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Central Garden & Pet Company’s (CENT - Analyst Report) second-quarter 2013 earnings came in at 46 cents a share that missed the Zacks Consensus Estimate of 53 cents a share but rose 2.2% year over year. 

Total sales increased approximately 7% year over year to $498.2 million, reflecting higher sales across the Pet and Garden segments. Moreover total sales surpassed the Zacks Consensus Estimate of $495 million.

Consolidated gross profit increased 3.7% year over year to $153.2 million, while gross margin decreased approximately 90 basis points to 30.7%, reflecting lower margins in the Garden segment. The company reported an operating income of $46.7 million, up 3.4% year over year. However, operating margin contracted 30 basis points to 9.4% during the quarter.  

Segment Details

Pet segment net sales increased 6% year over year to $234.8 million, reflecting enhanced sales in bird feed, professional sales and dog and cat care business. The segment’s branded product sales increased 7% to $193.1 million, whereas sales of other manufacturers’ products decreased 2% to $41.7 million in the quarter. Pet segment’s operating income rose 31% year over year to $27.5 million, whereas operating margin improved 230 basis points, reflecting increased sales of higher margin products and lower selling and marketing expenses.  

Revenue at the Garden segment rose 8% year over year to $263.4 million, reflecting increased sales of bird feed and Amdro Powerflex and Pennigton Smart Feed products. The Garden segment’s branded product sales increased 8% to $229.2 million, whereas sale of other manufacturers’ products escalated 5% to $34.2 million during the quarter.  The segment reported an operating income of $34 million, down 7.1% year over year, whereas operating margin declined 210 basis points, reflecting lower gross margins and higher promotional costs.

Other Financial Details

Central Garden & Pet ended the quarter with cash and cash equivalents of $11.3 million, total long-term debt of $593.7 million and shareholders’ equity of $474.6 million, excluding non-controlling interest of $1 million. The leverage ratio was 5.1x for the quarter. The company repurchased $1.5 million worth of shares during the quarter under its $100 million share repurchase authorization.

Our Take

Central Garden & Pet’s primary focus is on streamlining its cost structure, increasing operating efficiencies in order to improve its margins and concentrating on revenue enhancement through marketing and brand-building initiatives.

Alongside, being the leading producer of garden and pet supplies products in the U.S. and with a diversified portfolio of brands, Central Garden & Pet developed a healthy commercial relationship with giant retailers, such as Wal-Mart Stores Inc. (WMT - Analyst Report) and The Home Depot, Inc. (HD - Analyst Report). This provides a significant upside potential for the company.

However, the discretionary spending environment continues to remain sluggish amid high unemployment levels and tight credit markets. This is a looming concern for the company as a significant portion of its product portfolio consists of premium offerings. Moreover, the company expects its third-quarter results to decline year over year.

Consequently, shares of Central Garden & Pet carry a Zacks Rank #3 (Hold).

Other Stocks to Consider

Besides Central Garden, the other stock in the consumer goods sector worth considering includes Jarden Corp. (JAH - Snapshot Report), which holds a Zacks Rank #2 (Buy) and is expected to continue with its upbeat performance.

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