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Central Garden (CENT) Down 8.7% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Central Garden (CENT - Free Report) . Shares have lost about 8.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Central Garden due for a breakout? 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, Margins Expand

Central Garden & Pet Company came up with second-quarter fiscal 2024 results, wherein the top and bottom lines beat the Zacks Consensus Estimate. While net sales declined, earnings improved year over year owing to the Cost and Simplicity program.

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 adjusted quarterly earnings of 99 cents a share, which beat the Zacks Consensus Estimate of 83 cents. The bottom line improved sharply from the year-ago period’s earnings of 72 cents a share. The prior year’s number was adjusted for the February 2024 stock dividend.

The company generated net sales of $900.1 million, which came ahead of the Zacks Consensus Estimate of $896 million. The metric declined 1% from the year-ago period. Organic net sales decreased 0.7%.

The adjusted gross profit came in at $281.4 million compared with $259.6 million reported in the year-ago period. The adjusted gross margin expanded 270 basis points to 31.3%, driven by the Cost and Simplicity program, including the sale of the independent garden channel distribution business and exit of some private-label pet bed product lines, as well as moderating inflation.

Adjusted SG&A expenses of $182.7 million increased from $181.6 million in the prior-year quarter. As a percentage of net sales, it deleveraged 30 basis points to 20.3%, mainly due to our recent acquisitions.

The adjusted operating income totaled $98.7 million, significantly up from the $78 million reported in the year-ago period. The operating margin expanded 240 basis points to 11%, thanks to the higher gross margin. Adjusted EBITDA came in at $124.4 million compared with $106.9 million in the prior-year period.

Segment Details

Net sales for the Pet segment came in at $480.2 million, showing a 1.1% increase compared to the previous year, driven by growth in Consumables businesses and the recent TDBBS acquisition. Organic net sales fell 3%, excluding the impact of the recent buyout of TDBBS.

The segment’s operating income came in at $63 million, up from $55 million reported in the prior-year quarter. Meanwhile, the operating margin expanded 140 basis points to 13%, driven by the improved gross margin.

In the Garden segment, net sales of $419.9 million declined 3.2% from the year-ago period. Organic net sales grew 1.9%, excluding the impact of the sale of the independent garden channel distribution business. Growth in Live Plants, Grass Seed and Controls & Fertilizer more than offset lower sales in Wild Bird.

The segment’s adjusted operating income of $62.3 million improved from an adjusted operating income of $49.6 million reported in the prior-year quarter. The adjusted operating margin expanded 340 basis points to 14.8%
Financial Details

Central Garden & Pet ended the quarter with cash and cash equivalents of $301.3 million, long-term debt of $1,189 million and shareholders’ equity of $1,510.8 million, excluding the non-controlling interest of $1.4 million.

The company did not repurchase shares during the quarter under review. Management incurred capital expenditures of $9 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 $2.00 per share or better ($2.50 or better before the February 2024 stock dividend). The projection indicates uncertain consumer demand and retailer dynamics and an environment of macroeconomic and geopolitical volatility. It also suggests modest pricing actions to help mitigate inflationary headwinds.

How Have Estimates Been Moving Since Then?

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

The consensus estimate has shifted -10.67% due to these changes.

VGM Scores

At this time, Central Garden has a subpar Growth Score of D, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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.


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