Central Garden & Pet Company — Fiscal 2023 First-Quarter 10-Q Summary
Business Context and Reporting Period
Central Garden & Pet manufactures, markets and distributes pet and garden products, primarily in the United States. Operations are managed through the Pet and Garden reportable segments. This unaudited Form 10-Q covers the three months ended December 24, 2022, compared with the three months ended December 25, 2021. Garden results are highly seasonal, and the first quarter is typically an operating-loss period for the Garden segment.
Key Financial Metrics
| Metric | Q1 Fiscal 2023 | Q1 Fiscal 2022 | Change |
|---|---|---|---|
| Net sales | $627.7 million | $661.4 million | Down 5.1% |
| Gross profit | $171.7 million | $198.2 million | Down 13.4% |
| Gross margin | 27.4% | 30.0% | Down 260 basis points |
| Operating income | $0.4 million | $26.2 million | Down $25.8 million |
| Operating margin | 0.1% | 4.0% | Down 390 basis points |
| Net income attributable to Central | $(8.4) million | $9.0 million | Declined $17.4 million |
| Diluted earnings per share | $(0.16) | $0.16 | Declined $0.32 |
| Adjusted EBITDA | $28.7 million | $51.6 million | Down $22.9 million |
| Net cash used in operating activities | $63.3 million | $92.5 million | Improved $29.2 million |
Pet sales were $415.8 million, down 4.6%, and Pet operating income was $39.6 million, down 12.6%, with a 9.5% operating margin. Garden sales were $211.8 million, down 6.0%, and Garden reported an operating loss of $10.8 million versus operating income of $6.1 million in the prior-year quarter. Corporate operating expense increased to $28.3 million from $25.1 million.
At December 24, 2022, cash and cash equivalents were $87.8 million, or $102.5 million including restricted cash. Inventories were $1.024 billion, up from $844.9 million a year earlier and $938.0 million at fiscal year-end. Total debt was $1.187 billion, principally consisting of senior notes due in 2028, 2030 and 2031. The company had no borrowings or letters of credit outstanding under its $750 million asset-based revolving credit facility, and borrowing-base availability was approximately $538 million.
Material Changes Versus the Prior Comparable Period
- Sales decreased $33.7 million, driven by lower branded-product sales and other manufacturers’ product sales. Management attributed the decline primarily to lower volumes despite price increases.
- Pet sales declined mainly because of the exit from certain profit-challenged private-label pet-bed product lines and lower durable-item sales, partially offset by stronger dog and cat treats, toys and wild bird feed.
- Garden sales declined primarily because of elevated retailer inventories, lower retail traffic, and weaker controls and fertilizer sales.
- Gross margin contracted because of input-cost inflation and unfavorable overhead absorption in Garden, only partly offset by pricing actions.
- SG&A declined modestly by $0.7 million, but increased as a percentage of sales to 27.3% from 26.0%. Selling and delivery costs decreased, while warehouse and administrative expenses increased.
- Operating performance deteriorated substantially, with operating income nearly eliminated and the company moving from net income to a net loss.
- Operating cash use improved year over year, primarily because of more favorable working-capital changes, including lower inventory-related cash use. Capital expenditures declined to $17.7 million from $24.2 million.
- The company repurchased approximately 0.1 million voting shares and 0.2 million Class A shares for aggregate open-market costs of approximately $8.9 million, excluding shares withheld for taxes. Approximately $94.6 million remained under the repurchase authorization at quarter-end.
Outlook, Risks, Contingencies and Unusual Items
Management expects fiscal 2023 capital expenditures of approximately $70 million to $80 million, including investments in facilities, equipment and the enterprise-wide information-technology platform; approximately $18 million had been invested through December 24, 2022. Management believes operating cash flow, supplier arrangements and available revolver capacity should fund anticipated needs for at least the next 12 months, while noting that financing availability and terms cannot be assured.
Inflation remains a significant pressure, particularly for grain and seed, fuel, labor, freight, and ingredients used in controls and fertilizers. Risks include an economic slowdown, reduced consumer spending, retailer inventory corrections, inability to pass through costs, supply-chain disruptions, adverse weather, seasonality, international sourcing and tariffs. The company also identifies acquisition integration, restructuring, ERP implementation, cybersecurity, product liability, recalls, regulatory matters, goodwill or intangible-asset impairment and access to capital as risks.
The company was in compliance with all applicable debt and revolving-credit financial covenants as of December 24, 2022. No goodwill impairment was recorded during the quarter. A long-running Nite Glow litigation matter remains unresolved; the Federal Circuit eliminated the patent-infringement claim and ordered a new damages trial limited to alleged “head start” benefits from confidential information. Management believes the matter will not materially affect the consolidated financial statements, but acknowledges that the ultimate outcome is uncertain. State unclaimed-property examinations also remain ongoing.
The filing provides no specific full-year revenue or earnings guidance. Management notes that Garden sales and operating income are concentrated in the second and third fiscal quarters, making first-quarter results not necessarily indicative of full-year performance.
Important Facts for Investors to Verify
- Whether Garden retailer inventories normalize and whether controls, fertilizer and other Garden categories recover during the seasonal peak.
- Whether pricing actions offset continuing inflation in raw materials, labor, freight and energy without further volume erosion.
- Inventory levels, working-capital requirements and operating cash flow as the company builds inventory for the peak Garden season.
- Liquidity under the borrowing-base formula, revolver availability and compliance with debt covenants as interest rates and seasonal borrowing needs change.
- The company’s ability to achieve the stated $70 million to $80 million fiscal 2023 capital-expenditure plan while maintaining liquidity.
- Progress on the Nite Glow damages proceeding and the state unclaimed-property examinations.
- Potential impairment risk for goodwill and intangible assets, particularly given weaker operating performance and macroeconomic pressure.