
Our shareholders have benefited from a multi-year run that allowed us to more than double the value of this company in the five years since the introduction of Project Focus. We don't know exactly what fiscal 2021 has in store, but the one thing I do know is that we have the right team in place to manage whatever happens. With that, let me open up the line so we can take your questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. If you find your question has been answered, you may remove yourself from the queue by pressing star two. Please, we ask you ask one question and one follow-up question. As a reminder, it is star one if you would like to ask a question, and we'll pause just for a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Joseph Altobello from Raymond James. Please go ahead.
Thanks. Hey, guys. Good morning. I just want to go back to the roughly 8 million new lawns customers that you guys added last year. Does the upper end of your guidance assume you keep pretty much all 8 million this year? Maybe a question for Josh, if he's still on. Is there a way to target those 8 million customers to keep them in the category in a period when they'll likely have more competition for their time on weekends beyond just promotions? It sounds like you guys know roughly where they live, do you guys actually know who they are to be able to target market to them from a digital perspective? Thanks.
Hey, good morning. Great question. Yeah, right now the goal continues to be to not only retain, I would say, those eight million, but honestly, trying to bring in even more as we go into 2021. A lot of the feedback we got from consumers, even though time may become more of an issue, they definitely found lawn and garden to be a passion point that they hadn't really tapped into or hadn't thought was possible. We feel really good about not only knowing where they're at, but who they are, and I think this is where it does come into working with our retail partners to continue to keep them engaged and reaching them in new and unique ways and continuing to build on really what we've done here in 2020.
I was going to shell over and say, I'm surprised lawn sales weren't better. Joe, we had a lot of gardening clearly was sort of leading the pack this year, and I think we've learned enough that I think we ought to be seeing the same kind of growth in turf care. I think our products are improving. I think we're going to have a lot more promotional support this year, regardless of where COVID's at, unless it's a complete lockdown. I think you're likely to see the retailers not being as sensitive as they were this last year, and so that there'll be, I think, a lot more cooperation and a lot less shyness about bringing people into stores. I would be challenging the marketing group to do better in lawns than what they did and try to keep up with the gardens people.
Fair challenge, sir.
How are you, Joe? I hope you're being safe.
No, I am. Thank you. Just one other one for Chris, if I could. If you look at Hawthorne this year, the initial expectation was up 12%-15%. You did 61%, so a slight over delivery, I suppose. If you could put that 60-plus percent growth in more context, how much of that was from the market? How much of that was market share gains? Maybe what you're thinking for 2021.
Thanks, Joe. Good question. Yeah. As you heard for what we're expecting in 2021, we think there'll be continued sort of general market growth, and we certainly do intend to continue to take share. To try to quantify the gains from this year, we think there's probably a solid 20% increase in consumer usage of cannabis, and that's largely anecdotal, but we pull it from data sources that are available to us. It certainly seems like stay-at-home orders and that kind of thing did increase the sort of high single-digit usage gains that we see typically in a normal year. I think we attribute the rest of our growth to market share gains, but largely driven by our ability to continue to deliver a relatively high service level. We certainly had our challenges this year, but our competition, I think, suffered even greater challenges.
I got to give a lot of credit to our innovation team. We launched some really, really great products this year. The LED light that we launched under Gavita was the single biggest product launch in SMG history, not just Hawthorne, but the entire enterprise. That I think is definitely, I have to give a lot of credit to that for how we did this year.
Got it. Great. Thank you, guys.
We'll take our next question from Bill Chappell from Truist Securities. Please go ahead.
Thanks. Good morning. Going back to Hawthorne, just trying to understand, similar question, how tough the comps really are and how much visibility you had. Chris, I think you said you felt like you left $100 million on the table. I think by now you have some kind of, correct me if I'm wrong, idea of how states progress once they legalize medicinal and then recreational, and then revenue starts to come in. Is it really that tough of a comp? I understand March, when there was kind of a surge, was, but help me understand how the year really progresses, especially the back half, when you have these states coming on and you did leave, as you said, $100 million on the table.
