It has been about a month since the last earnings report for Central Garden (CENT). Shares have lost about 10% 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 drivers.
Central Garden Q1 Loss Narrower-Than-Estimated
Central Garden reported first-quarter fiscal 2020 results, wherein adjusted loss per share was narrower than the Zacks Consensus Estimate, while sales also surpassed the consensus mark. Further, net sales improved on a year-over-year basis.
Per management, the company’s exit from the fashion-oriented pottery product line along with the exit of a major retailer from the live fish business and fire in one of its pet bedding facilities affected quarterly results.
Delving Deeper
The company reported adjusted loss of 8 cents per share against earnings of 3 cents in the year-ago period. However, the reported figure was narrower than the Zacks Consensus Estimate of a loss of 12 cents. Notably, higher cost of goods sold and occupancy (up nearly 6%), and SG&A expenses (up 7.7%) affected the bottom line.
The California-based company reported net sales of $482.8 million, beating the Zacks Consensus Estimate of $472 million. Further, the metric rose 4.5% from the year-ago period, driven by acquisitions of Arden and C&S. Meanwhile, organic sales remained flat in the quarter under review owing to unfavorable timing of customer purchases along with the aforementioned exit from pottery business and the impact of a fire at its pet bedding facility.
Gross profit increased 0.8% to $131.3 million, whereas gross margin contracted 100 basis points to 27.2%. Gross margin contraction can be attributable to a decline in volumes in certain categories as well as unfavorable mix in product sales.
Operating income was $2.1 million, down roughly five folds from the prior-year quarter, while operating margin contracted 180 basis points to 0.4%. This downside was led by a dismal gross margin coupled with a rise in corporate and third-party-related costs.
Segment in Detail
Net sales at the Pet segment advanced 4% year over year to $354 million, driven by the acquisition of C&S. Organic sales increased 1.3%, driven by strength in dog treats and chews, aquatics and wild bird feed categories. This was partly offset by sluggish sales in lower bedding due to fire at one of the company's facilities, as well as weak live fish sales.
The segment’s operating income grew 1.6% year over year to $30.2 million, backed by the C&S acquisition. Meanwhile, operating margin contracted 20 basis points to 8.5% as headwinds related to supply constraints in the aquatics business persisted during the quarter.
At the Garden segment, net sales advanced 5.9% year over year to $128.8 million, driven by the acquisition of Arden. Organic sales decreased 4.4% due to the company’s exit from the fashion decor pottery product line. Also, lower sales in grass seed and controls businesses acted as deterrents.
The segment reported an operating loss of $8.3 million, wider than a loss of $4.6 million in the year-ago quarter. Also, operating margin contracted 270 basis points to 6.5%. The metrics declined due to the company’s exit from the pottery category and the addition of Arden to its portfolio.
Financial Details
Central Garden & Pet ended the quarter with cash and cash equivalents of $445.8 million and total debt of $693.3 million compared with $478.7 million and $692.4 million, respectively, in the prior-year period. Shareholders’ equity at the end of the quarter was $973.1 million, excluding non-controlling interest of $48,000.
Cash used in operating activities was $18 million in the reported quarter. Moreover, the company bought back shares worth $22.1 million during the fiscal first quarter. As of Dec 28, 2019, it had $100 million remaining under its share repurchase program. Additionally, it has 600,000 shares remaining under the Board's equity dilution authorization.
Net interest expenses increased to $8.6 million in the reported quarter, up from $8.1 million in the prior-year period. Management incurred capital expenditure of $10 million in the quarter under review. For fiscal 2020, capital expenditure is expected to be $40-$45 million.
Guidance
Management still anticipates fiscal 2020 earnings to be in line or slightly above $1.61 reported in fiscal 2019. Increased investments to drive long-term sustainable growth are likely to weigh on the company’s fiscal 2020 bottom line.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
VGM Scores
At this time, 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward 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.
Central Garden & Pet Company (CENT): Free Stock Analysis Report
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