A month has gone by since the last earnings report for Central Garden (CENT Quick QuoteCENT - Free Report) . Shares have added about 3.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Central Garden due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Central Garden & Pet Q2 Earnings Beat, Sales Up Y/Y

Central Garden & Pet Company posted better-than-expected second-quarter fiscal 2022 results, driven by favorable consumer trends. While the top line grew year over year, the bottom line declined from the year-ago period.

The California-based company is on track with its ‘Central to Home’ strategy and investing in digital marketing and innovation as well as customer insights and brand building to drive growth. The company is expanding its manufacturing capacity and investing in automation.

Let’s Delve Deeper

Central Garden & Pet Company reported quarterly earnings of $1.27 per share that handily beat the Zacks Consensus Estimate of $1.18. However, the figure reflected a decline from earnings of $1.32 reported in the year-ago period.

The company generated net sales of $954.4 million, surpassing the Zacks Consensus Estimate of $935.1 million. The metric improved 2% from the year-ago period, benefiting from recent acquisitions, which contributed $52 million. Organic net sales declined 3.5% from the prior-year quarter.

Gross profit increased 5.3% to $286.8 million. Meanwhile, the gross margin expanded 100 basis points to 30.1%. Pricing and favorable product mix coupled with productivity improvements helped offset cost inflation in commodities, freight and labor.

Operating income totaled $106.8 million, up 2.1% from the year-ago period. Operating margin of 11.2% was even with the year-ago period despite continued inflation and heightened investment spending.

SG&A expenses of $179.9 million rose 7.2% year over year on account of recent buyouts, higher logistics expenses, purposeful investment spending and capacity expansion as well as automation. As a percentage of net sales, SG&A expenses increased 100 basis points to 18.9%.

Segment in Detail

In the Garden segment, net sales increased 3% year over year to $456.7 million, courtesy of contributions from recent buyouts. However, on an organic basis, net sales declined 8.7%. Organic strength in wild bird was more than offset by declines in chemicals & fertilizer, garden distribution, controls and grass seed. Unfavorable weather conditions resulted in a late start to the garden season. We note that e-commerce has advanced more than 20%, representing low single digits of total garden sales. The segment’s operating income rose 7% to $71 million. We note that operating margin expanded 50 basis points to 15.4%, owing to contributions from recent buyouts and improved pricing, partly offset by inflationary pressures and higher investment spending.

Net sales in the Pet segment were $497.7 million, up 1.2% from the year-ago period. Contributions from dog and cat, outdoor cushions, professional and pet distribution businesses were negated by sluggishness in pet beds. The company increased its market share in health & wellness, dog toys/treats and equine. We note that e-commerce grew almost 10%, and now represents 22% of Pet branded sales. The segment’s operating income declined 2% to $61 million while operating margin contracted 40 basis points to 12.2%. Pricing actions and favorable product mix were more than offset by inflationary headwinds in commodities, freight and labor, as well as purposeful investments in growth initiatives.

Financial Details

Central Garden & Pet ended the quarter with cash and cash equivalents of $54.1 million, long-term debt of $1,185.5 million and shareholders’ equity of $1,293.1 million, excluding non-controlling interest of $1.2 million. The company repurchased about 227,000 shares worth $9.4 million during the quarter under review. Management incurred capital expenditure of $51 million.

Total debt was $1.2 billion, up from $1 billion at the same time last year. The company’s leverage ratio was 2.9 times at the end of the second quarter compared with 2.5 times a year ago.

Outlook

Management reiterated the fiscal 2022 GAAP EPS projection of $3.10 or better. The guidance includes anticipated pricing actions as well as investments in capacity expansion, brand building, consumer insights, innovation and e-commerce. The guidance takes into account rising costs for key commodities, freight and labor, return to more normalized consumer demand patterns following exceptional demand spanning two fiscal years, and resumption of more historical levels of promotional activity.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

At this time, Central Garden has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Central Garden has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.