Central Garden & Pet Co (NASDAQ:CENT) delivered solid third quarter 2024 earnings performance despite a challenging environment, with GAAP EPS of $1.19 and non-GAAP EPS of $1.32.
The company expanded its gross margin, driven by cost and simplicity projects, including the consolidation of its cushion business with dog beds and moderating inflation.
Pet segment sales increased by 1% to $508 million, driven by the TDBBS acquisition and growth in professional business, dog, cat, and equine categories.
E-commerce sales grew significantly, representing approximately 28% of pet sales and 7% of total garden sales, indicating strong online growth.
The company maintained a strong balance sheet with cash and cash equivalents of $570 million, compared to $333 million a year ago, and no borrowings under its credit facility.
Negative Points
Net sales declined by 3% compared to the prior year, with organic net sales also decreasing by 3%.
The garden segment faced a 6% decline in sales, primarily due to unfavorable weather impacting live plant sales and lower foot traffic in key home center customers.
The company anticipates a write-down of approximately $15 million to $20 million in grass seed inventory due to a significant decrease in market prices.
Non-GAAP SG&A expenses increased by 5% compared to the prior year, mainly due to the TDBBS acquisition and higher legal costs.
The pet segment continues to face challenges with declining durable pet product sales, attributed to softer new pet adoptions and macroeconomic pressures affecting consumer discretionary spending.
Q & A Highlights
Q: Can you discuss the underlying trends in the Garden segment, particularly the impact of weather and pricing? A: J.D. Walker, President of Garden Consumer Products, explained that the third quarter was challenging due to unfavorable weather, which significantly impacted the live goods business. Despite a strong start to the year, the cold and wet weather in April and May, followed by intense heat in June, led to a decline in sales. However, excluding live goods, the underlying metrics were healthy, and the company remains optimistic about the future, focusing on cost and simplicity initiatives and gaining market share in certain categories.
Q: What is the margin outlook for fiscal 2025, considering the current year's performance? A: Nicholas Lahanas, CFO, stated that the company will continue its cost and simplicity initiatives, focusing on portfolio optimization and higher-margin businesses. Despite challenges in the live goods business, margins are expected to expand due to these initiatives and moderating inflation. More detailed guidance for fiscal 2025 will be provided in November.
Q: Can you clarify the situation with grass seed inventory and market dynamics? A: J.D. Walker explained that the grass seed market has experienced fluctuations in supply and demand, leading to significant price drops recently. The company anticipates a write-down of $15 million to $20 million in grass seed inventory due to these market changes. The write-down is a result of marking inventory to market value, not due to spoilage.
Q: How did the pet segment perform, particularly in consumables and durables? A: John Hanson, President of Pet Consumer Products, noted that consumables grew mid-single digits, while durables declined in low double digits. The decline in durables is attributed to softening pet ownership, macroeconomic pressures, and low-priced imports. The company is focusing on consumables and e-commerce, which is growing and now represents 28% of pet sales.
Q: What is the company's approach to M&A, given the current cash position? A: Nicholas Lahanas highlighted that the company is looking for M&A opportunities, particularly in pet consumables and digital capabilities. The current M&A climate is slow, but the company is prepared to act quickly due to its strong cash position. The focus is on acquisitions that can add scale, enter adjacent categories, or enhance digital and e-commerce capabilities.
