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It has been about a month since the last earnings report for Central Garden (CENT). Shares have lost about 5.2% 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 Beats on Q3 Earnings, Raises View
Central Garden & Pet Company posted impressive third-quarter fiscal 2021 results, wherein both top and bottom lines not only surpassed the Zacks Consensus Estimate but also improved year over year. Sturdy demand for Pet and Garden brands contributed to the results. The company is also on track with its ‘Central to Home’ strategy. Stellar year-to-date performance prompted management to lift fiscal 2021 view.
Let’s Delve Deeper
The California-based company delivered adjusted earnings of $1.37 per share that handily beat the Zacks Consensus Estimate of 99 cents. The figure rose from $1.32 per share reported in the year-ago period.
Central Garden & Pet Company generated net sales of $1,037.1 million that surpassed the Zacks Consensus Estimate of $954.3 million. The top line improved 24% from the year-ago period, benefiting from organic growth in both segments along with contributions from recent buyouts to the tune of $137 million. Organic sales rose 9%. E-commerce accounted for 20% of the company’s pet-branded sales.
Gross profit increased 22% to $320.3 million. Meanwhile, gross margin contracted 50 basis points to 30.9% due to higher commodity, labor and freight costs, and impact of initial purchase accounting related to recent buyouts.
Operating income jumped 8% year over year to $113.2 million in the quarter under review. However, operating margin shrunk 170 basis points to 10.9% due to gross margin contraction, rising logistics expense and heightened investment spending.
SG&A expenses were $207.1 million, up 32% year over year on account of inorganic increases in the Garden segment related to recent buyouts, higher commercial investment and rise in logistics costs. As a percentage of net sales, SG&A expenses increased 110 basis points to 20%.
Segment in Detail
In the Garden segment, net sales advanced 42% to $529 million, courtesy of $137 million contribution from recent buyouts and organic growth of 5%, with notable strength in live plants, distribution and wild bird feed. The segment’s operating income grew 3% to $67 million, however, operating margin contracted 480 basis points to 12.7% primarily due to inventory-related purchase accounting, cost inflation and higher investment spend.
Net sales in the Pet segment grew 10% to $508 million, driven by significant contributions from dog and cat, live animals, distribution and aquatics. The segment’s operating income jumped 12% to $71 million. Operating margin increased 20 basis points to 14%.
Central Garden & Pet ended the quarter with cash and cash equivalents of $517.1 million, total debt of $1,184 million and shareholders’ equity of $1,240.4 million, excluding non-controlling interest of $1.6 million. The company had no borrowings under $400 million credit line at the end of the quarter. Cash provided by operations during the quarter was $299 million compared with $182 million in the year-ago period. During the quarter, the company did not buy any shares, and still has $100 million remaining under its existing share repurchase program.
Management now envisions fiscal 2021 GAAP earnings to be at or above $2.45 per share (or adjusted earnings of $2.62 per share or better) compared with the prior expectation of $2.25 or better (or adjusted earnings of $2.42 or above). The updated view reflects the benefit of robust performance in the first three quarters of fiscal 2021, the likely investments in capacity expansion, brand building and e-commerce. The guidance also takes into account cost inflation in key commodities, labor and freight, normal levels of promotional activity, as well as headwinds associated with lapping almost ideal weather for the gardening season and a return to more normalized consumer demand patterns after an unprecedented demand spanning two fiscal years.
The company stated that the net impact of the buyouts namely Hopewell Nursery, Green Garden Products and DoMyOwn.com (excluding the latest acquisition of D&D Commodities Ltd.) will be accretive to fiscal 2021 earnings in the band of 11 cents to 16 cents a share.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -453.85% due to these changes.
At this time, Central Garden has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Central Garden has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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