Central Garden & Pet Company (NASDAQ:CENT) Q1 2024 Earnings Call Transcript
Central Garden & Pet Company (NASDAQ:CENT) Q1 2024 Earnings Call Transcript February 7, 2024
Central Garden & Pet Company beats earnings expectations. Reported EPS is $0.01, expectations were $-0.17. CENT isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Central Garden & Pet First Quarter Fiscal 2024 Earnings Call. My name is Paul, and I will be your conference operator for today. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Friederike Edelmann, Vice President, Investor Relations and Corporate Sustainability. Please go ahead.
Friederike Edelmann: Good afternoon, everyone. Thank you for joining Central's first quarter fiscal 2024 earnings call. With me on the call today are Beth Springer, Interim Chief Executive Officer; Niko Lahanas, Chief Financial Officer; John Hanson, President Pet Consumer Products; and J.D. Walker, President Garden Consumer Products. In a moment, Beth will provide our key messages, and Niko will discuss this in more detail. After the prepared remarks, J.D. and John will join us for the Q&A. Before they begin, I would like to remind you that all forward-looking statements made during this call are subject to risks and uncertainties that could cause our actual results to differ materially from what we share today. We describe the range of risk factors in our Annual Report filed with the SEC.
Central undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events, or otherwise. Our press release and related materials are available at ir.central.com, and contain the GAAP reconciliation for the non-GAAP measures discussed on this call. Lastly, all growth comparisons made during this call are against the same period in the prior year unless otherwise stated. If you have further questions after the call or anytime during the quarter, please don't hesitate to reach out to me. And with that, I will now turn it over to Beth Springer. Beth?
Beth Springer: Thank you, Friederike, and good afternoon, everyone. Let me begin with the three themes I hope you'll take away from our call today. First, the fiscal year is off to a solid start. We delivered earnings per share of $0.01 and modestly grew net sales. Most importantly, we saw margins improving, thanks to our cost management and moderating inflation. Our market shares and total distribution points were up across most of our Pet and Garden businesses in track channels. We're particularly pleased to see our continued strong growth in e-commerce. Second, we're making progress on our multi-year journey to simplify our business and improve efficiency across our organization by rationalizing our footprint, optimizing our portfolio, and improving our cost structure.
We are intensely focused on this cost and simplicity program and continue to reap benefits from initiatives we implemented previously as well as kickoff new projects. Some examples of recent initiatives are the closure of a live plants facility and the implementation of an enhanced treasury management system. And third, our outlook for the fiscal year is unchanged. The vast majority of our Garden season is still in front of us and we continue to expect a challenging external environment for the balance of the year. Rest assured that all 6,700 members of us on Team Central are working hard to meet or exceed that guidance. Looking beyond the first quarter, we remain confident in our Central to Home strategy, the long-term vibrancy of the Pet and Garden industries, and the competitive strengths of our business, and we continue to make thoughtful investments for the future.
With that, let me turn it over to Niko, who will share with you more details. Niko?
Niko Lahanas : Thank you, Beth. Good afternoon, everyone. Expanding on Beth's key themes. I'll cover details of our first quarter results, the strides we are making on our cost and simplicity program, and our outlook for the year. Let's start with our Q1 results. Net sales increased 1% to 635 million. Organic net sales also grew 1%. Consolidated gross profit, increased 4% to 179 million, gross margin improved 80 basis points to 28.2% driven by our laser focus on cost management and moderating inflation. We've successfully controlled what we can control. SG&A expense of $170 million was in line with prior year and SG&A as a percentage of net sales decreased 40 basis points to 26.9%. Operating income increased by $8 million to $8.4 million, and operating margin increased 120 basis points to 1.3%.
The increase was driven by improved gross margin and our focused on cost and cash resulting in lower SG&A as a percentage of net sales. Net interest expense was $10 million compared to $14 million in the prior year, driven by higher cash balances and higher interest rates. Net income was $430,000 compared to a net loss of $8 million a year ago. Our earnings per share were $0.01 compared to a loss per share of $0.16. Adjusted EBITDA was $37 million compared to $29 million. From a tax standpoint, we realized an outsized tax benefit for the quarter larger than our small loss due to stock compensation. For the year, we expect an effective tax rate in the range of 22% to 24%, similar to 2023. I'll now provide some color on our two segments. Starting with Pet.
Pet segment sales declined 2% to $409 million as growth in health and wellness and aquatics and reptile was more than offset by double-digit declines in durables across pet beds, small animal and our distribution business. In line with the softness and pet ownership after the COVID spike, we expect the headwinds for durables to continue. Organic net sales, which exclude the TDBBS acquisition, declined 5%. Underscoring the health of our business, we grew market share and total distribution points or TDPs in the majority of our categories, including dog toys, small animal, pet bird, aquatics, and health and wellness. Our e-commerce business continues to grow and now represents approximately 26% of our pet sales. Pet segment, operating income improved by 10% to $43 million, and operating margin improved 110 basis points to 10.6%, driven by recently implemented initiatives under our cost and simplicity program and lower commercial spend.
Pet segment adjusted EBITDA was $54 million compared to $50 million a year ago. Turning now to Garden. Garden segment sales grew 6% to $225 million, driven by early season shipments in controls and fertilizer, grass and packet seeds. Unfavorable warmer weather, negatively impacted sales in Wild Bird. Recall that we recently sold the Independent Garden Channel business distribution business, which represented approximately 5% of garden sales and was margin dilutive. Organic net sales increased 11%. Garden segment operating loss was $9 million compared to a loss of $11 million a year ago. Garden segment operating margin improved a negative 3.9%, driven by improved growth margin and favorable overhead absorption, partially offset by higher commercial spend.
