Central Garden & Pet Company — Q1 Fiscal 2022 Form 10-Q Summary
Business context and reporting period
Central Garden & Pet Company operates through Pet and Garden segments, selling branded, private-label and third-party pet and garden products. The filing covers the unaudited three months ended December 25, 2021, compared with the three months ended December 26, 2020. Garden results are highly seasonal; approximately 69% of fiscal 2021 Garden sales occurred in the second and third fiscal quarters.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $661.4 million | $592.2 million | Up 11.7% |
| Gross profit | $198.2 million | $165.4 million | Up 19.8% |
| Gross margin | 30.0% | 27.9% | Up 210 basis points |
| Operating income | $26.2 million | $27.0 million | Down 3.1% |
| Operating margin | 4.0% | 4.6% | Down 60 basis points |
| Net income attributable to Central | $9.0 million | $5.6 million | Up 60.5% |
| Diluted EPS | $0.16 | $0.10 | Up $0.06 |
| Adjusted EBITDA | $51.6 million | $44.6 million | Up 15.6% |
| Net cash used in operating activities | $92.5 million | $36.1 million | Use increased $56.4 million |
- Pet sales were $436.0 million, down 0.1%; organic Pet sales increased 0.8%. Pet operating income rose 4.0% to $45.3 million, with a 10.4% operating margin.
- Garden sales were $225.4 million, up 44.7%, primarily reflecting $70.0 million from fiscal 2021 acquisitions. Organic Garden sales declined 0.3%. Garden operating income increased to $6.1 million, while its operating margin declined to 2.7%.
- SG&A increased 24.3% to $172.0 million, or 26.0% of sales versus 23.4% in the prior-year quarter, due primarily to acquired businesses, wage and freight inflation, and increased marketing investment.
- Cash, cash equivalents and restricted cash totaled $309.0 million at December 25, 2021, down from $439.5 million at September 25, 2021 and $622.0 million at December 26, 2020.
- Inventory increased to $844.9 million from $685.2 million at fiscal year-end and $574.9 million a year earlier, reflecting acquisitions, demand and planned inventory buildup.
- Total debt was $1.185 billion, compared with $789.0 million a year earlier. The debt comprised $300 million of 2028 Notes, $500 million of 2030 Notes and $400 million of 2031 Notes, net of issuance costs and other debt.
- Net availability under the $750 million asset-based revolving credit facility was approximately $414 million. No borrowings or letters of credit were outstanding under the facility at quarter-end.
- Capital expenditures were $24.2 million in the quarter. Management expects fiscal 2022 capital expenditures of approximately $80 million to $90 million.
Material changes versus the prior comparable period
- Sales growth was primarily acquisition-driven, particularly in Garden, following fiscal 2021 acquisitions including Green Garden Products and D&D Commodities. Organic consolidated sales increased only 0.5%.
- Gross margin improved through pricing actions, acquisitions and mix, but significant commodity, labor and freight inflation continued to pressure margins.
- Operating income declined despite higher sales and gross profit because SG&A grew faster than revenue.
- Net interest expense fell to $14.4 million from $20.8 million. The prior-year period included approximately $10.0 million of incremental costs associated with redeeming the 2023 Notes; the current period includes higher interest from the $400 million 2031 Notes issued in April 2021.
- Operating cash flow deteriorated primarily because of the inventory investment and working-capital needs. Investing cash outflow decreased because there were no current-period acquisitions, compared with the prior-year acquisition of DoMyOwn.
- Central repurchased approximately 0.2 million Class A shares for approximately $6.7 million, and $100 million remained available under the repurchase authorization at quarter-end.
Guidance, outlook, risks and unusual items
- Management believes available cash, operating cash flow, supplier arrangements and the revolving facility will meet anticipated working-capital, capital-expenditure and other cash needs for at least the next 12 months, but cautions that financing may not remain available on acceptable terms.
- Management does not expect to fully offset fiscal 2022 cost pressures through pricing. Key pressures include commodities, labor, freight, energy and raw materials.
- COVID-19 continues to affect workforce availability, productivity, supply-chain reliability, fill rates, demand patterns and logistics costs. New variants and changing consumer behavior make forecasting difficult.
- Other principal risks include seasonality, weather, customer concentration, competition, acquisition integration, potential declines in pandemic-related demand, international sourcing, tariffs, cyberattacks, regulatory matters, product liability and goodwill or intangible-asset impairment.
- The company entered into an amended credit agreement on December 16, 2021, providing a $750 million secured revolving facility with a potential $400 million accordion, maturing December 16, 2026. The company was in compliance with applicable financial covenants.
- A patent and misappropriation dispute with Nite Glow remains unresolved. Following appeal, patent infringement and duplicative breach-of-contract claims were rejected, but a new trial on damages for the remaining misappropriation claim was ordered. Management believes the matter will not materially affect the financial statements, while acknowledging litigation uncertainty.
- No goodwill impairment was recorded, no material changes to previously disclosed risk factors were reported, and disclosure controls were effective as of December 25, 2021.
Important facts for investors to verify
- Whether acquisition-driven Garden growth converts into sustainable organic growth, particularly given the 0.3% organic decline in the quarter.
- Whether pricing actions can offset continuing commodity, labor and freight inflation without weakening demand or margins.
- Inventory levels, working-capital conversion and the trajectory of operating cash flow through the peak Garden selling season.
- Debt leverage, interest costs, covenant compliance and liquidity availability as seasonal borrowing needs increase.
- Execution and integration of fiscal 2021 acquisitions, including the final purchase-price allocations and related goodwill and intangible-asset balances.
- Potential financial exposure from the Nite Glow litigation and continuing unclaimed-property examinations.