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Why Is Central Garden (CENT) Down 7.3% Since Last Earnings Report?

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It has been about a month since the last earnings report for Central Garden (CENT). Shares have lost about 7.3% 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 Q2 Earnings & Sales Beat, View Up

Central Garden & Pet Company posted impressive second-quarter fiscal 2021 results, wherein both top and bottom lines improved year over year. Notably, the quarter marked the sixth straight earnings beat. Results gained from continued strength in Pet and Garden. Management raised its fiscal 2021 bottom-line view.

Let’s Delve Deeper

Central Garden & Pet delivered adjusted earnings of $1.32 per share that beat the Zacks Consensus Estimate of $1.08. Moreover, the figure surged 69% year over year from 78 cents reported in the year-ago period. The uptick can be attributable to organic growth and gains of 7 cents from acquisitions.

Central Garden & Pet Company generated net sales of $935.3 million, surpassing the Zacks Consensus Estimate of $875 million. Further, the top line improved 33% from the year-ago period, benefiting from organic growth of 23%, along with contributions from recent buyouts to the tune of $76 million.

The company registered sturdy performance across both Pet and Garden in the e-commerce channel, including pure play, omni-channel and direct-to-consumer. At Pet segment e-commerce business grew more than 50% versus prior year, while in Garden segment, e-commerce business surged triple digits. Moreover, e-commerce accounted for 21% of the company’s branded pet consumer business and 6% of total garden sales.

Gross profit grew 32% to $272.4 million. Meanwhile, gross margin contracted 40 basis points to 29.1% due to higher commodity, labor and freight costs as well as adverse impacts from initial purchase accounting adjustments related to buyouts.

Operating income jumped 58% year over year to $105 million in the quarter under review. Moreover, operating margin increased 180 basis points to 11.2% due to gross margin gains and operating efficiencies.

SG&A expenses were $167.8 million, up 19% year over year driven by higher sales volumes, partly offset by increased SG&A expenses. As a percentage of net sales, SG&A expenses contracted 220 basis points to 17.9%.

Segment in Detail

In the Garden segment, net sales advanced 49% year over year to $443 million, driven by organic growth of 23%, with notable strength in distribution, fertilizers and controls, wild bird feed, and grass seed, coupled with $76 million contribution from acquisitions. The segment’s operating income grew 53% to $66 million and operating margin expanded 40 basis points to 14.9% in the reported quarter. Garden segment EBITDA increased 63% to $75 million driven by volume strength and operating leverage as well as contributions from recent acquisitions.

Net sales in the Pet segment increased 21% year over year to $492 million, driven by significant contributions from small animal supplies, distribution, dog and cat as well as outdoor pillows and cushions. The segment’s operating income grew 43% year over year to $62 million. Notably, operating margin expanded 190 basis points to 12.6%. Pet segment EBITDA increased 34.7% to $71 million driven by solid sales volume and favorable product mix as well as overhead efficiencies.

Financial Details

Central Garden & Pet ended the quarter with cash and cash equivalents of $39.9 million, total debt of $979 million and shareholders’ equity of $1,160.6 million, excluding non-controlling interest. At the end of the quarter, the company had $190 million of borrowings under $400 million credit line. Cash used by operating activities during six-month period ended Mar 27, 2021 was $120.2 million. Management incurred capital expenditures of $19 million during the quarter under review. The company is investing in capacity expansion and automation to meet the continuing strong demand. During the quarter, the company did not buy any shares, and still has $100 million remaining under its existing share repurchase program. Also, management issued $400 million in senior notes following the end of the fiscal second quarter.

Outlook

Driven by impressive first-half performance, management now envisions fiscal 2021 earnings to be at or above $2.25 versus prior projection of $1.90 or higher. The revised outlook includes the benefit of robust performance in the first half of fiscal 2021 and anticipated investments in capacity expansion, brand building and e-commerce to drive sustainable growth. The guidance also takes into account increasing costs for key commodities, labor and freight, resuming more normal levels of promotional activity, as well as second-half headwinds associated with lapping almost ideal weather for the gardening season and the COVID-19 tailwinds in fiscal 2020. The updated view does not take into consideration the impact of recent buyouts, as purchase accounting has not yet been finalized. However, early estimates suggests that the net impact of these acquisitions will be accretive to fiscal 2021 earnings in the band 11-16 cents a share.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

VGM Scores

At this time, Central Garden has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, 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

Estimates have been broadly trending upward 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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