A month has gone by since the last earnings report for Central Garden (CENT). Shares have lost about 4.8% 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 Meet, Sales Fall Y/Y
Central Garden & Pet Company came up with second-quarter fiscal 2023 results, wherein the top line beat the Zacks Consensus Estimate, while the bottom line met the same. We note that both net sales and earnings declined year over year.
A challenging operating environment and softness in the Garden portfolio have made things tough for Central Garden & Pet Company. In the release, management cited unfavorable weather conditions, soft foot traffic and unfavorable retailer inventory dynamics behind sluggishness in the Garden segment. Nonetheless, the Pet segment met expectations and gained market share.
Undoubtedly, Central Garden & Pet Company has been taking steps to strengthen its position in the pet supplies and lawn and garden supplies space. It is focusing on brand building, containing costs, lowering complexity and improving margins. The company has been expanding its manufacturing capacity and simplifying the portfolio.
Let’s Delve Deeper
Central Garden & Pet reported quarterly earnings of 90 cents a share, which came in line with the Zacks Consensus Estimate and our estimate. However, the bottom line declined sharply from earnings of $1.27 per share reported in the year-ago period.
The company generated net sales of $909 million, which beat the Zacks Consensus Estimate of $898 million and our estimate of $892.1 million. However, the metric declined 5% from the year-ago period.
The gross profit decreased 9.5% to $259.6 million. Also, the gross margin contracted 150 basis points to 28.6%. The decline was driven by the Garden segment due to unfavorable overhead absorption in key garden businesses and input cost pressures.
SG&A expenses of $181.6 million rose 0.9% year over year. As a percentage of net sales, SG&A expenses increased 110 basis points to 20%.
The operating income totaled $78 million, down from the $106.8 million reported in the year-ago period. The operating margin shriveled 260 basis points to 8.6%. Adjusted EBITDA was $106.9 million compared with $131.4 million in the prior year.
Net sales in the Pet segment were $475 million, down 5% from the year-ago period. The metric declined due to the muted demand for durable pet products, the decision to discontinue certain low-profit private-label pet bed product lines and lower sales in Outdoor Cushions. These were partly offset by strength in Dog & Cat Treats & Toys.
The segment’s operating income came in at $55 million, down from the $61 million reported in the prior-year quarter. Meanwhile, the operating margin shrunk 60 basis points to 11.6%. The decline was mainly driven by lower sales.
In the Garden segment, net sales decreased 5% year over year to $434 million, driven by lower sales in Grass Seed, Controls & Fertilizer and Live Goods, partly offset by strength in Wild Bird and Packet Seed. Unfavorable spring weather and changes in retailer buying patterns hurt net sales.
The segment’s operating income came in at $50 million, down from the $71 million reported in the prior-year quarter, while the operating margin contracted 400 basis points to 11.4%. Soft sales, input cost inflation and initial start-up costs associated with the recently acquired live goods facility hurt margins.
Central Garden & Pet ended the quarter with cash and cash equivalents of $60.6 million, long-term debt of $1,212.1 million and shareholders’ equity of $1,371.1 million, excluding the non-controlling interest of $1.2 million. The company repurchased about 75,000 shares worth $2.7 million in the quarter under review.
Central Garden & Pet estimates fiscal 2023 EPS to be $2.35 or better. The projection indicates macroeconomic uncertainty, inflationary pressure, changing customer behavior and unfavorable retailer inventory dynamics. It also suggests pricing actions and productivity initiatives across the board. Meanwhile, management anticipates capital spending to be substantially lower than fiscal 2022.
Markedly, the company foresees growth in the operating income and earnings per share during the second half of the fiscal year. It expects the garden season to normalize and retailer inventory dynamics to stabilize.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
Currently, Central Garden has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. 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. It's no surprise Central Garden has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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