Central Garden & Pet Company (CENT – Free Report) posted better-than-expected third-quarter fiscal 2022 results, wherein the bottom line grew from the year-ago period, while the top line declined.
The California-based company is on track with its ‘Central to Home’ strategy and investments in the pet and garden industries to drive long-term growth. However, softness in the garden segment, stemming from unfavorable weather, changing consumer behavior, a decline in foot traffic and changing inventory expectations, acted as a deterrent.
Let’s Delve Deeper
Central Garden & Pet reported quarterly earnings of $1.39 per share, surpassing the Zacks Consensus Estimate of $1.26 and our estimate of $1.27. Also, the figure reflected an increase of 1.5% from earnings of $1.37 reported in the year-ago period.
The company generated net sales of $1,015 million, surpassing the Zacks Consensus Estimate of $993 million and our estimate of $980 million. The metric fell 2% from the year-ago period due to sluggishness in the garden segment. Organic net sales declined 5% from the prior-year quarter.
Gross profit decreased 4% to $307.6 million. Also, the gross margin contracted 60 basis points (bps) to 30.3% due to cost inflation in commodities, freight and labor, as well as unfavorable product mix, which more than offset productivity improvements and positive pricing.
Operating income totaled $114 million, up 1% from the year-ago period. The operating margin expanded 30 bps to 11.2%, which was even with the year-ago period despite continued inflation and heightened investment spending.
SG&A expenses of $193.5 million declined 6.5% year over year. As a percentage of net sales, SG&A expenses contracted 90 bps to 19.1%.
Segment in Detail
In the Garden segment, net sales decreased 4% year over year to $511 million due to unfavorable weather. However, the metric beat the Zacks consensus mark of $464.2 million and our estimate of $452.4 million. On an organic basis, net sales declined 8%. Persistent strength in wild bird, new distribution and market share gains were more than offset by declines in the grass seed business.
We note that e-commerce has advanced 15%, accounting for mid-single-digit total segment sales. The segment’s operating income rose 13% to $76 million. We note that the operating margin expanded 210 bps to 14.8%, owing to contributions from the recent buyouts and improved pricing, partly offset by inflationary pressures and higher investment spending.
Net sales in the Pet segment were $505 million, almost in line with the year-ago period’s reported figure of $508 million. However, the metric lagged the consensus mark of $530.5 million and our estimate of $527.6 million. Contributions from dog and cat, treats and toys, and outdoor cushions were negated by the sluggishness in pet beds.
Also, the segment witnessed a decline in pet ownership and penetration rates after the pet adoption boom during the pandemic. This is expected to have resulted from increasing inflation and lifestyle changes.
The segment’s operating income declined 12% to $63 million, while the operating margin contracted 160 bps to 12.4%.
Central Garden & Pet ended the quarter with cash and cash equivalents of $196 million, long-term debt of $1,185.8 million, and shareholders’ equity of $1,351 million, excluding non-controlling interest of $1.4 million. The company repurchased about 542,000 shares worth $22.1 million in the quarter under review. This brings the remaining authorized share repurchase capacity to $100 million.
Management reiterated the fiscal 2022 GAAP EPS projection of $2.75 or better. The guidance includes anticipated pricing actions, and investments in capacity expansion, brand building, consumer insights, innovation and e-commerce.
The guidance takes into account rising costs for key commodities, freight and labor, stemming from the current geopolitical environment as well as return to more normalized consumer demand patterns following the exceptional demand spanning two fiscal years. The company also noted that the guidance does not include the impacts of potential buyouts during fiscal 2022.
Image Source: Zacks Investment Research
Shares of this Zacks Rank #4 (Sell) company have fallen 1.4% in the past three months compared with the industry’s decline of 4.4%.
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