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Central Garden (CENT) Down 3.5% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Central Garden (CENT - Free Report) . Shares have lost about 3.5% 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 catalysts.

Central Garden & Pet Q1 Earnings & Sales Miss Estimates

Central Garden & Pet Company commenced fiscal 2019 on a soft note, with both the top and bottom line missing the Zacks Consensus Estimate when the company reported its first-quarter results. Although, its top line improved on a year-over-year basis during the quarter, the bottom line declined from the year-ago period number. Per management, the company’s recent acquisitions of General Pet Supply and Bell Nursery aided sales growth but negatively impacted margins and profitability.

Let’s Delve Deep

The producer and distributor of products for the lawn and garden and pet supplies markets delivered earnings of 3 cents a share, which lagged the Zacks Consensus Estimate of 9 cents and decreased substantially from 19 cents reported in the year-ago period. We note that higher cost of goods sold and occupancy, increased SG&A expenses and rise in interest expenses might have weighed upon the bottom line.  

This California-based company, which recently acquired the remaining stake of 55% in Arden Companies, reported net sales of $462 million that fell short of the Zacks Consensus Estimate of $482.7 million. This marked the company’s first sales miss in the trailing nine quarters. Nevertheless, the metric rose 4.5% from the year-ago period. The uptick can primarily be attributed to recent buyouts of Bell and General Pet. Meanwhile, organic sales declined 1.7% during the quarter under review.

Gross profit slipped 1.3% to $130.2 million, whereas gross margin contracted 160 basis points to 28.2%. Operating income reduced to $10.2 million, down from $22.5 million registered in the prior-year quarter. In the meantime, operating margin contracted 290 basis points to 2.2%. Adjusted EBITDA plunged 33.2% to $22.5 million, while adjusted EBITDA margin expanded 270 basis points to 4.9%. Operating margins and EBITDA declined due to buyouts as well as higher freight, labor and raw material costs.

Segment Details

Net sales at the Pet segment increased 4.7% year over year to $340.4 million driven by the acquisition of General Pet. Organic sales decreased 0.6% due to decline in animal health sales, partially offset by gains in wild bird and aquatics businesses. Sales across the segment’s branded product fell 0.3% to $262 million, while across manufacturers’ products the metric increased 26.1% to $78.5 million. The segment’s operating income decreased 17.7% year over year to $29.8 million, while operating margin contracted 240 basis points to 8.7%.

At the Garden segment, net sales advanced 4% to $121.6 million backed by inclusion of Bell Nursery. Organic sales declined 4.6%. The Garden segment’s branded product sales came in at $92.5 million, up 6.3%, while sales of other manufacturers’ products declined 2.8% to $29.1 million. The segment incurred operating loss of $4.6 million compared to operating income of $2.3 million in the year-ago quarter. Operating margin contracted 580 basis points to 3.8% on account of higher raw material, freight and labor costs.

Financial Details

Central Garden & Pet ended the quarter with cash and cash equivalents of $478.7 million and total long-term debt of $692.3 million, up from $283.5 million and $691 million, respectively, in the prior-year period. Shareholders’ equity at the end of the period was $956.3 million, excluding non-controlling interest of $221,000. Net interest expenses rose to $8.1 million during the reported quarter, up from $7.2 million in the prior-year period. Management highlighted that higher interest expenses were due to the issuance of new notes in December 2017.

Management incurred capital expenditures of $8 million during the quarter under review, unchanged from last year.

Guidance

For fiscal 2019, the company continues to expect earnings per share of $1.80 or higher. Management stated that the company’s second-quarter results may be impacted by certain factors. Central Garden & Pet stated that historically Bell Nursery has recorded profits in the third quarter. Moreover, it may face tough year-over-year comparison in organic sales. Additionally, higher tax rate and a greater number of shares outstanding may also weigh upon the bottom line.

Central Garden & Pet highlighted that the second half of fiscal 2019 is likely to benefit from the alleviation of inflationary pressures, higher prices, favorable sales mix and cost savings initiatives.

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

At this time, Central Garden has a subpar Growth Score of D, however its Momentum Score 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 second quintile 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

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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