Central Garden (CENT) Q4 Earnings Lag Estimates, Sales Beat

Central Garden & Pet Company (NASDAQ:CENT) reported fourth-quarter fiscal 2019 results, wherein the bottom line missed the Zacks Consensus Estimate, while sales surpassed the same. Although net sales improved on a year-over-year basis, earnings per share declined from the year-ago period.

Per management, acquisitions of the highly seasonal Bell Nursery business along with sluggishness in animal health businesses affected results, owing to bad weather, inventory write-offs and increase in shares outstanding.

Central Garden & Pet Company Price, Consensus and EPS Surprise

Delving Deeper

The Zacks Rank #4 (Sell) company posted adjusted earnings of 4 cents a share, which lagged the Zacks Consensus Estimate of 17 cents. Moreover, the bottom line declined year over year. Earnings per share decreased 60% from 10 cents reported in the year-ago period. Notably, higher cost of goods sold, and occupancy (up 10.4%) and SG&A expenses (up 6.9%) coupled with increase in shares outstanding might have weighed on the bottom line.

The California-based company, which recently acquired C&S, reported net sales of $540.7 million, beating the Zacks Consensus Estimate of $518 million. Further, the metric rose 7.7% from the year-ago period. Meanwhile, organic sales grew 4.6% in the quarter under review on solid performances of Garden and Pet segments.

Gross profit increased nearly 1% to $148.5 million, whereas gross margin contracted 180 basis points to 27.5%. Gross margin contraction can be attributable to inventory write-off in the Pet segment as well as unfavorable mix in the Garden segment.

Operating income was $10.9 million, down 40.3% from the prior-year quarter, while operating margin contracted 160 basis points to 2%,

Segment in Detail

Net sales at the Pet segment advanced 4.9% year over year to $355.9 million, driven by the acquisition of C&S and organic growth. Organic sales increased 2.2%, owing to solid gain in dog & cat, and wild bird businesses along with higher sales of other manufacturers’ products. However, aquatics and live fish businesses witnessed soft sales. Sales across the segment’s branded products grew 3.9% to $272.3 million, while the metric increased 8.3% to $83.6 million across manufacturers’ products.

The segment’s operating income decreased 3.8% year over year to $30.9 million and operating margin contracted 80 basis points to 8.7%. The metrics were hurt by dismal performances in animal health and pet bedding businesses.

At the Garden segment, net sales advanced 13.4% to $184.8 million, backed by the buyout of Arden Companies and strong organic growth. Organic sales grew 9.7% on solid sales of other manufacturers' products along with gains from wild bird, grass seed and live plants businesses. The Garden segment’s branded product sales were $142.7 million, up 7.1%, while sales of other manufacturers’ products grew 42.2% to $42.1 million in the said quarter.

The segment reported operating income of $0.3 million, down more than five-fold from $1.6 million in the year-ago quarter. Also, operating margin contracted 80 basis points to 0.2% on acquisitions of Arden Companies and unfavorable product mix.

Financial Details

Central Garden & Pet ended the quarter with cash and cash equivalents of $497.7 million, and total long-term debt of $693.2 million compared with $482.1 million and $692.2 million, respectively, in the prior-year period. Shareholders’ equity at the end of the quarter was $996 million, excluding non-controlling interest of $170,000.

Cash flow from operating activities was $112.2 million in the reported quarter. Moreover, the company bought back 1.8 million shares during the fourth quarter. As of Sep 28, 2019, it had $100 million remaining under its share repurchase program. Additionally, it has 1.2 million shares remaining under the equity dilution authorization.

Net interest expenses decreased to $8.1 million in the reported quarter from $8.9 million in the prior-year period. Management incurred capital expenditure of $11 million in the quarter under review. For fiscal 2020, capital expenditure is expected to be higher than $32 million recorded in fiscal 2019.

Guidance

Management anticipates fiscal 2020 earnings to be in line or slightly above $1.61 reported in fiscal 2019. Increased investments in demand creation capabilities to drive long-term sustainable growth and challenges in animal health businesses are likely to weigh on the company’s fiscal 2020 bottom line.

For the fiscal first quarter, management expects to incur loss of 10-15 cents per share, owing to unfavorable timing of orders, continued sluggishness in the animal health businesses and increase in corporate expenses.

Price Performance

Shares of the company have gained 20.6% in the past three months, outperforming the industry’s growth of 9.7%.

Key Picks

BRF S.A.’s (NYSE:BRFS) bottom line outperformed the Zacks Consensus Estimate by 167.2%, on average, over the trailing four quarters. It currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

McCormick & Company (NYSE:MKC) currently has a long-term earnings growth rate of 8% and a Zacks Rank #2 (Buy).

Associated British Foods (OTC:ASBFY) presently has a long-term earnings growth rate of 8.4% and a Zacks Rank #2.

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