Business Context and Reporting Period
Central Garden & Pet Company manufactures, markets and distributes pet and garden products through its Pet and Garden segments. This unaudited Form 10-Q covers the quarter and nine months ended June 24, 2023, compared with June 25, 2022. Results are seasonal, particularly in Garden, and interim results are not necessarily indicative of the full fiscal year.
Financial Performance and Position
| Metric | Three months ended June 24, 2023 | Change vs. prior year | Nine months ended June 24, 2023 | Change vs. prior year |
|---|---|---|---|---|
| Net sales | $1,023.3 million | Up 0.8% | $2,559.9 million | Down 2.7% |
| Gross profit | $318.1 million | Up 3.4% | $749.4 million | Down 5.5% |
| Gross margin | 31.1% | Up 80 basis points | 29.3% | Down 80 basis points |
| Operating income | $122.8 million | Up 7.7% | $201.3 million | Down 18.5% |
| Operating margin | 12.0% | Up 80 basis points | 7.9% | Down 150 basis points |
| Net income attributable to Central | $83.1 million | Up 10.2% | $122.8 million | Down 20.3% |
| Diluted EPS | $1.56 | Up from $1.39 | $2.30 | Down from $2.82 |
- Segment sales: Third-quarter Pet sales were $503.3 million, down 0.3%; Garden sales were $519.9 million, up 1.8%. Nine-month Pet sales declined 3.1% to $1,394.4 million, while Garden sales declined 2.3% to $1,165.6 million.
- Segment operating income: Third-quarter Pet operating income was $60.0 million, down 4.2%, while Garden operating income was $88.1 million, up 16.6%. Nine-month Pet operating income declined 8.1% to $154.8 million, and Garden operating income declined 16.6% to $126.9 million.
- Cash flow: Nine-month operating cash flow was $227.6 million, compared with cash used of $82.4 million in the prior-year period. The improvement was driven mainly by inventory reduction and working-capital changes.
- Investing and financing: Capital expenditures were $40.9 million, versus $98.6 million in the prior-year period. Financing cash outflow was $33.7 million, including $33.4 million for debt repayment activity and share repurchases.
- Liquidity: Cash and cash equivalents were $333.1 million, or $346.7 million including restricted cash. The borrowing base supported approximately $559 million of availability under the $750 million asset-based revolving credit facility; no revolver borrowings or letters of credit were outstanding under that facility.
- Debt: Total debt was $1,187.8 million, consisting primarily of $300 million of 2028 Notes, $500 million of 2030 Notes and $400 million of 2031 Notes. The company reported compliance with applicable financial covenants.
- Balance sheet: Inventories declined to $865.5 million from $882.5 million a year earlier and $938.0 million at fiscal year-end. Total equity was $1,447.1 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter performance improved despite essentially flat sales, reflecting pricing, productivity initiatives and favorable product mix, particularly in Garden.
- Nine-month results remained weaker because of lower volumes, adverse weather, retailer inventory management, lighter retailer traffic, cost inflation and lower Garden sales.
- Pet results were affected by lower demand for durable products, including outdoor cushions and aquatics, and the exit from low-margin private-label pet-bed product lines.
- Garden sales and margins were pressured earlier in the fiscal year by lower controls, fertilizer and grass-seed sales, reduced overhead absorption, live-goods facility start-up costs and inflation.
- Corporate operating expense increased to $80.4 million for the nine-month period from $73.5 million, primarily because of higher insurance and payroll costs.
- Share repurchases totaled approximately $33.4 million during the nine months. Approximately $84.5 million remained available under the announced repurchase authorization at June 24, 2023.
Guidance, Outlook, Risks and Unusual Items
- Management expects fiscal 2023 capital expenditures of approximately $60 million to $70 million; $40.9 million had been invested through June 24, 2023.
- Management believes operating cash flow, supplier arrangements and available revolver capacity will provide sufficient liquidity for anticipated needs for at least the next 12 months, while noting that financing availability and terms cannot be assured.
- In July 2023, the company sold its independent garden-center distribution business, representing less than 5% of Garden sales, to simplify the business and optimize its customer footprint. The company retained third-party distribution for its largest three retail partners and select national accounts.
- During the quarter, Central closed a leased manufacturing and distribution facility in Athens, Texas as part of its Cost and Simplicity program. It recorded approximately $13.9 million of one-time costs, including $8.0 million in cost of goods sold and $5.9 million in selling, general and administrative expense; most costs were non-cash.
- The Athens closure was excluded from management’s non-GAAP measures. Third-quarter non-GAAP operating income was $136.8 million and non-GAAP diluted EPS was $1.75, compared with GAAP operating income of $122.8 million and diluted EPS of $1.56.
- A $4.7 million non-cash impairment charge was recorded for a finite-lived customer-related intangible asset in the Pet segment. No goodwill impairment was recorded.
- Key risks include inflation and commodity costs, interest rates, recessionary consumer spending, retailer inventory levels, adverse weather, seasonality, supply-chain disruptions, customer concentration, competition, acquisition integration, restructuring execution, cybersecurity, product liability, litigation and potential impairment of goodwill or intangible assets.
- The Nite Glow litigation remains unresolved. The company believes the ultimate outcome will not materially affect its consolidated financial statements, but acknowledges that the final resolution could result in expense exceeding expectations. State unclaimed-property examinations also remain ongoing with uncertain outcomes.
Important Facts for Investors to Verify
- Whether improved third-quarter margins and Garden performance continue after the seasonal peak and following the July distribution-business sale.
- The sustainability of demand trends in durable pet products and the financial impact of exiting low-margin private-label pet-bed products.
- Progress toward the stated $60 million to $70 million fiscal 2023 capital-expenditure plan and continued working-capital conversion.
- Actual revolver availability, borrowing-base capacity, interest costs and compliance with debt covenants as market conditions change.
- The cash and earnings effects of the Athens facility closure, including whether additional restructuring or impairment charges arise.
- Developments in the Nite Glow matter, unclaimed-property examinations and any product recalls or regulatory proceedings.
- Management’s non-GAAP adjustments and reconciliations, particularly the exclusion of facility-closure costs from performance measures.