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Lower sales along with increased promotional and innovation costs took a toll on Central Garden & Pet Company’s (CENT - Analyst Report) first quarter 2013 results as the company reported a loss of 32 cents per share, widening from the Zacks Consensus Estimate of a loss of 28 cents a share. Moreover, reported loss increased 5 cents on a year-over-year basis.

Total sales for this Zacks Rank #5 (Strong Sell) company decreased 3% year over year to $292.5 million, reflecting lower sales across the Pet and Garden segment. However total sales came marginally ahead of the Zacks Consensus Estimate of $292 million.

Consolidated gross profit decreased 4.7% year over year to $77 million, while gross margin decreased approximately 40 basis points to 26.3%. The company reported an operating loss of $13.1 million that widened from an operating loss of $11.3 million in the prior-year quarter. The company stated that increased promotional and innovation expenses and lower revenues from the decor business negatively impacted the results.

Segment Details

Pet segment net sales inched down 2% year over year to $195.2 million, reflecting sales decline in dog and cat products. The segment’s branded product sales decreased 1.5% to $154.2 million, whereas sales of other manufacturers’ products decreased 4% to $41 million in the quarter. Pet segment’s operating income increased 5.2% year over year to $10.2 million, whereas operating margin improved by 30 basis points, reflecting healthy performance of the equine business.

Garden sales declined 5% year over year to $97.3 million, reflecting lower decor sales. The Garden segment’s branded product sales decreased 5.1% to $85.3 million, whereas sales of other manufacturers’ products decreased 7% to $12 million during the quarter. The company typically generates lower sales in the Garden segment during the first quarter.  The segment reported an operating loss of $8.5 million compared with a loss of $11.1 million in the year-ago quarter.

Central Garden & Pet ended the quarter with cash and cash equivalents of $12.6 million, total long-term debt of $450.8 million and shareholders’ equity of $450 million, excluding non-controlling interest of $239,000. The leverage ratio was 4.1x for the quarter, marginally ahead of the target range of 2.5x to 4.0x.

The company did not buyback any shares during the quarter under review. As of Dec 29, 2012, approximately $52 million still remained at its disposal under its share repurchase authorization.

Strategic Initiatives

Central Garden & Pet earlier announced that it will focus on streamlining its cost structure, increasing operating efficiencies in order to improve its margins and will concentrate more on revenue growth through product innovation and marketing and brand-building initiatives. The company’s long-term target is to attain growth of at least 10% in the top line, and achieve operating margins in the range of 10% to 15%.

Management also targets $40 million in cumulative cost savings as it exits fiscal 2013. Central Garden & Pet intends to lower its annual costs by $120 million by calendar year 2015 with savings from supply-chain initiatives and SG&A.

The company intends to save costs on the warehouse and distribution platform, and plans to combine garden and pet products in the same warehouses wherever possible.

Another significant area of savings is the SKU rationalization, and the company aims to lower its total SKU count by at least 30% to 35% by the end of 2014. Central Garden & Pet is consolidating its purchasing activities across the whole organization as well as its sales initiatives by category and channel.

Other Stocks to Consider

Until any further upward revision in Central Garden & Pet’s rating, other stocks in the consumer goods and pet products universe with a favorable Zacks Rank worth considering include PetSmart, Inc. (PETM - Snapshot Report), The Scotts Miracle-Gro Company(SMG - Snapshot Report) and Jarden Corp. (JAH - Snapshot Report) all holding a Zacks Rank #2 (Buy), respectively.

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