Central Garden & Pet Company — Fiscal 2023 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended March 25, 2023, compared with the periods ended March 26, 2022. Results are unaudited and seasonal, particularly in the Garden segment. The company operates through Pet and Garden reportable segments and primarily serves U.S. markets.
Financial Results and Key Metrics
| Metric | Three months ended March 25, 2023 | Year-over-year change | Six months ended March 25, 2023 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $909.0 million | Down 4.8% | $1,536.7 million | Down 4.9% |
| Gross profit | $259.6 million | Down 9.5% | $431.3 million | Down 11.1% |
| Gross margin | 28.6% | Down 150 bps | 28.1% | Down 190 bps |
| Operating income | $78.0 million | Down $28.8 million | $78.4 million | Down $54.7 million |
| Operating margin | 8.6% | Down from 11.2% | 5.1% | Down from 8.2% |
| Net income attributable to Central | $48.1 million | Down from $69.7 million | $39.7 million | Down from $78.7 million |
| Diluted EPS | $0.90 | Down from $1.27 | $0.74 | Down from $1.44 |
| Adjusted EBITDA | $106.9 million | Down from $131.4 million | $135.6 million | Down from $183.0 million |
- Segment sales: Second-quarter Pet sales were $475.2 million, down 4.5%; Garden sales were $433.8 million, down 5.0%. Six-month Pet sales were $891.0 million, down 4.6%; Garden sales were $645.6 million, down 5.3%.
- Segment operating income: Second-quarter Pet operating income was $55.3 million, down 8.9%, while Garden operating income was $49.6 million, down $20.9 million. Six-month Pet operating income was $94.8 million and Garden operating income was $38.8 million.
- Expenses and taxes: Second-quarter SG&A increased 0.9% to $181.6 million, or 20.0% of sales, compared with 18.9% in the prior-year quarter. The quarterly effective tax rate was 23.9%, versus 23.4%.
- Cash flow: Six-month operating cash flow was negative $97.1 million, improving from negative $272.1 million in the prior-year period. Capital expenditures were $30.2 million, compared with $75.4 million. Financing activities provided $8.6 million, primarily reflecting net borrowings under the revolving facility.
- Liquidity: Cash and cash equivalents were $60.6 million and restricted cash was $13.5 million at March 25, 2023. Total cash, cash equivalents and restricted cash declined from $192.2 million at fiscal year-end September 24, 2022.
- Debt: Total debt was $1.212 billion, compared with $1.186 billion at March 26, 2022. The company had $25.0 million outstanding under its $750 million asset-based revolving credit facility, with approximately $635 million of borrowing-base availability.
- Capital spending outlook: Fiscal 2023 capital expenditures are expected to be approximately $70 million to $80 million; approximately $30 million had been invested through March 25, 2023.
Material Changes Versus the Prior Comparable Period
- Sales declined in both segments, with volume declines more than offsetting pricing actions. Pet weakness was concentrated in durable products, outdoor cushions, aquatics and exited private-label pet-bed lines.
- Garden sales were pressured by adverse weather, unfavorable pre-season retailer ordering patterns and lighter retailer traffic. Controls, fertilizer and grass seed declined, partly offset by higher wild bird feed sales.
- Gross margin contracted primarily in Garden because of lower production volumes and overhead absorption, start-up costs at a live-goods facility acquired in the prior year, and input-cost inflation. Pricing actions only partially offset these factors.
- Corporate expense increased because of higher insurance and payroll costs. The company also reported continued inflation in grain, seed, fuel, labor, freight and garden-control inputs.
- Inventory increased to $966.9 million from $888.1 million at March 26, 2022, while accounts receivable declined to $564.9 million from $619.6 million.
- The company repurchased approximately 0.3 million shares during the first six months for approximately $16.2 million. Approximately $94.6 million remained under the principal repurchase authorization at March 25, 2023.
Outlook, Commentary, Risks and Unusual Items
- Management stated that available operating cash flow, revolving-credit availability and supplier arrangements are expected to support working capital, capital expenditures and other cash needs for at least the next 12 months, while noting that financing availability and terms are not assured.
- In April 2023, the company announced closure of a leased manufacturing and distribution facility in Athens, Texas, and an exit from low-margin private-label pet-bed product lines. The closure is expected to produce a one-time fiscal third-quarter charge of approximately $15 million, mostly non-cash, for closure costs, severance, inventory liquidation and related intangibles.
- Key disclosed risks include inflation, rising interest rates, recessionary consumer demand, commodity and energy costs, inability to pass through cost increases, excess retail inventory, adverse weather, supply-chain disruption, seasonality, retailer concentration, competition, acquisitions, restructuring, cybersecurity, product liability, regulatory matters and potential goodwill or intangible-asset impairment.
- A longstanding Nite Glow litigation matter remains unresolved. The company prevailed on patent infringement and contract damages issues, but a new trial on potential misappropriation-related “head start” damages remains. Management believes the matter will not materially affect the consolidated financial statements, although the outcome is uncertain.
- State examinations concerning unclaimed-property compliance remain ongoing, with the ultimate financial impact uncertain.
- The company reported no goodwill impairment, no material change in market-risk exposure, effective disclosure controls, and no material changes to its previously disclosed risk factors.
Important Facts for Investors to Verify
- Whether Garden demand, weather conditions and retailer ordering patterns improve during the seasonally important third fiscal quarter.
- Whether gross-margin pressure from inflation, lower volumes, start-up costs and reduced overhead absorption moderates or persists.
- The timing and final cost of the Athens facility closure and whether the expected approximately $15 million charge is sufficient.
- Inventory levels, customer receivables and operating cash flow as the company moves through peak Garden selling periods.
- Revolving-credit availability, borrowing costs, covenant compliance and refinancing requirements for the $300 million of senior notes due in 2028.
- Progress on the exit from low-margin product lines, cost-and-simplicity initiatives and the company’s ability to restore operating margins.
- The potential financial exposure from the Nite Glow litigation and ongoing unclaimed-property examinations.