Yeah. Whoa. Let me just throw some spin on this, Bill. I think this is a year where, honestly, and I think we've been hinting pretty hardcore in the recorded portion of the script, the sort of difference between what we hope, and I think based on our knowledge of business, both consumer will do and Hawthorne will do and live goods will do, versus what we're kind of committing to within the range. This drives a, I think diversity was used somewhere in the script, I think maybe by Randy, of sort of views of what we think could happen, what we want to happen. Those numbers, the operating numbers, are quite a bit different, to be honest. We just don't believe we can commit to that. I would ask everybody on the call to sort of bear with us on this.
I think we can't say it more clearly that we're trying to be safe here. I know we're going to have more conversations with you guys about this. I think up until when, at least on the consumer side, there's consumer takeaway, so call it next spring, I think you're going to continue to see, I don't know what Randy used, the adjective he used, gigantic, enormous, ginormous, sort of what looked a lot like the sort of growth rate we saw in Q4 and Q1. Q2 probably won't be quite as ginormous as that, but it'll be pretty big numbers, I think that'll put pressure on you guys to sort of think we're sandbagging or this whole believability factor. The hints we're trying to lay allow you guys to sort of connect the dots.
When you say to Chris, how come you don't think you can do better than that? It's a pretty hard one to answer because we do think we can do better than that. We're just not committing to it on either the consumer business or the Hawthorne business. Chris can answer the question. I'm not quite sure how, but he can try to talk everybody down and talk himself down. Remember, Mike's operating plans are different than what we're talking about, but they're included in sort of the expectations of We're trying to drive this thing of saying consumer could be down five, Hawthorne could be up 15, and we still bust $8. Okay? Then you sort of take it from there, and it leverages up pretty fast.
We had a board meeting yesterday where we, I think, put to bed sort of the budget and incentive goals for next year. I think not too hard, but they're lucrative if really good things happen, and they're fair if we're kind of at the bottom end of the range, and nothing terrible happens. I do think that that's kind of what we're dealing with. When you say, please defend your low number, it's kind of hard to do. It's just saying nobody knows and nobody expected sort of 60%-plus growth in a single year. I don't know, Chris, how would you answer the question?
All right. All that said, look, realistically, internally, yeah, I am definitely driving the team towards a more aggressive number than we have inside the building. Like Jim said, look, the back half of this past year that we just finished was unlike anything that I think anybody in our business has ever seen before. The idea that we're going to be able to match that, it's a challenge for sure. Now, the remarks that we had up at the top of the call, those were pre-recorded earlier this week. Now we know what happened in the election. We know how citizens voted on cannabis issues, and they voted extremely favorably across the board. We do expect to see incremental business as a result of what happened in states like New Jersey and Arizona and others. That being said, these changes aren't going to happen overnight.
What we've seen is there's typically a 12-18 month lag from when a state legalizes till there's any meaningful increase in business for us. I wouldn't expect a significant amount of business as a result of those votes in this fiscal year. That looks like it will be probably more of a 2022 uptick for us.
I do want to throw out, as we were looking and trying to analyze lighting sales, and I might be off by a little bit, but you can correct me, Chris. Our high-pressure sodium lights, the HPS lights, they're kind of the traditional lights that get hot and all that, I think they were up 50%. Clearly, we had a blow-away success with the innovation on LEDs, and we're trying to say, "Where did they go?" I think that in states that are legalizing, you're seeing build-outs occur, which I think are kind of in advance of the marketplace, and I think that's healthy for us. I think you've heard me mention, and I'm a gigantic fan of Senator Sweeney in New Jersey, who sort of led that process.
I don't think he legislatively could get New Jersey done, and he just kind of threw his hands up. The guy's like an ironworker, okay? Big union guy, one of the few guys with a mouth fouler than mine. He has a real vision for New Jersey being an important center of excellence in cultivation, and the Garden State means something to him. I do think you're likely to see build-out occur because, again, as we look at where these lights are going, and you say certain people are just improving the lights and going with LEDs, but there's a good bit of build-out occurring in there. I think that build-out occurs in advance of the market, as you'd expect.
The one thing, Jim, I'd add to that is when we look at our sales of lights this year, so everybody knows California is about half of our sales, and lights had a tremendous year. We over-indexed in California versus the rest of the country. California being an established market, the fact that we are able to over-index indicates to me that there's a lot of renovation and replacement going on, which is really a positive for the long run, too.
