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A month has gone by since the last earnings report for Central Garden (CENT). Shares have added about 2.5% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Central Garden due for a pullback? 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 Q1 Earnings & Sales Beat, Rise Y/Y
Central Garden & Pet Company continued with its stellar performance in first-quarter fiscal 2021, wherein both the top and the bottom line not only surpassed the Zacks Consensus Estimate but also improved year over year. Notably, the quarter marked the fifth straight sales and earnings beat. The performance primarily benefited from strong organic growth across all segments. Solid execution and strong consumer demand across the Pet and Garden segments drove the quarterly performance. Also, the company’s ‘Central to Home’ strategy bodes well. Management is encouraged about the recent buyouts, which are expected to build scale in the Garden segment, expand into attractive adjacencies and enhance omnichannel and digital capabilities.
The company delivered adjusted earnings of 29 cents a share, which compared favorably with the Zacks Consensus Estimate of break-even earnings. Moreover, the figure compared favorably with a loss of 8 cents reported in the year-ago period. The company incurred non-GAAP expenses related to its recent debt refinancing as well as the loss on the sale of the Breeder's Choice business, which hurt earnings per share by 15 cents and 4 cents, respectively.
Central Garden & Pet Company generated net sales of $592.2 million, beating the Zacks Consensus Estimate of $555.6 million. Further, the top line improved 22.7% from the year-ago period, benefiting from organic growth in both segments. Notably, point-of-sales trends were outstanding in e-commerce and robust in the brick-and-mortar channel.
Gross profit surged 26% to $165.4 million. Also, gross margin expanded 70 basis points to 27.9% owing to favorable mix of product sales and volume efficiencies, somewhat offset by persistent supply-chain constraints and inflationary pressure. Operating income jumped to $27 million from $2.1 million in the year-ago quarter. Markedly, operating margin increased 420 basis points to 4.6% due to gross margin gains and operating efficiencies.
SG&A expenses were $138.4 million, up 7.1% year over year on account of higher payroll related and logistics costs resulting from increased volumes partly offset by lower travel and entertainment expense. As a percentage of net sales, SG&A expenses contracted 340 basis points to 23.4%.
Segment in Detail
Net sales at the Pet segment increased 19% year over year to $436.4 million, driven by significant contributions from dog and cat, distribution and small animal supplies. Meanwhile, e-commerce accounted for 20% of the company’s branded pet consumer business. The segment’s operating income grew 51.5% year over year to $43.5 million. Notably, operating margin expanded 220 basis points to 10%, courtesy of robust sales contribution and improved operating leverage.
At the Garden segment, net sales advanced 34.1% year over year to $155.8 million mainly owing to solid growth in distribution, wild bird feed, grass seed, controls and fertilizers, and live plants. Garden e-commerce business, while still on a small footing, surged triple digits due to shift in consumer buying pattern. The segment’s operating income of $4.7 million increased sharply from an operating loss of $6.9 million in the year-ago period. Operating margin expanded 890 basis points to 3%, driven by organic growth, higher gross margins and lower SG&A.
Central Garden & Pet ended the quarter with cash and cash equivalents of $608.3 million, total debt of $789 million and shareholders’ equity of $1,086.6 million, excluding non-controlling interest. The company had no borrowings under $400 million credit line. Cash used by operations during the quarter was $36.1 million compared with $18 million a year ago. Management incurred capital expenditures of $15 million during the quarter under review.
On Dec 18, 2020, Central Garden & Pet concluded the acquisition of DoMyOwn, a key fast-growing online retailer of professional-grade control products. This buyout will fortify the company's position in the control product category. On Jan 8, it closed the buyout of a major provider of live plants, Hopewell Nursery. Further, the acquisition of Green Garden Products is likely to conclude in the second quarter of fiscal 2021.
Central Garden & Pet continues to anticipate fiscal 2021 earnings of $1.90 per share or better. This outlook excludes the impact of the recent or additional buyouts that may close in fiscal 2021. We note that the company reported earnings $2.20 per share in fiscal 2020. The year-over-year decline indicates higher investments related to capacity expansion, brand building and e-commerce, and increases in labor and freight cost as well as key commodity costs. Management also estimates second-half challenges associated with lapping almost ideal weather for the gardening season and the COVID-19 tailwinds in fiscal 2020. Central Garden & Pet anticipates fiscal 2021 adjusted earnings to be $2.09 per share or better. We note that the company reported adjusted earnings $2.26 per share for fiscal 2020.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month.
Currently, Central Garden has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. 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 looks promising. 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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