Central Garden & Pet Company — Fiscal 2024 Second-Quarter Form 10-Q
Business context and reporting period
Central Garden & Pet Company manufactures, markets and distributes pet and garden products through two reportable segments: Pet and Garden. The filing covers the three and six months ended March 30, 2024, compared with the periods ended March 25, 2023. The Garden business is highly seasonal, so interim results may not be indicative of full-year performance.
In November 2023, the company acquired TDBBS, LLC, a provider of premium natural dog chews and treats, for approximately $60 million. Purchase-price allocation remains incomplete, with approximately $40 million recorded in other assets pending allocation.
Key financial metrics
| Metric | Three months ended March 30, 2024 | Year-over-year change | Six months ended March 30, 2024 |
|---|---|---|---|
| Net sales | $900.1 million | Down 1.0% | $1,534.6 million, down 0.1% |
| Gross profit | $278.9 million | Up 7.4% | $457.7 million, up 6.1% |
| Gross margin | 31.0% | Up 240 basis points | 29.8%, up 170 basis points |
| Operating income | $93.4 million | Up 19.7% | $101.9 million, up 29.8% |
| Operating margin | 10.4% | Up from 8.6% | 6.6%, up from 5.1% |
| Net income attributable to Central | $62.0 million | Up from $48.1 million | $62.4 million, up from $39.7 million |
| Diluted EPS | $0.93 | Up from $0.72 | $0.93, up from $0.59 |
| Net interest expense | $11.5 million | Down 21.9% | $21.2 million, down 25.6% |
Non-GAAP diluted EPS was $0.99 in both the quarter and six-month period, excluding after-tax facility-closure and network-consolidation costs. Adjusted EBITDA was $124.4 million in the quarter and $161.4 million for the six months, compared with $106.9 million and $135.6 million, respectively, in the prior-year periods.
Segment performance and material changes
- Pet: Quarterly sales increased 1.1% to $480.2 million, but organic sales declined 3.0%. Six-month sales decreased 0.2% and organic sales declined 3.8%. Weakness reflected lower demand for durable products, outdoor cushions, pet beds, pet birds and small animals, partly offset by dog and cat growth and the TDBBS acquisition.
- Garden: Quarterly sales decreased 3.2% to $419.9 million on the exit from the independent garden-channel distribution business, while organic sales increased 1.9%. Six-month reported sales were essentially flat at $645.2 million, while organic sales increased 5.0%, supported by branded controls, grass seed and live plants.
- Margin expansion: Both segments benefited from prior Cost and Simplicity initiatives, including the exit from private-label pet beds and the independent garden-channel distribution business, as well as moderating input costs.
- Facility actions: The company decided to close a manufacturing facility in Chico, California and began consolidating four Southeast distribution locations into one facility. It recorded approximately $5.3 million of one-time costs, mostly non-cash, including $2.5 million in cost of goods sold and $2.8 million in SG&A.
- Stock dividend: A one-for-four Class A stock dividend was distributed on February 8, 2024. Share and per-share information was retroactively adjusted; authorized shares and par values were unchanged.
Cash flow, liquidity and debt
| Item | March 30, 2024 | Comparison |
|---|---|---|
| Cash and cash equivalents | $301.3 million | $60.6 million at March 25, 2023; $488.7 million at September 30, 2023 |
| Cash, cash equivalents and restricted cash | $315.5 million | Down from $502.9 million at fiscal year-end |
| Total debt | $1,189.3 million | Down from $1,212.3 million at March 25, 2023 |
| Revolving credit facility borrowings | None | Approximately $685 million of net availability |
| Inventories | $914.4 million | Up from $838.2 million at fiscal year-end; down from $966.9 million year over year |
Operating activities used $94.3 million of cash in the first six months, compared with $97.1 million used in the prior-year period. Working-capital investment included a $240.4 million increase in accounts receivable and a $59.3 million increase in inventories. Investing activities used $80.3 million, including $59.8 million for acquisitions and $19.5 million for capital expenditures. Financing activities used $13.2 million, including $12.1 million for share repurchases and related tax withholding.
Outstanding debt primarily comprises $300 million of 5.125% senior notes due 2028, $500 million of 4.125% senior notes due 2030 and $400 million of 4.125% senior notes due 2031. Management expects fiscal 2024 capital expenditures of approximately $70 million, of which approximately $19 million had been invested through March 30, 2024. Management believes available liquidity will be adequate for working capital, capital spending and other needs for at least the next 12 months and beyond.
Outlook, risks, contingencies and unusual items
The filing does not provide a specific consolidated fiscal 2024 revenue or earnings guidance target. Management noted that inflationary pressure on commodities, labor and freight had begun to moderate in calendar 2024. Results remain exposed to seasonality, weather, consumer spending, raw-material prices, interest rates, competition, retailer concentration, supply constraints and the success of the Cost and Simplicity and Central to Home strategies.
Management identified material weaknesses in internal control over financial reporting related to information-technology general controls at the Live Plant and Green Garden businesses and controls over an outsourced service provider supporting Live Plant revenue processes. Disclosure controls and procedures were therefore deemed ineffective as of March 30, 2024. Management reported no identified financial-statement misstatements and is implementing remediation, but the weaknesses will not be considered remediated until controls operate effectively for a sufficient period.
A long-running Nite Glow litigation matter remains pending. A March 2024 retrial on potential “head start” damages concluded without a decision as of the filing date. The company believes the matter will not materially affect its consolidated financial statements, but acknowledges that the ultimate outcome is uncertain and could exceed expectations.
No goodwill impairment was recorded in the six months ended March 30, 2024. The company reported compliance with its debt and revolving-credit financial covenants.
Important facts for investors to verify
- Whether organic Pet demand, particularly durable products and post-COVID categories, stabilizes and whether TDBBS delivers expected growth.
- Whether Garden growth continues after the distribution-business exit and through the seasonally important third fiscal quarter.
- The sustainability of margin improvement after excluding the $5.3 million of facility and distribution-network costs.
- Cash conversion and working-capital needs as accounts receivable and inventory build for the peak garden season.
- Progress and eventual effectiveness of remediation for the reported internal-control material weaknesses.
- The final damages determination in the Nite Glow litigation.
- Acquisition accounting for TDBBS, including the allocation of approximately $40 million currently recorded in other assets.
- Leverage, refinancing requirements beginning with the February 2028 notes, and continued access to the $750 million revolving facility.