Thank you. No, thanks for that, the color. One, I'll try to be quicker on the second one, looking at your U.S. consumer guidance, and Randy, help me if I think I'm doing this math right. I mean, at the low end of your guidance, say it's down 5% in 2021, still assumes that the revenue would be up 17, 18% versus 2019 levels. Can you maybe help us bridge that as I assume like five points over a two-year period is price and 12 points is volume, and so it's kind of assuming you get a normalized, I guess, a 6% growth for the category over a two-year period. Is that the right way to look at it?
Let me try to bridge it by quarter and then first half, second half, Bill. First quarter, like we said, it's gonna be tremendous. It's gonna have growth rates for the entire company, but U.S. included, it'll look a lot like what we saw in Q4. Still a lot of confidence into Q2, retailers will be building, and we expect consumers to be continually engaged, and we expect POS rates to continue like we've seen in Q4, what we expect to see in Q1, and we expect that to roll through Q2. At that point, our assumption beyond that point is that to get to a -5 or do a zero number for the U.S., that would assume that we're down about a third or half of what we gained in the second half of 2020 on a POS basis and really beginning basis.
You could argue that's really conservative because we think people are going to be continuing to work from home. I don't expect people to go back five days a week. I think people who have newly engaged in the category will continue to be because they've enjoyed it, and they will continue to want to capitalize on investments they made this year. Time will tell. For us to try to speculate what's going to be going on in the world and the economy and how that applies to the U.S. lawn and garden, I think that's really, really challenging. That's assumption that we've made, and we want to be transparent about what the math looks like to get to that kind of guidance. Hopefully that helps you, Bill.
Yeah, that helps. Thank you.
We'll take our next question from William Reuter from Bank of America. Please go ahead.
Hi. Great numbers. Two questions from me. The first is, you're gonna be doing $800 million of free cash flow over a two-year period. I guess what are your plans with regard to that cash flow? Your leverage continues to go lower as your results have gotten better and better. I guess what are your plans in terms of leverage targets at this point? That's it. Thanks.
Well, Randy and I are partnered real well on this issue. I'll start and hand it over to Randy. This is one of the areas where I think we are completely in agreement. As we prepped for the call, we sort of figured this would come up. I think at the moment, we're pretty happy with our leverage, where it's at. It gives us a lot of options. I think I'll want to spend some time understanding the election results, to be honest, and what's happening with corporate tax rates, dividends, personal income tax rates, which in this company matters, I think, to our shareholders.
I think we were very much prepared to special dividend a lot of money out if we felt that taxes were going up to the people who own this company, and that is our entire shareholder base. We definitely have a more active M&A pipe than we did probably two years ago. Nothing crazy. If you look at the Bonnie deal, we haven't really talked about it, but it's pretty accretive. I'm going to say relatively neutral to leverage. This is one where we're actually doing a deal, and it's really hardly moving leverage, and on the EPS line, it's accretive. I think we feel good about that. I think we're looking really hard and spending a lot of time with the board on the evolving cannabis and hemp marketplace and how we place bets there.
I think live goods continues to be an interest for us. We do have a commitment to our shareholders to be shareholder-friendly, and we absolutely intend to do that. What happened in 2020 has been really good. We did not expect to end this year at 2.5 times. I'd have to ask Randy, but I think if you look at our numbers for year-end, I think we're talking, I think the projections internally are down like 2.0 or something like that. We've got a lot of flexibility. We're committed to shareholder friendly, and we're committed to investments in the business, but we're not feeling any rush at this point to act any way sort of quickly. Catherine, did you?
Great.
Talk about it enough here.
That's very helpful. Thanks a lot. I'll pass it on.
We'll now take our next question from Eric Bosshard from Cleveland Research. Please go ahead.
Good morning.
Hey.
On the Bonnie business, I'm just curious for a little bit more color. For the last 20 years, you have been somewhat aggressive about trying different things in different adjacencies, but never really done anything in live goods. I'm curious if there's something's changed in the dynamics of that business or the opportunity to make money in that business, and especially interested in the thinking on that relative to the bigger runway that you have in the cannabis business, just sort of what changed in the thinking to get you to want to get in the live goods business?
