After two straight quarters of earnings beat Central Garden & Pet Company (CENT - Free Report) reported a negative earnings surprise of 1.3% in the third quarter of fiscal 2018. However, the top line of this California-based company continues to impress investors, beating the consensus estimate for seventh straight quarter. Moreover, both the top and bottom lines continued to improve year over year.
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. These factors have aided this Zacks Rank #3 (Hold) stock to advance roughly 20% in the past six months compared with the industry’s growth of approximately 13%.
The producer and distributor of products for the lawn and garden and pet supplies markets delivered earnings of 79 cents a share that missed the Zacks Consensus Estimate by a penny but surged 27.4% from 62 cents reported in the year-ago period. Management hinted that bottom line gained from higher net sales and lower effective tax rate that helped offset rise in interest expenses.
Net sales of $657.9 million came ahead of the Zacks Consensus Estimate of $627 million and grew 14.5% year over year. The increase in sales was primarily driven by recent buyouts and robust organic growth in the Pet segment. However, the company’s total organic sales were relatively flat, down 0.1% on account of lower demand in the organic Garden business due to adverse weather condition in the early part of the quarter under review and a considerable year-over-year shift in selling weeks during the quarter.
Gross profit jumped 10.3% to $202.1 million, however, gross margin contracted 120 basis points to 30.7%. The company hinted that lower organic volumes in the Garden segment, an unfavorable shift in sales mix and increased raw materials, labor and freight costs hurt the margin.
Operating income came in at $60.8 million, up 5% from the prior-year quarter, however, operating margin shriveled 90 basis points to 9.2% in the quarter under review on account of lower gross margin. This was partly mitigated by a contraction of 30 basis points in SG&A expenses as a percentage of net sales.
The Pet segment’s net sales gained 13.2% year over year to $354.7 million. Rise in sales can be attributed to the acquisition of General Pet and a 6.6% 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 $267.9 million and $86.9 million, reflecting an increase of 5.3% and 47.3%, respectively.
The segment’s operating income rose 8.7% year over year to $39.2 million, while operating margin shrunk 40 basis points to 11.1%.
Net sales at the Garden segment advanced 16.1% to $303.2 million including contribution from Bell Nursery. Organic sales declined 8%. Sales across the segment’s branded product were $248.9 million, up 19.9% year over year, while at other manufacturers’ products were $54.3 million, up 1.5%.
The segment’s operating income rose 6.7% to $40.9 million, however, operating margin decreased 120 basis points to 13.5% on account of lower organic volume and higher commodity and freight costs.
Central Garden & Pet ended the quarter with cash and cash equivalents of $204.4 million and total long-term debt of $691.9 million, up from $435.4 million, respectively, in the prior-year period. Shareholders’ equity at the end of the period was $744.1 million, excluding non-controlling interest of $586,000.
Net interest expense rose to $10 million during the quarter, up from $7.2 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.
Management continues to envision 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 Zacks Consensus Estimate for the fiscal year is currently pegged at $1.96.
Stocks to Consider
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Columbia Sportswear (COLM - Free Report) has a long-term earnings growth rate of 10.8%. It carries a Zacks Rank #2 (Buy).
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