Garden segment adjusted EBITDA was $2 million compared to break even a year ago. While Garden performance was strong in the first quarter, it is not indicative for the year as our first quarter typically represents only 15% of annual Garden sales. The prior year quarter ended on Christmas Eve. This year, we had a more favorable timing with the quarter ending a week later. In addition, select retailers have been loading their stores earlier in anticipation of the season. We gained market share in grass, fertilizer and insecticides, thanks to our investments in consumer insights and brand building. And although still a small part of our Garden business, our e-commerce sales grew double-digits versus prior year. Now, moving on to the balance sheet and cash flows, we are pleased with the strength of our balance sheet and the progress we made decreasing inventories by $76 million.
Despite the added inventory from the TDBBS acquisition. Cash and cash equivalents at the end of the first quarter were $341 million compared to $88 million a year ago, an increase of $254 million after paying for the TDBBS acquisition and our usual Q1 working cap build. Net cash used by operations was $70 million for the quarter compared to $63 million a year ago. CapEx was $10 million for the quarter, 43% below prior year. This quarter, we invested in maintenance and productivity initiatives in dog and cat, small animal, bird, grass, and life goods. Total debt of $1.2 billion was in line with prior year. Our leverage ratio was 3x at the end of the quarter compared to 3.1x a year ago. Well, within our target range, we had no borrowings under our credit facility at the end of the first quarter.
Depreciation and amortization for the quarter was $23 million compared to $22 million in the prior year quarter. During the quarter, we repurchased approximately 40,000 shares or $1.4 million of our stock. Now turning to some of the strides we're making on our cost and simplicity program. As a reminder, we've identified a series of projects across procurement, manufacturing, logistics, portfolio optimization, and administrative costs. Let me share a few highlights from the first quarter. We see procurement as one of the largest opportunities. We have projects underway to further centralize the purchasing of items such as pallets, corrugates, and containers. We are improving our capabilities with training in best practices and are investing in software solutions to lay the groundwork for future savings in procurement.
Following the closure of our outdoor cushion manufacturing and warehousing facility in Amarillo, Texas, we just closed a live goods greenhouse in Burtonsville, Maryland. In addition, we continue to reduce our SKU count across our Pet and Garden businesses, and are deploying technology solutions to reduce waste and increase manufacturing yields. As a result of the recent sale of our independent Garden Center distribution business, we closed our Portland, Oregon Garden distribution facility. Additionally, we are in the initial stages of integrating our recent acquisition of the dog treat and chew company, TDBBS. We are pleased with their performance thus far. Lastly, we are implementing an enhanced treasury management system to streamline our treasury process, reduced costs and complexity of bank connectivity, minimize interest expense, and approve forecasting and cash returns.
We remain focused on this multi-year journey to reduce costs, simplify our business, and approve efficiency, and we'll continue to provide quarterly updates. Our pipeline of projects to leverage our scale and deploy our capabilities across the company is strong, and we will continue to prioritize business continuity and minimize disruption to our operations. As in the past, our goal is to supplement organic growth with acquisitions and we expect there will be plenty of opportunity ahead of us. As announced in December, our Board of Directors approved a stock dividend to increase the liquidity in our Class A common shares. We believe the enhanced liquidity will benefit our stockholders and provide central with more flexibility to pursue our growth objectives.
Tomorrow at the close of business, each shareholder will receive one additional Class A common share for every four shares of any class of shares held on the record date on January 8th. Trading will begin on a dividend adjusted basis the day after February 9th. And finally, turning to our fiscal ‘24 outlook, which is unchanged from the guidance we gave in November. We continue to expect non-GAAP EPS for the year of $2.50 or better translating to non-GAAP EPS of $2 or better after the stock dividend. For the remainder of the fiscal year, we assume a challenging environment with deflationary cost pressures in certain commodity businesses, softer consumption in a number of categories and lower foot traffic in key retailers. Our outlook includes modest carry over pricing to help mitigate inflationary headwinds.
While we've done an excellent job managing inventories, higher value inventory continue to put pressure on margins. The benefit of the lower cost is taking more time to realize as we continue to work through on hand high cost inventory. Additionally, our expectation for CapEx remains unchanged at about $70 million across both segments, driven mostly by maintenance and productivity initiatives. Our guidance reflects our belief in the competitive strength of Central, our central to home strategy, and the long-term trends supporting growth in the Pet and Garden industries. In the near-term, we will continue to focus on cost and cash, and we'll take a more deliberate approach to investments in our consumer growth agenda. Thanks to our strong financial position and the amount available on our credit facility, we are always on the lookout for great growth and margin accretive acquisition targets in both Pet and Garden.
This outlook excludes any impact from potential acquisitions or restructuring activities undertaken during the year, including any projects under the cost and simplicity program. The outlook also excludes the impact of our recent TDBBS acquisition, given we're still in the initial stages of the integration process. And with that, we'd like to open the line for questions.
See also Top 12 Oil and Gas Stocks To Invest In According To Hedge Funds and 15 Countries with the Most Reserve Military Manpower in the World.
To continue reading the Q&A session, please click here.
