It has been about a month since the last earnings report for Central Garden & Pet Company (CENT - Free Report) . Shares have added about 13.4% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is CENT due for a pullback? 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 Tops Q2 Earnings, Lifts ’18 View
Central Garden & Pet Company continued with its upbeat performance in the second quarter of fiscal 2018 as well and also provided an encouraging earnings view. This California-based company delivered positive earnings surprise of 4.9% in the quarter under review following earnings beat of 26.7% in the preceding quarter. The top line also continues to impress investors, beating the consensus estimate for sixth straight quarter.
Improved product offerings, strategic investments such as acquisitions of General Pet Supply and Bell Nursery, growth in e-commerce and cost containment efforts bode well for the company.
The producer and distributor of products for the lawn and garden and pet supplies markets delivered earnings of 86 cents a share that surpassed the Zacks Consensus Estimate of 82 cents. The quarterly earnings surged 28.4% from 67 cents reported in the year-ago period.
Management highlighted that higher net sales, lower effective tax rate, changes in accounting standards and rise in other income from joint venture investments positively impacted the bottom line.
Net sales of $613.1 million came ahead of the Zacks Consensus Estimate of $587 million and grew 7.6% year over year. The increase in sales was primarily driven by robust organic growth across both the Garden and Pet segments. The company’s organic sales rose 6.1%.
Gross profit jumped 6% to $194.5 million, however, gross margin contracted 50 basis points (bps) to 31.7%. The company hinted that a shift in sales mix in the Pet segment and higher raw materials and freight costs hurt the margin. Operating income came in at $65.8 million, up 3% from the prior-year quarter, however, operating margin shriveled 50 bps to 10.7% in the quarter under review on account of lower gross margin.
The Pet segment’s net sales gained 7.8% year over year to $321.7 million. Rise in sales can be attributed to 6.3% jump in Pet organic sales buoyed by sturdy e-commerce and mass channels. Sales across the segment’s branded product and other manufacturers’ products came in at $257.4 million and $64.3 million, reflecting an increase of 7% and 11.1%, respectively.
The segment’s operating income fell 5.4% year over year to $32.8 million, while operating margin shrunk 140 bps to 10.2%.
Net sales at the Garden segment advanced 7.3% to $291.4 million including contribution from Bell Nursery acquired in March this year. Organic sales rose 6%. Sales across the segment’s branded product were $240.2 million, up 10.8% year over year, while at other manufacturers’ products were $51.2 million, down 6.6%.
The segment’s operating income rose 10.3% to $50.7 million, while operating margin expanded 50 bps to 17.4% on the back of cost cutting endeavors and production efficiencies.
Central Garden & Pet ended the quarter with cash and cash equivalents of $132.3 million and total long-term debt of $691.1 million, up from $6.2 million and $496.2 million, respectively, in the prior-year period. Shareholders’ equity at the end of the period was $704.5 million, excluding non-controlling interest of $594,000.
Net interest expense rose to $9.9 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 portion of the proceeds is currently reflected in the cash balance, partly offset by buyout of Bell Nursery.
The company incurred capital expenditure of $9 million during the quarter and expects the same to amount approximately $40-$45 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 $1.90 per share or more, reflecting an increase of 26.7% or higher year over year. The company had earlier projected earnings of $1.85. The increased guidance can be attributed to the buyout of Bell Nursery.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There has been one revision higher for the current quarter.
Central Garden & Pet Company Price and Consensus
At this time, CENT has a poor Growth Score of F, however its Momentum is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Zacks' style scores indicate that the company's stock is suitable for value and momentum investors.
Estimates have been trending upward for the stock and the magnitude of this revision looks promising. It comes with little surprise CENT has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.