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Why Is Central Garden (CENT) Down 12.1% Since Last Earnings Report?

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A month has gone by since the last earnings report for Central Garden (CENT). Shares have lost about 12.1% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Central Garden Q4 Earnings Beat, Sales Improve Y/Y

Central Garden & Pet Company continued with its stellar performance in fourth-quarter fiscal 2020, wherein both the top and the bottom lines not only surpassed the Zacks Consensus Estimate but also improved year over year. The quarter marked fourth straight sales and earnings beat. Results primarily benefited from strong organic growth across segments.

The California-based company delivered quarterly earnings of 25 cents a share, which compared favorably with the Zacks Consensus Estimate of a loss of 5 cents. Moreover, the figure rose substantially from 4 cents reported in the year-ago period.

Central Garden & Pet Company generated net sales of $676 million, beating the Zacks Consensus Estimate of $596.5 million. Further, the top line improved 25% from the year-ago period. Management stated that the company has now lapped its most recent buyouts — Arden and C&S Products, and as a result, net sales benefited from organic growth in both segments.

Gross profit surged 32% to $196.1 million, while gross margin expanded 150 basis points to 29% owing to favorable mix of product sales and pricing. Operating income jumped to $25.2 million from $10.9 million in the year-ago quarter. Markedly, operating margin increased 170 basis points to 3.7% due to gross margin gains and improved operating leverage.

SG&A expenses were $170.9 million, up 24.2% year over year. As a percentage of net sales, SG&A expenses contracted 20 basis points to 25.3%.

Segment in Detail

Net sales at the Pet segment increased 22% year over year to $434.1 million, driven by strength in dog treats and chews, distribution, and small animal consumables and supplies.

The segment’s operating income grew 28% year over year to $39.6 million. Notably, operating margin expanded 40 basis points to 9.1% courtesy of volume strength, favorable product mix and overhead efficiencies, partly offset by cost increases in key commodities and freight.

At the Garden segment, net sales advanced 30.9% year over year to $241.9 million as favorable weather and robust consumer demand drove increases in distribution, controls and fertilizers, wild bird feed and live plants.

The segment’s operating income of $10.2 million increased sharply from $0.3 million in the year-ago period. Operating margin expanded 400 basis points to 4.2%, driven by improved operating leverage, favorable product mix and pricing. This was partly offset by cost inflation.

Financial Details

Central Garden & Pet ended the quarter with cash and cash equivalents of $652.7 million, total debt of $694.1 million and shareholders’ equity of $1,076.8 million, excluding non-controlling interest. Cash provided by operations during the quarter was $175.4 million compared with $112.2 million a year ago. Management incurred capital expenditures of $16 million during the quarter under review. For fiscal 2021, management envisions capital expenditures to be $70-$80 million.

Outlook

Central Garden & Pet anticipates fiscal 2021 adjusted earnings to be $2.05 per share or better. We note that the company reported adjusted earnings $2.26 per share for fiscal 2020. This 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 prices. Additionally, management expects an incremental interest expense of 14-16 cents a share. Further, the company anticipates second-half headwinds associated with lapping almost ideal weather for the gardening season and the COVID-19 tailwinds in 2020. The company forecast continued supply chain pressure owing to higher demand levels and inflationary pressure in key commodities in fiscal 2021.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 100% due to these changes.

VGM Scores

At this time, Central Garden has a great Growth Score of A, a grade with the same score on the momentum front. Following the exact same course, 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.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. 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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