Bearish View on Central Garden

Central Garden & Pet Company’s ( CENT - Analyst Report ) disappointing performance compelled us to take a bearish stance on the stock, and hence we downgrade our recommendation to Underperform with a price target of $8.25. Earlier, we had an Outperform view on the stock.

The company posted fiscal fourth-quarter 2012 loss of 21 cents a share that remained flat with the prior-year quarter loss but was wider than the Zacks Consensus Estimate of a loss of 20 cents. The company hinted that increased promotional and innovation expenses and lower revenues from the decor business negatively impacted the results.

Central Garden missed the Zacks Consensus Estimate in three of the trailing four quarters in the range of negative 16.7% to 0.0%. The average surprise over the last four quarters remained negative at 8.5%. Following dismal bottom-line performance for the fourth quarter, the Zacks Consensus Estimates has been showing a downward trend.

For fiscal 2013 and 2014, the Zacks Consensus Estimate dropped by 6 cents and 14 cents to 80 cents and 99 cents a share in the last 7 days, respectively. For the first quarter of fiscal 2013, the Zacks Consensus Estimate of a loss widened by 5 cents to 27 cents, whereas earnings estimate for the second quarter dropped by 2 cents to 52 cents a share over the same time frame.

Management now anticipates the sales and earnings for the first quarter of fiscal 2013 to be lower than the comparable prior-year period due to the adverse impact of Hurricane Sandy that to a great extent negatively impacted the Pet segment.

Central Garden & Pet’s business is seasonal in nature and generates a high proportion of sales during the second and third quarters, which are characterized by the spring and the summer seasons. As a result, the company is exposed to significant risks from unseasonably cool or hot weather, which may adversely affect its operating performance.

The company is now primarily focusing on streamlining its cost structure, increasing operating efficiencies in order to improve its margins and concentrating on revenue growth through marketing and brand-building initiatives. The company also maintains a healthy commercial relationship with giant retailers, such as The Home Depot Inc. ( HD - Analyst Report ) and Lowe's Companies Inc. ( LOW - Analyst Report ) .

The above analysis advocates our bearish stand on the stock, which is well defined through our Zacks #5 Rank that translates into a short-term Strong Sell rating. However, the company has undertaken a slew of measures, which have yet to show results.