All right. Well, I don't think anything, actually. I think we've been trying live goods, Miracle-Gro plants and stuff like that. I call it modest success in that. I think if we look at sort of the whole Project Focus approach to the business that we took, I don't know, whatever we're saying, five years ago. It was sell businesses that we thought were not long-term beneficial to us, and look for businesses that had a higher growth rate. Remember at that time, a lot of stuff has changed since then, to be honest, which is that I think we were looking at 0%-2% on core at the time, and that's not a crazy number now, but it's clearly we believe better than 0%-2%. We wanted businesses that could grow faster than that.
I think we did view live goods, particularly herbs and veggies, as a business that could grow some multiple of zero two and that's been true. That's really why we hooked up with them with AFC, Alabama Farmers Co-op , and Bonnie to sort of begin with. The reason that we were at the 25% level with them was because that's as far as they'd let us go. Okay? We've had other discussions with other opportunities, and I think liked the Bonnie opportunity better. When AFC asked us, and Mike Sutterer asked us, could he go over there to upgrade their management team? We were very encouraging about that. I think if you looked and said, "What would Randy have been critical of?" I think it would be sort of a lot of processes within Bonnie that I think we thought could be better.
That's because we were kind of with them, understood the business, but as a kind of minority partner. I think Mike Sutterer agrees with those things, and he's done a lot of that. I think as we look at the business, and remember this will become more clear, but it's an average of earnings over the past three years, that it was a big enough increase this year that we kind of wanted to go more quickly. We had a right to go to 51%, they had the right to say no and buy us back out. We ended up, I think, very happily at this sort of 50/50 place, which we're actually super comfortable with. When you look at the profitability of that business today versus before Sutterer was there, big difference. A much more attractive business today than it was.
Growth rates that continue to exceed our core consumer business. This idea that we want to be a gardening business. If you have not been aware of our interest in live goods, I guess we haven't been clear enough. I don't view it as an exclusive decision where it's binary, like decide on consumer veggie, edible live goods or within the Hawthorne business. We've clearly been spending beaucoup dollars building our Hawthorne franchise, and they've done a really nice job integrating all those pieces. You're not a part of the board, but I would say the board is very encouraging of continuing to look for opportunities and, with kind of fair pricing, to continue to invest in that business. I think that this is where Randy and I fight.
Mike Lukemire and Chris Hagedorn and the rest of the group advocate for deals, and it's Randy Coleman and my job, really, and our finance committee at the board, that's run by my sister, my twin, to sort of look at those and evaluate them based on lots of things, but shareholder-friendly leverage, what we think the opportunity is long term. I think we're positive about both of them. I think if you read something from that, I would say continued investment in live goods, continued investment in the Hawthorne Gardening Company, and continued shareholder-friendly reaction, and very pleased with the result of the election, at least in regard to the Senate and stability of sort of taxation, at least in the near term. You must have something to say.
I always have something to say. I guess what I'd add is they've been a really good partners for the last four years. The quality of the team there, top-notch, and we've enjoyed working with them. I'm optimistic going forward that we're going to make it even better. It's been a really good partnership.
Look, Eric, just a quickie, and it's maybe redundant. Randy was one of the more tough guys to get on board with our live goods approach. You might talk about why that's so and what's changed.
On a relative profit basis, Bonnie's the class of live goods when we look at operating margins, but still, it was below what we'd see in our U.S. business and below our corporate average. This year, they've been a beneficiary of the growth that we have as well, but their profitability rate is actually higher now than our corporate average. A lot of optimism that they're going to have a good 2021, just like Scotts will. I think we're making the right kind of changes to maintain that kind of profitability rate. At that point, it's easier to get on board. I think the price we're paying too is fair in that it is based on a three-year average. If we waited another year, we'd have a much higher check to write.
I think now is the right time, like you said, Jim.
Okay. Very good. Thank you.
You're welcome.
We'll take our next question from Jon Andersen from William Blair. Please go ahead.
Hey, good morning, everybody.
Hey.
Most of my questions have been answered, actually. I guess one thing that piqued my interest, Jim, you mentioned the competitive dynamic at retail in 2021. Could you just talk a little bit more about what you expect there by channel or with respect to some of your major customers? I know that pricing at retail is up or promo is down. To what extent did that impact you or benefit you, or was that truly just a kind of a retail phenomenon? How you expect that to kind of play out in 2021? Thanks.
