Central Garden Q3 Earnings Miss on Weak Segmental Results

Zacks

Central Garden & Pet Co. (CENT) recorded adjusted earnings per share of 28 cents in third-quarter fiscal 2014. The reported quarterly earnings remained flat year over year and missed the Zacks Consensus Estimate of 31 cents.  

Persistent weakness in both the Pet and Garden segments is dragging down its financial performance. In the quarter, the company discontinued some of its products in the Garden segment whereas the Pet segment continues to stumble on the after effects of lost shelf space in 2013. Moreover, weakness on the demand side has added to the woes.

Including one-time items, earnings of 9 cents per share declined 68% year over year.

The company’s top line fell 11% year over year to $438 million and was way below the Zacks Consensus Estimate of $483 million.

Gross profit slipped 21.9% to $119.1 million, while gross margin shriveled 370 basis points (bps) to 27.2%. Selling, general and administrative expenses as a percentage of sales contracted 120 bps to 23%.

The fall in gross margin negated the improved SG&A, causing the operating margin to shrink 250 bps to 4.2%.

Segment Details

Revenues at the Garden segment fell 18% year over year to $210.9 million impacted by the shift of April sales to the second quarter.

The segment’s branded product revenues fell 20% to $172.7 million, while sale of other manufacturers’ products was down 6% to $38.2 million in the quarter. The segment’s adjusted operating margin improved 60 bps to 8.7% reflecting lower marketing costs.

The Pet segment’s net sales decreased 5% year over year to $227.1 million due to weakness in the sector and lower retail distribution of few products.

The segment’s branded product sales were down 9% to $177.1 million while sales of other manufacturers’ products surged 15% to $50 million in the quarter. The segment’s operating income slumped nearly 14.2% year over year to $28.4 million and its operating margin contracted 140 bps to 12.5%. Higher marketing cost was the primary reason.

Other Financial Details

The company, which competes with NUTRISYSTEM, INC. (NTRI), Prestige Brands Holdings, Inc. (PBH) and Summer Infant, Inc. (SUMR), ended the year with cash and cash equivalents of $31.8 million, total debt of $450.3 million and shareholders’ equity of $491.1 million, excluding non-controlling interest of $1.9 million.

As of Jun 28, 2014, this Zacks Rank #3 (Hold) stock had no outstanding borrowings under the senior secured asset-based revolving credit facility of $390 million.

Closing Comment

Central Garden has in place several initiatives like costs curtailment, management restructuring, customer care and hike in fill rates. However, the company remains susceptible to various operating challenges. Also, management believes that it still has a year or more to go, before it is able to deliver a consistent performance by leveraging its latest product pipeline.

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