Central Garden & Pet Company — Fiscal 2023 Form 10-K Summary
Business context and reporting period
Central Garden & Pet Company operates in the U.S. pet and lawn-and-garden markets through its Pet and Garden reportable segments. The filing covers the 53-week fiscal year ended September 30, 2023; the prior comparable fiscal year ended September 24, 2022 and included 52 weeks. The company sells branded, private-label and third-party products through major retailers, e-commerce channels, independent retailers and professional markets.
Financial performance and liquidity
| Metric | Fiscal 2023 | Fiscal 2022 | Change |
|---|---|---|---|
| Net sales | $3,310.1 million | $3,338.6 million | Down 0.9% |
| Gross profit | $946.8 million | $992.3 million | Down 4.6% |
| Gross margin | 28.6% | 29.7% | Down 110 basis points |
| Operating income | $210.6 million | $260.0 million | Down 19.0% |
| Operating margin | 6.4% | 7.8% | Down 140 basis points |
| Net income attributable to Central | $125.6 million | $152.2 million | Down 17.4% |
| Diluted EPS | $2.35 | $2.80 | Down 16.1% |
| Net cash from operating activities | $381.6 million | $(34.0) million | Improved by $415.6 million |
| Adjusted EBITDA | $342.9 million | $366.8 million | Down $23.9 million |
- Pet net sales were $1,877.2 million, essentially flat year over year. Pet operating income was $198.0 million, down 5.2% on a GAAP basis.
- Garden net sales were $1,432.9 million, down 1.9%. Garden operating income was $123.5 million, down 19.8%, primarily because of adverse weather, lower volumes, retailer inventory management and lighter foot traffic.
- Operating cash flow benefited from lower inventories and accounts receivable. Inventories declined to $838.2 million from $938.0 million, while accounts receivable declined to $332.9 million from $376.8 million.
- Cash and cash equivalents were $488.7 million at year-end, or $502.9 million including restricted cash.
- Total debt was $1,188.2 million, compared with $1,186.6 million in the prior year. The company had no borrowings or letters of credit outstanding under its $750 million asset-based revolving facility and reported approximately $493 million of net availability.
- Capital expenditures were $54.0 million, compared with $115.2 million in fiscal 2022. Management expects approximately $70 million of capital expenditures over the next 12 months.
Material changes versus the prior comparable period
- Sales declined despite the additional fiscal week, with the largest decrease in Garden and lower private-label sales across both segments. Wild bird sales increased, while other garden, other pet and certain durable pet products declined.
- Inflation in grains, seeds, chemicals, fertilizer ingredients, labor, fuel and freight continued to pressure margins. Pricing actions did not fully offset cost increases in fiscal 2023.
- Pet facility closures in Athens and Amarillo, Texas generated approximately $15.7 million of one-time costs, most of which was non-cash. Excluding specified adjustments, Pet operating income increased and Pet operating margin was 11.5%.
- The company sold its independent garden-center distribution business for approximately $20 million and recognized a $5.8 million gain, net of related costs. The divested business represented less than 5% of Garden sales.
- The company recorded approximately $11.5 million of intangible-asset impairment charges, including $7.5 million in Pet and $3.9 million in Garden. No goodwill impairment was recorded.
- Net interest expense declined to $49.7 million from $57.5 million because higher interest income and cash balances offset the effect of interest rates.
- Operating cash flow improved sharply after fiscal 2022 working-capital investment, when inventories had increased to protect customer fill rates amid supply-chain disruption.
Outlook, management commentary, risks and unusual items
Management is implementing its “Central to Home” strategy and Cost and Simplicity program, focused on brand investment, e-commerce, portfolio optimization, supply-chain simplification, facility rationalization, procurement, logistics and administrative efficiency. The company expects to incur additional transition and implementation costs over the next several years and does not provide a clear consolidated fiscal 2024 revenue or earnings guidance figure in the filing.
- On November 3, 2023, after year-end, Central acquired TDBBS, LLC, a premium natural dog-chew and treat provider, for approximately $60 million.
- Major risks include inflation, interest rates, commodity-price volatility, adverse weather, reduced consumer spending, retailer destocking, competition, supply-chain disruption, tariffs and dependence on China-based sourcing.
- Customer concentration is significant: the top five customers represented approximately 52% of fiscal 2023 net sales. Walmart and Home Depot each represented approximately 16%; the top three customers represented approximately 40%.
- Garden is highly seasonal: approximately 67% of Garden sales and 58% of total company sales occurred in the second and third fiscal quarters. Substantially all Garden operating income is generated during that period.
- The company had two material weaknesses in internal control over financial reporting involving IT general controls and controls over an outsourced IT service provider supporting acquired businesses. Management and Deloitte concluded that controls were not effective as of September 30, 2023, although no resulting financial-statement misstatements were identified.
- The company remains involved in Nite Glow litigation. The patent-infringement claim was rejected, but a damages issue related to alleged misappropriation of confidential information remains subject to further proceedings. Management believes the ultimate resolution will not be material, but the outcome is uncertain.
- The company does not expect to pay cash dividends in the foreseeable future. William E. Brown, the chairman and founder, beneficially controlled approximately 55% of voting power as of September 30, 2023.
Most important facts for an investor to verify
- Whether the Cost and Simplicity program produces sustainable margin improvement after facility-closure and restructuring costs end.
- Whether Garden sales and profitability recover from adverse weather, retailer inventory actions and lower traffic, given the segment’s seasonality.
- Progress in remediating the two material weaknesses and integrating acquired-business IT systems and outsourced service-provider controls.
- Debt repayment capacity and refinancing requirements, particularly the $300 million of senior notes due in 2028 and total scheduled debt principal of approximately $1.2 billion thereafter.
- Exposure to Walmart, Home Depot and other concentrated customers, including changes in ordering patterns, private-label substitution and retailer credit risk.
- The integration, purchase accounting and earnings contribution of the post-year-end TDBBS acquisition.
- Potential additional intangible-asset impairment from weaker demand or lower market valuations, and the unresolved Nite Glow litigation outcome.