Central Garden & Pet Company (CENT Quick QuoteCENT - Free Report) posted a narrower-than-expected loss in the first quarter of fiscal 2023. Net sales also came ahead of the Zacks Consensus Estimate.

However, the top and bottom lines declined year over year. Nonetheless, the company’s better-than-expected performance came despite challenges related to softness in the garden segment, higher retailer inventories, sluggish foot traffic at garden retailers and higher input costs.

Central Garden & Pet Company has been taking steps to strengthen its position in the pet supplies and lawn and garden supplies space. It has been simplifying the portfolio, developing new products and advancing digital capabilities as well as automation.

For the remainder year, management foresees a normal garden season. It anticipates inventory dynamics to stabilize and expects pricing actions and cost containment efforts to largely mitigate the impact of inflation. Central Garden & Pet Company reiterated its fiscal 2023 earnings view.

Let’s Delve Deeper

Central Garden & Pet reported a quarterly loss of 16 cents a share, narrower than the Zacks Consensus Estimate of a loss of 18 cents. However, the bottom line declined sharply from earnings of 16 cents reported in the year-ago period.

The company generated net sales of $627.7 million, which beat the Zacks Consensus Estimate of $605.6 million. However, the metric declined 5% from the year-ago period.

The gross profit decreased 13.4% to $171.7 million. Also, the gross margin contracted 260 basis points to 27.4%. The decline was driven by the Garden segment, largely due to cost inflation and unfavorable overhead absorption owing to lower sales. This was partly mitigated by pricing actions.

SG&A expenses of $171.3 million declined 0.4% year over year. As a percentage of net sales, SG&A expenses increased 130 basis points to 27.3%.

The operating income totaled $0.4 million, down from the $26.2 million reported in the year-ago period. The operating margin shriveled 390 basis points to 0.1%. Adjusted EBITDA was $28.7 million compared with $51.6 million in the prior year.

Segment Details

Net sales in the Pet segment were $416 million, down 5% from the year-ago period. The metric declined due to the muted demand for durable pet products, primarily in Aquatics, and the decision to exit low-profit private-label product lines, especially in pet beds. However, the company registered a sturdy sales performance in dog and cat brands and outdoor cushions.

The segment’s operating income came in at $40 million, down from the $45 million reported in the prior-year quarter. Meanwhile, the operating margin shrunk 90 basis points to 9.5%. The decline was mainly driven by inflation and lower sales, partly offset by pricing actions.

In the Garden segment, net sales decreased 6% year over year to $212 million, driven by softness in live goods and Controls & Fertilizer, partly mitigated by strength in Wild Bird and Grass Seed. Higher inventories at retail and lower foot traffic also hurt net sales. The segment’s operating loss came in at $11 million against the operating income of $6 million reported in the year-ago period.

Financial Details

Central Garden & Pet ended the quarter with cash and cash equivalents of $87.8 million, long-term debt of $1,186.6 million and shareholders’ equity of $1,322.9 million, excluding the non-controlling interest of $0.6 million. The company repurchased about 251,000 shares worth $9 million in the quarter under review.

Management incurred capital expenditures of $18 million during the quarter under review. For fiscal 2023, Central Garden & Pet anticipates capital expenditures in the band of $70 million-$80 million.

Outlook

Central Garden & Pet maintained the fiscal 2023 earnings projection of $2.60 to $2.80 per share. The company expects the bottom line in the first two quarters of the fiscal year to be lower than the prior year but foresees growth in the second half.

The projection indicates macroeconomic uncertainty, further cost inflation, changing customer behavior and unfavorable retailer inventory dynamics. It also suggests anticipated pricing actions and productivity initiatives to mitigate the impact of inflationary headwinds.

Shares of this Zacks Rank #4 (Sell) company have fallen 3.6% in the past six months against the industry’s rise of 4.3%.

Stocks to Consider

Here we have highlighted three better-ranked stocks, namely Casey's General Stores (CASY Quick QuoteCASY - Free Report) , Albertsons Companies (ACI Quick QuoteACI - Free Report) and Chewy (CHWY Quick QuoteCHWY - Free Report) .

Casey's, one of the leading convenience store chains in the United States, sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Casey's current financial-year sales and EPS suggests growth of 23.1% and 18.4%, respectively, from the year-ago period. Casey's has a trailing four-quarter earnings surprise of 7.2%, on average.

Albertsons, a leading food and drug retailer in the United States, currently carries a Zacks Rank #2 (Buy). The expected EPS growth rate for three to five years is 5.4%.

The Zacks Consensus Estimate for Albertsons’ current financial-year revenues and EPS suggests growth of 7.8% and 5.2%, respectively, from the year-ago reported figure. Albertsons has a trailing four-quarter earnings surprise of 17.2%, on average.

Chewy, an online retailer of pet food and other pet-related products, carries a Zacks Rank #2. The expected EPS growth rate for three to five years is 20%.

The Zacks Consensus Estimate for Chewy’s current financial-year revenues suggests growth of 12.9% from the year-ago reported figure. Chewy has a trailing four-quarter earnings surprise of 82.6%, on average.