You are going to get me in a potload of trouble with that. Actually, I think it's a really good question that I'd like to answer. We've talked about how the large footprint format of some of our larger customers actually was when this whole thing of essentiality and the risk of COVID and nobody wanted to get anybody sick and they were worried about their own associates, that there was a lot of kind of head in the sand during the peak of the season. What happened was you saw a lot of our relatively smaller retailers, Tractor Supply, Ace, Costco, who really got their head down and were relatively less afraid because I think there was less criticism based on their format of bringing people into the stores.
I think early in the season, you saw just a sort of beaucoup share gain with our sort of next tier down below The Home Depot and Lowe's. I think that once sort of June happened, you saw, and we had a lot of conversations, great ones, with guys I consider friends, both at The Home Depot and Lowe's, to sort of reconnect to the market. If you look at sort of the second half of the season, they really started to actually work pretty well and take advantage of the marketplace. A lot of credit goes to those smaller retailers who just did really innovative work along with our sales and marketing teams to drive that business. They deserve a lot of credit, and they're going to look to defend their share.
The number we threw out of $200 million roughly of sales between Hawthorne and core consumer business, I think there was a lot out of stock, or a lot of stock just in consumer products world where people wanted to buy the stuff and nobody wants to do that again. Everybody is also saying, "We got to be in stock." You're seeing that drive our manufacturing processes right now. Retailers are buying heavily. I think there's much less fear of investing in the marketplace. Therefore, I think you're going to see a very active promotional schedule as people try to say, "Actually, this worked out pretty well for us." I think you're going to see that small customers, large customers, the whole thing. I want to mention Walmart just for sake. I think they did a fantastic job this year.
They've done a really nice job of head down in the marketplace and working alongside of us, just like our other retailers have. They deserve a compliment because it's been a while since we said they were leading in the space too, and they were. Now you get to pricing. This is one area where, because of the relative lack of promotion, I think most of that benefit went to the retailers, to be honest. We got a little bit of pricing last year, but I think our view is retails were probably up about 10% because of a lack of promotion, especially these big, heavy Black Friday events. I think what we learned is consumers, on a unit basis, were relatively insensitive to it.
That doesn't mean we should be raising our prices and taking advantage of it. I think it is a data point that says how valuable. You guys have heard me talk about these Black Fridays. I generally think they're almost always poorly planned. We miss weather a lot. A lot of our marketing approach deals with that in a much more sensitive level. You do have to question the whole Black Friday. I just wouldn't be surprised if 75% of our promotional dollars are going to a couple weekends. We're working through this with our retailers, but our benefit was less than the retailer benefits. I think their costs were up significantly as they dealt with hygiene and safety issues in the store. I think a lot of that money was spent just in their operations trying to stay open.
I do think it's worthy of real conversation as we go forward as to what does promotion mean in this space? What does pricing mean in this space? Does selling mulch at a loss, just as an example, does that make a lot of sense? I think there's a lot of work still to do on this issue. Mike and his team are, I think, very engaged with a lot of people who are very much personal friends of ours on trying to understand this. I've had some of those discussions with senior management as well. Where it all goes, I don't know. I hope that they don't all get amnesia, get back into the same world of give product away, steal share from each other in 2021, and not remember the lessons we learned in 2020, which I think really are fundamental.
Again, if anybody can remember, it's a little bit like, look at the election results. I think there's a lot of lessons learned here. You just wonder if six months from now, everybody's going to go back to their corners and just do the same old crap that they've always done. I think there's real reason here to reflect on what does it all mean.
Jon, I'll give you a little perspective on what pricing means for us just over the last few years and thinking about next year and thereafter. If you recall, in 2018, we didn't take pricing. In 2019, we did a two-year catch-up. Going into 2020, we thought our pricing would be about 75 basis points, and it actually turned out to be higher because we did pull back some promotional money. Like retailers, we ended up spending that against media marketing, so we didn't necessarily drop to the bottom line, but we invested back in the business. The actual pricing ended up higher than 75 basis points just to good mix in that the areas where we did take pricing, those products sold especially well.
