It has been about a month since the last earnings report for Central Garden (CENT). Shares have lost about 1.7% 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 & Pet’s Q4 Loss Narrower Than Expected
Central Garden & Pet Company posted narrower-than-expected fourth-quarter fiscal 2021 loss. Impressively, the top line not only surpassed the Zacks Consensus Estimate but also improved year over year, thanks to the continued strength in the Garden and Pet segments. The company is also on track with its ‘Central to Home’ strategy, and investing in digital marketing and innovation as well as customer insights to drive growth.
Let’s Delve Deeper
The company reported a quarterly loss of 6 cents a share narrower than the Zacks Consensus Estimate of a loss of 27 cents. However, the figure showed a sharp decline from earnings of 25 cents reported in the year-ago period.
Central Garden & Pet Company generated net sales of $739.1 million, which surpassed the Zacks Consensus Estimate of $729.2 million. The metric improved 9% from the year-ago period, benefiting from four recent acquisitions, namely DoMyOwn.com, Hopewell Nursery, Green Garden Products and D&D Commodities Ltd. This was partly offset by an organic sales decline of 1%.
Gross profit increased 8% to $212.8 million. Meanwhile, gross margin contracted a marginal 20 basis points to 28.8%. Aggressive pricing actions and gross productivity efforts as well as favorable product mix helped offset inflationary cost pressure.
Operating income totaled $10 million, sharply down from $25 million in the year-ago period. Also, operating margin shrunk 240 basis points to 1.3% due to rise in key commodities costs, higher freight and labor expenses as well as increased strategic investment spending. These were partly mitigated by pricing actions and favorable product mix as well as improved overhead leverage.
SG&A expenses amounted to $203.2 million, up 19% year over year on account of acquisitions, higher commercial investment and rise in logistics costs. As a percentage of net sales, SG&A expenses increased 220 basis points to 27.5%.
Segment in Detail
Net sales in the Pet segment grew 3% to $459 million, driven by significant contributions from dog treats and chews, distribution, outdoor cushions and animal health. The segment’s operating income was $32 million, down from $36 million in the prior-year quarter. Operating margin decreased 110 basis points to 6.9%. This decrease was primarily due to cost inflation across key commodities, freight and labor as well as heightened investment levels to build capacity and drive future growth. These were partly offset by pricing actions and favorable product mix.
In the Garden segment, net sales advanced 21% to $280 million, courtesy of a $78 million contribution from recent buyouts. However, on an organic basis, net sales declined 13%, as continued strength in wild bird feed was more than offset by sluggishness across the rest of the Garden portfolio. The segment’s operating income was $1.1 million, down from $14 million in the year-ago period. Operating margin shriveled 570 basis points to 0.4% primarily due to substantial cost inflation and investment, which more than offset pricing and productivity initiatives.
Financial Details
Central Garden & Pet ended the quarter with cash and cash equivalents of $426.4 million, total debt of $1,185.8 million and shareholders’ equity of $1,222.2 million, excluding non-controlling interest of $1.3 million. Management incurred capital expenditure of $80 million in fiscal 2021, reflecting strict focus on capacity expansion and automation as well as IT infrastructure to support long-term organic growth. The company has invested $23 million in the final quarter. The company anticipates fiscal 2022 capital expenditure to be at or slightly higher than last year.
Outlook
Tim Cofer, CEO said, “As we look to fiscal 2022, we expect to face continued inflationary pressures and supply chain disruption.” Management now envisions fiscal 2022 GAAP EPS of $3.10 or better compared with GAAP EPS of $2.75 in fiscal 2021. The guidance includes expected investments in capacity expansion and automation at or marginally above fiscal 2021 levels as well as higher investments in brand building and e-commerce. The guidance also takes into account rising costs for key commodities, freight and labor, muted consumer demand patterns following exceptional demand in the last two fiscal years, and pricing actions to mitigate inflationary headwinds. Management expects first half of fiscal 2022 to be hit hard by the ongoing headwinds with first-quarter GAAP earnings per share to be well below the prior-year quarter.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -19.05% due to these changes.
VGM Scores
Currently, Central Garden has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% 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 broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Central Garden has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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Central Garden & Pet Company (CENT): Free Stock Analysis Report
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