Central Garden & Pet Company (CENT Quick QuoteCENT - Free Report) came up with second-quarter fiscal 2023 results, wherein the top line beat the Zacks Consensus Estimate, while the bottom line met the same. We note that both net sales and earnings declined year over year.

A challenging operating environment and softness in the Garden portfolio have made things tough for Central Garden & Pet Company. In the release, management cited unfavorable weather conditions, soft foot traffic and unfavorable retailer inventory dynamics behind sluggishness in the Garden segment. Nonetheless, the Pet segment met expectations and gained market share.

Undoubtedly, Central Garden & Pet Company has been taking steps to strengthen its position in the pet supplies and lawn and garden supplies space. It is focusing on brand building, containing costs, lowering complexity and improving margins. The company has been expanding its manufacturing capacity and simplifying the portfolio.

Let’s Delve Deeper

Central Garden & Pet reported quarterly earnings of 90 cents a share, which came in line with the Zacks Consensus Estimate and our estimate. However, the bottom line declined sharply from earnings of $1.27 per share reported in the year-ago period.

The company generated net sales of $909 million, which beat the Zacks Consensus Estimate of $898 million and our estimate of $892.1 million. However, the metric declined 5% from the year-ago period.

The gross profit decreased 9.5% to $259.6 million. Also, the gross margin contracted 150 basis points to 28.6%. The decline was driven by the Garden segment due to unfavorable overhead absorption in key garden businesses and input cost pressures.

SG&A expenses of $181.6 million rose 0.9% year over year. As a percentage of net sales, SG&A expenses increased 110 basis points to 20%.

The operating income totaled $78 million, down from the $106.8 million reported in the year-ago period. The operating margin shriveled 260 basis points to 8.6%. Adjusted EBITDA was $106.9 million compared with $131.4 million in the prior year.

Segment Details

Net sales in the Pet segment were $475 million, down 5% from the year-ago period. The metric declined due to the muted demand for durable pet products, the decision to discontinue
certain low-profit private-label pet bed product lines and lower sales in Outdoor Cushions. These were partly offset by strength in Dog & Cat Treats & Toys.

The segment’s operating income came in at $55 million, down from the $61 million reported in the prior-year quarter. Meanwhile, the operating margin shrunk 60 basis points to 11.6%. The decline was mainly driven by lower sales.

In the Garden segment, net sales decreased 5% year over year to $434 million, driven by lower sales in Grass Seed, Controls & Fertilizer and Live Goods, partly offset by strength in Wild Bird and Packet Seed. Unfavorable spring weather and changes in retailer buying patterns hurt net sales.

The segment’s operating income came in at $50 million, down from the $71 million reported in the prior-year quarter, while the operating margin contracted 400 basis points to 11.4%. Soft sales, input cost inflation and initial start-up costs associated with the recently acquired live goods facility hurt margins.

Financial Details

Central Garden & Pet ended the quarter with cash and cash equivalents of $60.6 million, long-term debt of $1,212.1 million and shareholders’ equity of $1,371.1 million, excluding the non-controlling interest of $1.2 million. The company repurchased about 75,000 shares worth $2.7 million in the quarter under review.

Outlook

Central Garden & Pet estimates fiscal 2023 EPS to be $2.35 or better. The projection indicates macroeconomic uncertainty, inflationary pressure, changing customer behavior and unfavorable retailer inventory dynamics. It also suggests pricing actions and productivity initiatives across the board. Meanwhile, management anticipates capital spending to be substantially lower than fiscal 2022.

Markedly, the company foresees growth in the operating income and earnings per share during the second half of the fiscal year. It expects the garden season to normalize and retailer inventory dynamics to stabilize.

Shares of this Zacks Rank #5 (Strong Sell) company have fallen 15.5% in the past six months compared with the industry’s decline of 7.5%.

Stocks to Consider

Here we have highlighted three better-ranked stocks, namely Kroger (KR Quick QuoteKR - Free Report) , BJ's Wholesale Club (BJ Quick QuoteBJ - Free Report) and General Mills (GIS Quick QuoteGIS - Free Report) .

Kroger, which operates supermarkets and multi-department stores, currently carries a Zacks Rank #2 (Buy). The expected EPS growth rate for three to five years is 6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Kroger’s current financial-year revenues and EPS suggests growth of 2.5% and 6.6%, respectively, from the year-ago reported figure. Kroger has a trailing four-quarter earnings surprise of 9.8%, on average.

BJ's Wholesale Club, a leading operator of membership warehouse clubs, carries a Zacks Rank #2. The expected EPS growth rate for three to five years is 9.3%.

The Zacks Consensus Estimate for BJ's Wholesale Club’s current financial-year sales and earnings suggests growth of 7.3% and 0.8% from the year-ago period. BJ has a trailing four-quarter earnings surprise of 19.6%, on average.

General Mills, which manufactures and markets branded consumer foods, currently carries a Zacks Rank #2. The expected EPS growth rate for three to five years is 7.5%.

The Zacks Consensus Estimate for General Mills’ current financial-year sales and earnings suggests growth of 6.3% and 7.4% from the year-ago period. GIS has a trailing four-quarter earnings surprise of 8.1%, on average.