We were able to realize over 1% by the time we got to the end of the year on just an invoice sales basis. Going into 2021, we're starting out in a similar place, but I'd quantify it on a total company basis at about 75 basis points. Again, that could flex up a little bit up or down, depending on how the year unfolds. We're really comfortable with that in that we take pricing almost every year. We try not to get too far ahead of things, and we try to think long term about our pricing and making sure that it's reasonable. 2021, about 75 basis points, and that will cover commodity costs, which have started to increase a little bit over the last couple of months.
I think more important to us when we think about gross margin more broadly, that we are seeing necessary investments in warehousing and distribution just to keep up with the volume and labor costs as well. There's some pressure there. Two months ago, we would have thought we'd see gross margin rates closer to flat versus down 50 basis points. Definitely going to take pricing in 2022 as well and continue that multi-year continual pricing approach that we've talked about.
That's really helpful. Just one quick follow-up. In Hawthorne, a couple of years ago, you were very aggressive, I believe, from a pricing perspective, it was, I think, part of a strategy to consolidate market share, et cetera, shore up customer relationships, other things. I think you, correct me if I'm wrong, maybe eased off on that a little bit in the last year and a half. What should we expect from Hawthorne on pricing? Are we in more of a steady state mode like U.S. Consumer, or any changes to expect there?
To quantify, we will be taking pricing for Hawthorne again. Probably not as high in 2021 as what we did in 2020. I think in addition to just a little bit of pricing, and we are clearly not trying to be greedy by any means, but just be rational about it. We have also greatly simplified the way we do business with our retailers, and we have structured new trade programs and rebates and so on that is much more rational. When you think about how we combine all these businesses that we bought over a three or four-year period, and they were all going to business differently in different programs. Now we have streamlined that, simplified it, made our business much easier to deal with, and I think there will be a lot of benefits from that simplification as well.
As we're thinking about Hawthorne, it's similar to the U.S. in that we expect to take pricing most every year, but definitely don't want to get too far ahead of ourselves. Chris, I don't know if you want to add anything to that.
Yeah. I do. Absolutely, Randy. I think you covered it pretty well. We have taken price from the start of the year. Randy, as Randy said, we're really looking at this when we talk about it, pricing and trade program. Like you said, revising and simplifying and rationalizing those trade programs make it a lot easier for us to deal, a lot easier for retailers to understand where they're at with us. We expect to see some pretty significant benefits from that as we go through the year.
Great. Thanks. One warning out to the team, I know Luke carries around this on his shoulders a lot. There's quite a few products on both sides, Consumer and within Hawthorne, where we're completely oversold even today. I think that one of the things we have to be really careful of is because we know what we've done in the Consumer side, which is this whole idea of one face to the customer. I think we did a lot as we saw the U.S. Consumer business, which goes back 15, 20 years ago. We built a bunch of companies into one easy to do business to some extent, powerhouse. I think Hawthorne is down that track. This is a year where We're not alone. There's a lot of people who have products that sold well during COVID time.
It is not unfair to say that we couldn't fulfill probably a quarter billion dollars of business. That does make it hard to look someone in the eye and say, "I want pricing." We've got to be a better partner than that. I don't think anybody takes it too personally, which kind of surprises me a little bit, to be honest, because I would, and I do. I don't know, Mike, your view on kind of the acceptability of sort of having a pricing discussion right now where we couldn't satisfy demand.
That's a difficult conversation. If you're building infrastructure to support the business, I think that's one you do with the retailer, and you both try to win because everybody's trying to increase infrastructure on direct-to-consumer and delivery to stores. If you're not servicing, for me, that's very personal. I don't like not servicing. I was here when we were really bad back 25 years ago, and we built a great supply chain. It's time to go to the next level. You're going to see some capital and some expenditure that is to build that next capability.
Yeah. This is a little bit of a clear line drawn in regards to this conversation. Mike took this stuff really personally this year. So did Randy. I think Randy's issue was that while the numbers were great, we had a real difficult time keeping up with the budgeting side of it. I think it's going to involve us trying to really make some improvements to our system and how we think about budgeting. On Mike's side, with the supply chain. Let me tell you, this company was entirely functional during what I view as a pretty significant national emergency and could have been for us. So this is not saying it sucked being here. It was saying.
