Central Garden & Pet Company (CENT Quick QuoteCENT - Free Report) came up with first-quarter fiscal 2024 results, wherein the top and bottom lines beat the Zacks Consensus Estimate. Markedly, both net sales and earnings improved year over year in spite of the challenging environment.

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

Let’s Delve Deeper

Central Garden & Pet reported quarterly earnings of 1 cent a share against the Zacks Consensus Estimate of a loss of 18 cents. The bottom line improved sharply from a loss of 16 cents a share reported in the year-ago period. The bottom line benefited from an improved gross margin and early season shipments.

The company generated net sales of $634.5 million, which came ahead of the Zacks Consensus Estimate of $620 million. The metric improved 1.1% from the year-ago period. Organic net sales rose 0.5%.

The gross profit came in at $178.8 million compared with $171.7 million reported in the year-ago period. The gross margin expanded 80 basis points to 28.2%, driven by cost-containment efforts and moderating inflation.

SG&A expenses of $170.4 million decreased from $171.3 million in the prior-year quarter. As a percentage of net sales, it decreased 40 basis points to 26.9%. We had anticipated a 1.1% year-over-year decrease in SG&A expenses.

The operating income totaled $8.4 million, significantly up from the $0.4 million reported in the year-ago period. The operating margin expanded 120 basis points to 1.3%. Adjusted EBITDA came in at $37 million compared with $28.7 million in the prior-year period.

Segment Details

Net sales for the Pet segment came in at $409.2 million, showing a 1.6% decline compared to the previous year. We anticipated a 2.1% decline in segment sales. Strength in Health & Wellness and Aquatics was more than offset by double-digit declines in durables across the pet beds, small animal and distribution business. Organic net sales fell 4.8%, excluding the impact of the recent buyout of TDBBS.

The segment’s operating income came in at $43.4 million, up from $39.6 million reported in the prior-year quarter. Meanwhile, the adjusted operating margin expanded 110 basis points to 10.6%, driven by the favorable impact of Central's Cost and Simplicity program coupled with lower commercial spend.

In the Garden segment, net sales of $225.3 million increased 6.3% from the year-ago period and fared better than our estimate of $214.4 million. Early season shipments in Controls & Fertilizer, Grass, and Packet Seeds contributed to the results. However, unfavorable warmer weather conditions adversely impacted sales in Wild Bird. Organic net sales grew 11.3%.

The segment’s operating loss of $8.9 million improved from an operating loss of $10.8 million reported in the prior-year quarter.

Financial Details

Central Garden & Pet ended the quarter with cash and cash equivalents of $341.4 million, long-term debt of $1,189.1 million and shareholders’ equity of $1,451.9 million, excluding the non-controlling interest of $0.7 million. The company repurchased about 39,576 shares worth $1.4 million in the quarter under review. Management incurred capital expenditures of $10 million during the quarter. It expects to incur a capital expenditure of $70 million in fiscal 2024.

Outlook

Central Garden & Pet continues to estimate fiscal 2024 adjusted earnings to be $2.50 per share or better compared with the $2.59 reported in fiscal 2023. The projection indicates deflationary pressure in some of the commodity businesses, changing consumer behavior and unfavorable retailer inventory dynamics in an environment of macroeconomic and geopolitical uncertainty. It also suggests modest pricing actions to help mitigate inflationary headwinds.

Shares of this Zacks Rank #4 (Sell) stock have risen 2% in the past six months against the industry’s decline of 8.2%.

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