Central Garden & Pet Company — Fiscal 2020 Form 10-K Summary
Business context and reporting period
Central Garden & Pet manufactures, markets and distributes branded, private-label and third-party products in the U.S. pet supplies and lawn and garden markets through its Pet and Garden segments. The filing covers the 52-week fiscal year ended September 26, 2020, including the fiscal fourth quarter ended that date.
Fiscal 2020 results benefited materially from COVID-19-related increases in pet ownership, home gardening, do-it-yourself pet care and e-commerce demand. The Garden segment remains highly seasonal, with approximately 67% of segment sales and 57% of total company sales generated in the second and third fiscal quarters.
Financial performance and key metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $2,695.5 million | $2,383.0 million | Up 13.1% |
| Gross profit | $796.6 million | $704.0 million | Up 13.1% |
| Gross margin | 29.6% | 29.5% | Up 10 basis points |
| Operating income | $198.0 million | $152.1 million | Up 30.2% |
| Operating margin | 7.3% | 6.4% | Up approximately 90 basis points |
| Net income attributable to Central | $120.7 million | $92.8 million | Up 30.1% |
| Diluted EPS | $2.20 | $1.61 | Up 36.6% |
| Cash flow from operations | $264.3 million | $205.0 million | Up $59.3 million |
| Capital expenditures | $43.1 million | $31.6 million | Up $11.5 million |
- Pet sales increased 12.8% to $1,562.2 million; Pet operating income increased 25.6% to $154.2 million, and segment margin increased to 9.9% from 8.9%.
- Garden sales increased 13.5% to $1,133.3 million; Garden operating income increased 29.8% to $132.6 million.
- Organic sales increased 10.7% overall, including 10.7% in Pet and 10.6% in Garden. Organic sales increased 20.2% in the second half of the fiscal year.
- EBITDA, as defined by the company, was $253.3 million versus $202.9 million in fiscal 2019.
- Cash and cash equivalents were $652.7 million at year-end; cash, cash equivalents and restricted cash totaled $666.4 million. Working capital was $1,085.0 million.
- Total debt was $694.1 million at year-end, compared with $693.2 million in the prior year. No borrowings were outstanding under the $400 million asset-based revolving credit facility, which had $400 million of net availability.
- Total assets were $2.34 billion and total equity was $1.08 billion. The company adopted ASC 842 and recorded approximately $115.9 million of operating lease right-of-use assets and $120.0 million of operating lease liabilities at year-end.
Material changes versus the prior comparable period
- Sales growth accelerated sharply in the second half of fiscal 2020 as pandemic-related demand increased. Fiscal fourth-quarter sales were $676.0 million versus $540.7 million in the prior-year quarter, while fourth-quarter net income increased to $13.6 million from $2.4 million.
- Operating leverage, higher volume and cost improvements reduced SG&A to 22.2% of sales from 23.2%, despite higher marketing, freight, labor, compensation and COVID-19 safety costs.
- Pet growth was broad-based but was partially offset by lower live-fish sales following a major retailer’s exit from the category, as well as weaker live-animal, bedding and aquatics performance.
- Garden growth reflected increased home gardening, favorable weather and new listings, partially offset by lower grass-seed sales, competitive pressure, commodity costs and the 2019 exit from a fashion-decor pottery line.
- The company repurchased approximately 0.2 million voting shares and 1.8 million Class A shares for an aggregate cost of approximately $52.3 million, excluding certain tax-withholding activity. The $100 million 2019 repurchase authorization remained unused at year-end.
- Fiscal 2020 included a $3.6 million non-cash impairment charge for two private-company investments. No goodwill or intangible-asset impairment was recorded in fiscal 2020; fiscal 2019 included a $2.5 million intangible-asset impairment charge.
Guidance, outlook, risks and unusual items
- The filing does not provide specific fiscal 2021 revenue or earnings guidance. Management expects liquidity to be adequate for at least the next 12 months and anticipates approximately $75 million of capital expenditures over the following 12 months.
- Management launched its Vision 2025 strategy, focused on consumer brands, e-commerce, customer relationships, portfolio management, cost savings, margin improvement and an entrepreneurial operating culture. The company expects substantial investments and transitional costs over the next several years.
- COVID-19 created both demand benefits and operational risks. Management reported supply-chain stress, lower fill rates, temporary facility closures, employee absences and higher logistics, sanitation and personal-protection costs. Demand may decline as consumer behavior normalizes, particularly in categories that benefited from stay-at-home activity.
- In October 2020, the company issued $500 million of 4.125% senior notes due 2030 and used proceeds to redeem its $400 million 6.125% notes due 2023. Fiscal 2021 first-quarter results are expected to include approximately $6.1 million of redemption premium and a $2.5 million non-cash write-off of deferred financing costs. Future annual interest expense is expected to be approximately $3.9 million lower than under the redeemed notes.
- The company agreed to sell its Breeder’s Choice natural pet food business, subject to conditions, with closing expected in December 2020. The filing does not provide transaction proceeds or an expected gain or loss.
- A Nite Glow patent and related litigation resulted in a reduced judgment of approximately $12.4 million. Central has appealed, the plaintiff has cross-appealed, and the outcome remains uncertain.
- Other key risks include customer concentration, commodity and freight-cost inflation, tariffs and dependence on Chinese sourcing, adverse weather, seasonality, e-commerce execution, acquisitions, goodwill impairment, environmental and regulatory liabilities, product recalls, cyberattacks, ERP implementation and variable-rate debt exposure.
- The top five customers represented approximately 52% of fiscal 2020 sales; the largest customer represented approximately 17%. Walmart, Home Depot and Lowe’s represented approximately 17%, 13% and 10% of total sales, respectively.
Important facts for investors to verify
- Whether pandemic-driven demand in pet consumables, home gardening and e-commerce persists or normalizes materially.
- Fiscal 2021 sales, margins and cash flow after the unusually strong second half of fiscal 2020.
- The effects of the 2030 refinancing, including the redemption charges and resulting lower interest expense.
- Progress and costs associated with Vision 2025, including e-commerce and supply-chain investments.
- Final closing terms and financial impact of the Breeder’s Choice sale.
- Resolution and potential cash impact of the Nite Glow litigation and any insurance recoveries related to the DMC fires.
- Exposure to customer concentration, commodity prices, tariffs, China sourcing and seasonal working-capital requirements.
- Potential impairment of investments, goodwill or other long-lived assets if post-pandemic demand or customer liquidity deteriorates.