Bothered people a lot was our inability to keep up with the growth from a sort of budgeting point of view, because we view it as a credibility issue to our board, to ourselves, to you guys. Mike's view that got sort of sourer and sourer toward the end of the summer, that this is unacceptable, that we can't deliver. I just want to throw that out in regards to pricing that we've got some work to do to make it If we can build a business where we are an absolutely perfect supplier, vendor, partner, whatever you want to call it, to a retailer, and you make it easier to do business, people don't have a beef with that. Okay. If you ain't delivering product, that's a way harder conversation.
It's worth noting of how difficult the last sort of two or three months have been for Mike, as he has focused most of his time, like back in the day, of kind of dedicating himself to improving our supply chain and our ability to get our deals done with, when somebody asks for something, we give it to them 100% of the time in full, in the timeline they want it. We're still out of stock on products that are important to the future.
This is Randy, yeah. Let me just make one more point, because I'm not sure we've been absolutely clear enough. We're all aligned on building a lot more inventory than what we need to be flat in the U.S., and similarly to be up 15 or 20% in Hawthorne. There will be a point in the spring where we need to evaluate what the second half of the year looks like, but we're not building the inventory to meet the numbers we talked about in the guidance, because we need to do better, and we need to get ahead of things, and we're actively working on that to make that happen. There will be a point where we need to evaluate, but it's not on November 4th.
Thanks so much for everyone chiming in. I appreciate it, and good luck.
We'll take our next question from Alex Maroccia from Berenberg. Please go ahead.
Good morning, guys. Thanks for taking my question. Can you explain the cannabis market opportunity in Jersey and Arizona, and how it compares to other states that have well-established medical user bases already?
I can explain what we know of it. Now, look, there's a lot of regulation obviously yet to be written in those states, so it's a little premature, I think, to give our opinion on the morning that we saw that the votes went positively. That being said, if you look even just the sort of opportunity size, particularly New Jersey, I think it's significant. We expect those guys, particularly with New York and Pennsylvania not having responded yet. Number one, I do expect that New Jersey is going to be a trigger for those guys. They've gone so long, particularly with the COVID budget holes that all states had, frankly, but those two as well, that they're going to let New Jersey kind of take their cannabis money.
It's an easy subway ride across under the river from Manhattan into Jersey, as well as easy to go from Philly into New Jersey. I think we'll see a lot of tax money flowing across that border there. Much like you see with lotto states that have border states that don't have lottery. Our conversations that Jim referenced earlier with Senator Sweeney are encouraging in New Jersey. They make us think that there'll be a rationally regulated, rationally taxed marketplace there that should be pretty business permissive. We think there's significant opportunity there, and that's a marketplace that we've been building up our service and sales operations in anticipation of. Arizona, we think will be, it's not quite as significant an opportunity just in terms of absolute numbers, but again, that's a state that's been slowly developing a positive way forward. We already have a good presence there.
Our sales team is on the ground and well-established relationships with the large cultivators there, and retailers. We feel good about both states. I think New Jersey's more exciting, not only for its potential, but the way we think it's going to drive the rest of the Northeast.
How do you view that market, which is Connecticut, New York, New Jersey, Pennsylvania, just relative to the kind of West?
Oh, look, extremely positive. We've talked about this in the past. The research that we've done and the rubber meets the road, and we'll see how it actually plays out, says that Northeast cannabis consumers, that it's a higher per capita consumption area than California. We should expect it. You're talking about when you combine those states, a similar number of individuals, about 40 million people. It should be a market like California for us, obviously fractured into a few different states. One thing to expect, just because we talked about it, or something we need to note is, California is by far our largest state. Still around half of our total business is just California. We expect California to de-emphasize as the Northeast comes online.
A lot of the product that is grown in California illicitly, we believe is to service the illicit market in the tri-state area. As those states increasingly have their own kind of domestic and stable legal markets, we expect the business to kind of flow across the country for us, and for business in those states to replace some of the business that we do in California now.
Got it. That makes sense. As a follow-up, can you explain the current retail environment in Hawthorne? I know that one of the retailers has been aggressive in recent months from an acquisition standpoint. How should we think about industry consolidation and its impact on relationships?
