A month has gone by since the last earnings report for Central Garden (CENT). Shares have lost about 9.2% 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 its most recent earnings report in order to get a better handle on the important catalysts.
Central Garden & Pet Beat on Earnings & Sales in Q3
Central Garden & Pet Company posted better-than-expected third-quarter fiscal 2022 results, wherein the bottom line grew from the year-ago period, while the top line declined.
The company is on track with its ‘Central to Home’ strategy and investments in the pet and garden industries to drive long-term growth. However, softness in the garden segment, stemming from unfavorable weather, changing consumer behavior, a decline in foot traffic and changing inventory expectations, acted as a deterrent.
Let’s Delve Deeper
Central Garden & Pet reported quarterly earnings of $1.39 per share, surpassing the Zacks Consensus Estimate of $1.26 and our estimate of $1.27. Also, the figure reflected an increase of 1.5% from earnings of $1.37 reported in the year-ago period.
The company generated net sales of $1,015.4 million, surpassing the Zacks Consensus Estimate of $993 million and our estimate of $980 million. The metric fell 2.1% from the year-ago period due to sluggishness in the garden segment. Organic net sales declined 5% from the prior-year quarter.
Gross profit decreased 4% to $307.6 million. Also, the gross margin contracted 60 basis points (bps) to 30.3% due to cost inflation in commodities, freight and labor, as well as unfavorable product mix, which more than offset productivity improvements and positive pricing. Management expects full year gross margin to expand compared with the prior year.
Operating income totaled $114.1 million, up 1% from the year-ago period. The operating margin expanded 30 bps to 11.2%, despite continued inflation and heightened investment spending.
SG&A expenses of $193.5 million declined 6.5% year over year due to lower delivery costs, primarily in the Garden segment and lower variable compensation. As a percentage of net sales, SG&A expenses contracted 90 bps to 19.1%.
Segment in Detail
In the Garden segment, net sales decreased 3.5% year over year to $510.6 million due to unfavorable weather. However, the metric beat the Zacks consensus mark of $464.2 million and our estimate of $452.4 million. On an organic basis, net sales declined 8.3%. Unfavorable weather conditions coupled with broad inflation both at the macro and garden levels compelled consumers to shop less frequently.
We note that e-commerce has advanced 15%, accounting for mid-single-digit of total segment sales. The segment’s operating income rose 13% to $76 million. We note that the operating margin expanded 210 bps to 14.8%, owing to contributions from the recent buyouts and improved pricing, partly offset by inflationary pressures and higher investment spending.
Net sales in the Pet segment were $504.8 million, almost in line with the year-ago period’s reported figure of $507.8 million. However, the metric lagged the consensus mark of $530.5 million and our estimate of $527.6 million. Contributions from dog & cat treats and toys and outdoor cushions were impacted by lower sales of pet beds.
Also, the segment witnessed a decline in pet ownership and penetration rates after the pet adoption boom during the pandemic. This is expected to have resulted from increasing inflation and lifestyle changes. E-commerce grew 14% and now represent approximately 22% of Pet branded sales, an increase of 200 bps versus prior year.
The segment’s operating income declined 12% to $63 million, while the operating margin contracted 160 bps to 12.4% due to inflationary headwinds in commodities, freight and labor, as well as purposeful investments in initiatives to drive long-term growth.
Central Garden & Pet ended the quarter with cash and cash equivalents of $195.8 million, long-term debt of $1,185.8 million, and shareholders’ equity of $1,351 million, excluding non-controlling interest of $1.4 million. The company repurchased about 542,000 shares worth $22.1 million in the quarter under review. Management incurred capital expenditures of $23 million in the quarter.
Management reiterated the fiscal 2022 GAAP EPS projection of $2.75 or better. The guidance includes anticipated pricing actions, and investments in capacity expansion, brand building, consumer insights, innovation and e-commerce. The guidance takes into account rising costs for key commodities, freight and labor, stemming from the current geopolitical environment as well as return to more normalized consumer demand patterns following the exceptional demand spanning two fiscal years.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
The consensus estimate has shifted -48% due to these changes.
Currently, Central Garden has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. 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 #3 (Hold). We expect an in-line return from the stock in the next few months.
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