Central Garden & Pet Company — Fiscal Q1 2024 Form 10-Q Summary
Business Context and Reporting Period
Central Garden & Pet manufactures, markets and distributes pet and garden products through two reportable segments: Pet and Garden. The unaudited quarter ended December 30, 2023 is compared with the quarter ended December 24, 2022. Garden operations are highly seasonal; approximately 67% of fiscal 2023 Garden sales occurred in the second and third fiscal quarters.
Financial Performance and Key Metrics
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $634.5 million | $627.7 million | Up 1.1% |
| Gross profit | $178.8 million | $171.7 million | Up 4.2% |
| Gross margin | 28.2% | 27.4% | Up 80 basis points |
| SG&A | $170.4 million | $171.3 million | Down 0.5% |
| Operating income | $8.4 million | $0.4 million | Up $8.0 million |
| Operating margin | 1.3% | 0.1% | Up 120 basis points |
| Net income attributable to Central | $0.4 million | $(8.4) million | Improved $8.9 million |
| Diluted EPS | $0.01 | $(0.16) | Improved |
| Adjusted EBITDA | $37.0 million | $28.7 million | Up $8.3 million |
Pet sales declined 1.6% to $409.2 million, while Garden sales increased 6.3% to $225.3 million. Pet operating income increased 9.7% to $43.4 million, and Garden’s operating loss narrowed to $8.9 million from $10.8 million. Corporate operating expense declined 7.9% to $26.1 million.
Net interest expense declined to $9.7 million from $13.8 million, primarily because higher cash balances generated more interest income. The company reported a $0.9 million income tax benefit, including a discrete stock-compensation-related benefit. Management expects a fiscal 2024 effective tax rate of approximately 22% to 24%.
Cash Flow, Debt and Liquidity
- Operating cash flow was negative $69.8 million, compared with negative $63.3 million in the prior-year quarter, primarily due to working-capital usage.
- Investing cash flow was negative $70.5 million, including $59.5 million for acquisitions and $10.1 million of capital expenditures.
- Financing cash flow was negative $7.8 million, including $6.8 million of debt and share-related payments, a $0.9 million distribution to noncontrolling interest and $6.8 million of share repurchases, including tax-withholding share activity.
- Cash, cash equivalents and restricted cash totaled $355.6 million at December 30, 2023, down from $502.9 million at September 30, 2023 but up from $102.5 million at December 24, 2022.
- Total debt was $1.19 billion, consisting primarily of $300 million of 2028 Notes, $500 million of 2030 Notes and $400 million of 2031 Notes. No borrowings were outstanding under the $750 million asset-based revolving credit facility, which had approximately $568 million of net availability.
- Management expects fiscal 2024 capital expenditures of approximately $70 million, including investments in facilities and the enterprise-wide information technology platform. Approximately $10 million had been invested through December 30, 2023.
Management believes available cash, operating cash flow, supplier arrangements and credit-facility availability will fund anticipated needs for at least the next 12 months and beyond, while noting that future liquidity could be affected by operating performance, acquisitions and financing conditions.
Material Changes and Unusual Items
- Organic consolidated sales increased 0.5%, excluding the TDBBS acquisition and the July 2023 sale of the independent garden-channel distribution business.
- Pet organic sales declined 4.8%, primarily due to lower durable outdoor-cushion sales and lower pet-distribution sales.
- Garden organic sales increased 11.3%, benefiting from control and fertilizer, grass seed and packet seed sales, timing differences in the fiscal quarter-end and early-season retailer shipments.
- On November 3, 2023, Central acquired TDBBS, a premium natural dog-chew and treat provider, for approximately $60 million. Purchase-price allocation was not finalized; approximately $40 million remained unallocated in other assets at quarter-end.
- In December 2023, the board approved a one-for-four Class A stock dividend, distributed February 8, 2024 to holders of record on January 8, 2024, intended to increase Class A share liquidity.
- No goodwill impairment was recorded. Net intangible assets declined to $489.1 million from $534.2 million year over year, primarily reflecting amortization and accumulated impairment balances.
Outlook, Risks and Contingencies
- Management cited moderating inflation in commodities, labor and freight, with both segments benefiting from cost management and lower inflation during the quarter.
- Results remain exposed to inflation, interest rates, raw-material and energy prices, the company’s ability to pass through cost increases, consumer spending, weather, seasonality, competition, international sourcing and tariffs.
- Management expects Garden profitability to be concentrated in the second and third fiscal quarters; first-quarter Garden losses are historically typical.
- The company is involved in the Nite Glow litigation. A prior $12.4 million judgment was narrowed on appeal to a new trial concerning potential “head start” damages related to misappropriation of confidential information. Management believes the matter will not materially affect the consolidated financial statements, but acknowledges the outcome is uncertain and costs could exceed expectations.
- Disclosure controls and procedures were not effective as of December 30, 2023 because previously reported material weaknesses remained in information-technology general controls at the Live Plant and Green Garden businesses and controls involving an outsourced Live Plant revenue-process provider. Remediation efforts include control redesign, SOX training, additional IT staffing and enhanced oversight.
- The company stated that it was in compliance with all applicable financial covenants at quarter-end and reported no material change in market-risk exposure from its fiscal 2023 Form 10-K.
Important Facts for Investors to Verify
- Whether improved gross margins and operating income are sustained as Garden sales become more seasonal and Pet organic sales remain under pressure.
- The final purchase-price allocation, earnings contribution and integration results for TDBBS.
- Working-capital requirements and cash conversion during the seasonal build-up to the Garden peak selling period.
- Progress in remediating the material weaknesses and the timing of management’s conclusion that disclosure controls and internal control over financial reporting are effective.
- The potential financial exposure and resolution timeline of the Nite Glow litigation.
- Leverage, interest costs and refinancing or redemption considerations for the 2028, 2030 and 2031 senior notes.
- Actual fiscal 2024 capital expenditures relative to the approximately $70 million expectation and the stated 22%–24% effective tax-rate outlook.