Yeah. There is definitely industry consolidation. I assume the retailer you're referencing is GrowGeneration. They have been aggressive for sure. It's probably worth acknowledging the fact that they announced two days ago that they had acquired a retail chain out of Northern California called The GrowBiz. The GrowBiz is one of the larger retail chains in California in the country, and they've been a consistently very loyal Hawthorne customer. We expect the positive relationship to continue. We have a good, strong relationship with GrowGeneration. They're our largest retail customer. They've been aggressive, and working with large and aggressive retailers is something that's pretty deep in our DNA at Scotts Miracle-Gro. Watching them grow, they brought in former The Home Depot executives as advisors to them. I think it's clear what their objective is, and it's one that we're familiar with being partners to.
We don't expect any negativity from that. We've got a good, strong relationship with Grow Gen and their executive team. They've been a great partner to us.
Understood. Thank you, guys.
We'll take our last question from Carla Casella from JP Morgan. Please go ahead.
Hi, good morning. This is Sarah Clark on for Carla Casella. Thank you so much for fitting us in, and apologies if you addressed some of this. We had to hop on late. On working capital, how do you see that normalizing coming out of COVID? It looks like you've been managing your inventory and also seen an increase in payable days. How do you expect that to look going into next year?
Sure. This is Randy. I'll take this one. Working capital, let me start with inventory. At the end of September of 2020, things where ideally we would've probably had about another $100 million in inventory versus where we finished the year. Like I'd mentioned in our scripted remarks, as soon as we could buy product or manufacture product, depending on the business we're talking about, it was more or less being shipped out the door. That will be a drag on free cash flow next year. When you think about what inventory looked like at the end of Q1 and even Q2, I'd expect us to be significantly higher than that as we finish those quarters, just as we're trying to build ahead of demand that we're trying to meet now and where we expect demand to be in the back half of the year.
Like I said, there will be an inflection point at some point in the spring when we need to decide how things look. We'll be looking at things just like you do. As far as payables were up and receivables were up a lot as well in the fourth quarter just because sales were so high. Trying to forecast that out for what it looks like for 12 months from now, I don't think we can do that accurately because it's going to depend on, again, so many factors and what consumer demand looks like and how all that rolls out and whether we need to continue to build. Even in addition to working capital, let me talk about SG&A a little bit. We pulled a lot of projects into Q4 that would've been phased more typically in Q1 or Q2.
Really trying to get ahead of things. We'll get to the third and fourth quarter of next year. If things go as well as we hope internally, our SG&A could be even higher because we'll keep our foot on the gas and we'll keep investing. There's a lot of flexibility there, too. If we need to slow things down, we have all of our flexibility. It's going to be interesting. Can't answer your question perfectly because there's just so much uncertainty right now, but that's the way we're thinking about it.
No, that was extremely helpful. Thank you. Our last question. You talked a little bit about M&A. How have you seen valuations change pre-COVID versus now? That's all from us. Thank you, and congrats on the good quarter.
Sure. On the M&A side, the multiple we're paying on the Bonnie deal was prenegotiated from four years ago, so it's eight times trailing three years EBITDA. Not a lot going on there that would change based on current marketplace. As far as the other deals that we're pursuing right now, I would say that it hasn't changed a whole lot, and I don't think it's necessarily driven upward or downward based on what's happening in the world around COVID. There are a few things in the pipeline that we're looking at. Still very early that we can't begin to commit to right now. When it comes to usage of cash, beyond the Bonnie deal, there will be things that we talk about probably in the next quarter or the quarter after that, and the quarter after that. Stay tuned.
Great. Thanks.
That does conclude our question and answer session. I would like to turn the call back over to Jim King for any additional or closing remarks.
Thank you. For those people who have additional follow-ups, if you want to call my office directly, you can reach me at nine, three, seven, five, seven, eight, five, six, two. Right now, we are tentatively scheduled for our Q1 results to be released on January 27th. We have no kind of active IR plans between now and then. Put it on your calendar and we hope to talk to you then. Thanks for participating today, everybody, and have a great day.
That does conclude today's call. Thank you for your participation. You may now disconnect.