Why Is Central Garden (CENT) Down 1% Since Last Earnings Report?

A month has gone by since the last earnings report for Central Garden (CENT). Shares have lost about 1% in that time frame, outperforming 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's Q2 Earnings Beat Estimates

Central Garden reported second-quarter fiscal 2019 results, wherein both top and bottom lines surpassed the Zacks Consensus Estimate. Although net sales improved on a year-over-year basis, earnings per share declined from the year-ago period. Per management, the company’s recent acquisitions of Arden Companies, Bell Nursery and General Pet aided sales growth but adversely impacted margins.

Let’s Delve Deep

This producer and distributor of products for the lawn and garden, and pet supplies posted adjusted earnings of 72 cents a share that surpassed the Zacks Consensus Estimate of 69 cents. However, the bottom line continues to decline year over year.

Earnings per share decreased 16.3% from 86 cents reported in the year-ago period. We note that higher cost of goods sold and occupancy (up 11.7%), and increased SG&A expenses (up 11.8%) might have weighed on the bottom line.

This California-based company, which recently acquired the remaining stake of 55% in Arden Companies, reported net sales of $673.7 million that beat the Zacks Consensus Estimate of $655 million. Further, the metric rose 9.9% from the year-ago period. The uptick can primarily be attributed to recent buyouts of Arden Companies, Bell Nursery and General Pet. Meanwhile, organic sales grew 2.1% during the quarter under review, backed by solid performance in the Garden segment.

Gross profit increased nearly 6% to $206.1 million, whereas gross margin contracted 110 basis points to 30.6%. Adjusted operating income came in at $65.8 million, down 6.5% from the prior-year quarter, while operating margin contracted 160 basis points to 9.1%.

Segment Details

Net sales at the Pet segment advanced 5.1% year over year to $338.2 million, driven by the acquisition of General Pet. Organic sales increased 0.1%, owing to gains in the dog and cat, aquatics, and live fish businesses. This was partly offset by decline in animal health sales, especially the professional business, due to unfavorable weather conditions and headwinds related to inventory. Sales across the segment’s branded products inched up 1% to $260 million, while across manufacturers’ products the metric increased 21.6% to $78.2 million.

The segment’s operating income decreased 17.7% year over year to $27 million, while operating margin contracted 220 basis points to 8%. Excluding the impairment charge for the live fish business, operating income declined 9.9% to $29.5 million.

At the Garden segment, net sales advanced 15.1% to $335.5 million, backed by inclusion of Bell Nursery and Arden Companies. Organic sales grew 4.4%. The Garden segment’s branded product sales came in at $283.2 million, up 17.9%, while sales of other manufacturers’ products grew 2.1% to $52.3 million.

The segment reported operating income of $53.4 million, up 5.1% from $50.7 million in the year-ago quarter. However, operating margin contracted 150 basis points to 15.9% on account of acquisitions of Bell Nursery and Arden Companies.

Financial Details

Central Garden & Pet ended the quarter with cash and cash equivalents of $329.7 million and total long-term debt of $697.8 million, up from $132.3 million and $691.1 million, respectively, in the prior-year period. Shareholders’ equity at the end of the period was $998.7 million, excluding non-controlling interest of $553,000.

Net interest expenses decreased to $8.4 million during the reported quarter from $9.9 million in the prior-year period. Management incurred capital expenditures of $6 million during the quarter under review as compared to $9 million in the prior-year quarter.

Guidance

For fiscal 2019, the company continues to expect earnings per share of $1.80 or higher. Also, management expects margin improvement in the second half of fiscal 2019. The company anticipates to witness organic growth in its Pet segment during the fourth quarter 2019 which might result in fourth successive year of robust organic sales growth in the range of 2-3%.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months.

VGM Scores

At this time, Central Garden has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Central Garden has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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