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Will Central Garden & Pet's Efforts Drive it Higher in 2018?

Zacks Equity Research

Central Garden & Pet Company CENT is a sound investment opportunity backed by its robust growth strategies and an impressive brand portfolio. Organic growth, value accretive acquisitions and divestment of non-strategic assets have also been boding well for the stock.

Also, shares of the company have returned 21.8% in the past six months. The stock has outperformed both the industry’s decline of 5.7% and the broader Consumer Discretionary sector’s growth of 6.7%. Also, this Zacks Rank #3 (Hold) stock has a VGM Score of A and a long-term earnings growth rate of 10%.

What’s Pushing the Stock Higher?

Central Garden & Pet is revamping both its Pet and Garden segments. The company intends to have a balanced approach that encompasses revenue growth as well as cost reduction. It also plans to launch several products that appeal to customers and upgrade customer services. The company expects to enhance market share in the home centers, mass market, grocery, specialty pet store and other independent channels as well.

Impressively, the company’s Pet segment recorded ninth straight quarter of organic sales growth in fourth-quarter fiscal 2017, primarily owing to solid performance of the dog & cat businesses.

Armed with a diversified portfolio of brands, the company is the leading producer of garden and pet supplies products in the United States and has developed healthy commercial relationships with giant retailers. This, in turn, is expected to provide the company a significant opportunity to drive growth.

Additionally, Central Garden & Pet has an impressive gross margin trend backed by its efforts to improve manufacturing efficiency. The improvement was further aided by exit from the holiday decor business that was hampering the margin, due to lower raw material costs.

This leading producer and marketer of premium and value-oriented products have shown constant improvement in the past five quarters. In the first, second, third and fourth quarters of fiscal 2017, gross margin expanded 110, 90, 10 and 50 basis points to 28.8%, 32.2%, 31.9% and 29.6%, respectively.

What Bothers the Stock?

Unfortunately, the company could not maintain its robust earnings surprise streak in the fourth quarter of fiscal 2017. After 12 straight quarters of earnings beat, Central Garden & Pet’s bottom line not only missed the consensus mark but also declined sharply year over year owing to rise in cost of goods sold and occupancy and higher SG&A expenses. This along with high debt and seasonality of business remains a major concern.

Still, management envisions adjusted earnings per share for fiscal 2018 to increase by 8% or higher, which indicates that the company may be back on growth track in the quarters ahead.
Looking for Solid Picks, Check These

Some better-ranked stocks in the Consumer Discretionary space include SodaStream International Ltd. SODA, Nutrisystem, Inc. NTRI and PVH Corp. PVH.

SodaStream has pulled off an average positive earnings surprise of 61.4% in the trailing four quarters. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Nutrisystem, with a long-term earnings growth rate of 18.3% has delivered an average positive earnings surprise of 29.7% in the last four quarters. The stock carries a Zacks Rank #2 (Buy).

PVH Corp. has a long-term earnings growth rate of 13% and carries a Zacks Rank #2. Also, the company’s earnings have outpaced the Zacks Consensus Estimate in each of the trailing four quarters by an average of 2.6%.

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Central Garden & Pet Company (CENT) : Free Stock Analysis Report
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