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Central Garden (CENT) Up 0.1% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Central Garden (CENT - Free Report) . Shares have added about 0.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Central Garden due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Central Garden & Pet Q4 Earnings Beat, Guides FY19

After reporting a negative earnings surprise of 1.3% in the third quarter, Central Garden & Pet Company delivered an earnings beat in the fourth quarter of fiscal 2018. This California-based company’s top-line continues to impress investors, beating the consensus estimate for eighth 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.

The producer and distributor of products for the lawn and garden and pet supplies markets delivered earnings of 10 cents a share that beat the Zacks Consensus Estimate by a penny and grew 25% from 8 cents reported in the year-ago period. Experts believe that the bottom line benefited from higher net sales and marginally lower SG&A expenses that mitigated rise in interest expenses.

Net sales of $502.3 million came ahead of the Zacks Consensus Estimate of $487.4 million and rose 2.4% from the year-ago period that included an extra week. The increase in sales can primarily be attributed to recent buyouts. Organic sales, excluding the extra week in the prior year, jumped 2.8% due to gains in the Pet segment.

Gross profit improved 1.2% to $147 million, however, gross margin contracted 30 basis points to 29.3%. Operating income came in at $18.2 million, up from $14.4 million in the prior-year quarter, while operating margin expanded 70 basis points to 3.6% gaining from reduced selling and marketing expenses. Adjusted EBITDA surged 18.7% to $30.5 million, while adjusted EBITDA margin surged 90 basis points to 6.1%.

Segment Details    

The Pet segment’s net sales advanced 2.7% year over year to $339.4 million. Rise in sales can be attributed to the acquisition of General Pet and organic growth that offset fall in animal health sales. Sales across the segment’s branded product declined 1.9% to $262.2 million, while across manufacturers’ products the metric increased 22.3% to $77.2 million. Pet organic sales, excluding the extra week last year, rose 4.8% attributable to higher sales at other manufacturers' products and solid dog & cat businesses.

The segment’s operating income rose 17% year over year to $32.2 million, while operating margin increased 120 basis points to 9.5%.

Net sales at the Garden segment advanced 1.8% to $162.9 million including contribution from Bell Nursery. Organic sales, excluding the extra week last year, declined 1.4%. The Garden segment’s branded product sales came in at $133.3 million, up 5.7%, while sales of other manufacturers’ products declined 12.6% to $29.6 million. Organic sales, excluding the extra week, fell 1.4% owing to unfavorable weather and reduced sales at other manufacturers' products.

The segment’s operating income came in at $1.6 million, up from $0.2 million in the year-ago quarter. Operating margin expanded 80 basis points to 1% on account of decrease in marketing expenditures.

Financial Details

Central Garden & Pet ended the quarter with cash and cash equivalents of $482.1 million and total long-term debt of $692.2 million, up from $395.7 million, respectively, in the prior-year period. Shareholders’ equity at the end of the period was $952.4 million, excluding non-controlling interest of $385,000.

Net interest expense rose to $10.6 million during the reported 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 incurred capital expenditures of $11 million during the quarter under review and $37.8 million during fiscal 2018.

Guidance

Management now envisions fiscal 2019 net sales to improve in the mid-single digits with organic revenue growth in line with long-term annual target of 2-3%. The company projects EBITDA growth in the mid-single-digits, with organic EBITDA growth is expected to come in the upper-single digits. For the fiscal 2019, the company forecasts earnings per share of $1.80 or higher. The company had reported adjusted earnings of $1.91 in fiscal 2018.

The company informed that full year earnings are likely to be adversely impacted by 25 cents due to higher estimated tax rate and the timing of the acquisition of seasonal Bell Nursery business in fiscal 2018. It was further affected by 15 cents on account of increase in the number of shares outstanding owing to equity offerings in August this year. Adjusting these, earnings per share is expected to increase 15% or more when compared with fiscal 2018.

Further, Central Garden & Pet highlighted that the first quarter of fiscal 2019 is likely to be tough as increase in prices to contain inflationary pressures will come into effect from the beginning of next year. As a result, margins are anticipated to remain under pressure during the quarter. Moreover, interest expense is anticipated to be higher owing to the timing of debt issuance in December of 2018. These will have a cumulative impact on the bottom line that is likely to be substantially lower from the prior-year period.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions.

VGM Scores

Currently, Central Garden has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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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