After posting a negative earnings surprise of 20% in the final quarter of fiscal 2017, Central Garden & Pet Company (CENT - Free Report) commenced fiscal 2018 on a high note and provided an upbeat outlook. This California-based company delivered positive earnings surprise of 26.7% in the first quarter. Improved product offerings, strategic investments, growth in e-commerce and cost containment efforts worked collectively in favor of the company.
The producer and distributor of products for the lawn and garden and pet supplies markets delivered adjusted earnings of 19 cents a share that surpassed the Zacks Consensus Estimate of 15 cents. The quarterly earnings surged 58.3% from 12 cents reported in the year-ago period.
The top line continues to impress investors, beating the consensus estimate for fifth straight quarter. Net sales of $442 million came ahead of the Zacks Consensus Estimate of $434.3 million and grew 5.4% year over year. The increase in sales was primarily driven by buyouts. The company’s organic sales rose 1.1%.
Organic growth, value accretive acquisitions such as that of the pet bedding business and Segrest along with divestment of non-strategic assets bode well for the company. This has led this Zacks Rank #3 (Hold) stock to advance 10.5% in a year, against the industry’s decline of 14.1%.
Gross profit jumped 9.2% to $131.8 million, while gross margin expanded 100 basis points (bps) to 29.8% due to cost savings and favorable impact of buyouts. Central Garden & Pet reported adjusted operating income of $22.5 million, up 25.9% from the prior-year quarter, while adjusted operating margin increased 80 bps to 5.1% in the quarter under review on account of higher gross margin.
The Pet segment’s net sales gained 6.9% year over year to $325.1 million on the back of Segrest and K&H acquisitions. Moreover, increase of 1.1% in Pet organic sales can be attributable to sturdy e-commerce channel, partly offset by reduced sales at certain pet specialty retailers. Sales across the segment’s branded product and other manufacturers’ products came in at $262.9 million and $62.2 million, reflecting an increase of 6.7% and 7.7%, respectively.
The segment’s operating income grew 8.3% year over year to $36.2 million, while operating margin expanded 10 bps to 11.1%.
Net sales at the Garden segment advanced 1.3% to $116.9 million gaining from controls and fertilizers category, offset by wild bird feed results. Sales across the segment’s branded product and other manufacturers’ products came in at $87 million and $29.9 million, reflecting an increase of 0.6% and 3.3%, respectively. Operating income came in at $2.3 million, marginally down from $2.7 million registered in the year-ago quarter, while operating margin shriveled 30 basis points to 2%. Excluding the sale of distribution facility, operating income jumped $1.7 million, while operating margin expanded 150 bps.
Central Garden & Pet ended the quarter with cash and cash equivalents of $283.5 million and long-term debt of $691 million, up from $6.6 million and $395 million, respectively, in the prior-year period. Shareholders’ equity at the end of the period was $661.9 million, excluding non-controlling interest of $62,000.
Net interest expense rose to $7.2 million during the quarter, up from $6.8 million in the prior-year period.
Management highlighted that higher debt and interest expense were due to the issuance of $300 million of fixed income securities in December 2017. A major portion of the proceeds is currently reflected in the cash balance.
The company incurred capital expenditure of $8 million during the quarter and expects the same to amount approximately $40 million for fiscal 2018. Moreover, the company still has $35 million available under its share repurchase program.
Management now envisions fiscal 2018 adjusted earnings to come in at $1.85 per share or more, reflecting an increase of 23.3% or higher year over year. The company had earlier projected earnings of $1.62. The increased guidance can be attributed to lower Federal tax rate and sturdy quarterly performance. The Zacks Consensus Estimate for the fiscal year is currently pegged at $1.66, which could witness an upward revision in the coming days.
Stocks to Consider
Zumiez Inc. delivered an average positive earnings surprise of 22.2% in the trailing four quarters. It has a long-term earnings growth rate of 18% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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Ross Stores, Inc. (ROST - Free Report) delivered an average positive earnings surprise of 5.5% in the trailing four quarters. It has a long-term earnings growth rate of 10% and a Zacks Rank #2.
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