Central Garden & Pet Company — Fiscal 2021 First-Quarter 10-Q Summary
Business context and reporting period
Central Garden & Pet manufactures, markets and distributes branded, private-label and third-party pet and garden products. The report covers the three months ended December 26, 2020, compared with the three months ended December 28, 2019. Results are unaudited and affected by significant seasonality, particularly in the Garden segment.
The Company has two reportable segments: Pet and Garden. Outdoor cushion operations were reclassified from Garden to Pet beginning in fiscal 2021, and prior-period segment information was recast.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $592.2 million | $482.8 million | Up 22.7% |
| Gross profit | $165.4 million | $131.3 million | Up 26.0% |
| Gross margin | 27.9% | 27.2% | Up 70 basis points |
| Operating income | $27.0 million | $2.1 million | Up $25.0 million |
| Operating margin | 4.6% | 0.4% | Up 4.2 percentage points |
| Net income attributable to Central | $5.6 million | $(4.4) million | Returned to profitability |
| Diluted EPS | $0.10 | $(0.08) | Improved $0.18 |
| Net interest expense | $20.8 million | $8.6 million | Up $12.2 million |
| Adjusted non-GAAP net income | $15.7 million | $(4.4) million | Adjusted diluted EPS: $0.29 |
Pet sales increased 19.0% to $436.4 million, with operating income increasing 51.5% to $43.5 million. Garden sales increased 34.1% to $155.8 million, and the segment returned to operating profitability with $4.7 million of operating income versus a $6.9 million loss in the prior-year quarter.
Selling, general and administrative expense increased 7.1% to $138.4 million but declined to 23.4% of sales from 26.8%, reflecting operating leverage and lower travel and entertainment costs. EBITDA was $40.0 million versus $15.2 million in the prior-year quarter.
Cash flow, debt and liquidity
| Metric | December 26, 2020 | December 28, 2019 |
|---|---|---|
| Cash and cash equivalents | $608.3 million | $445.8 million |
| Cash, cash equivalents and restricted cash | $622.0 million | $458.8 million |
| Total debt | $789.0 million | $693.4 million |
| Net cash used in operating activities | $36.1 million | $18.0 million |
| Net cash used in investing activities | $93.4 million | $10.4 million |
| Net cash provided by financing activities | $84.4 million | $(24.0) million |
Operating cash flow was negative because of seasonal inventory investments and increased demand. Inventory increased to $574.9 million from $556.5 million a year earlier. Capital expenditures were $14.7 million during the quarter; management expects approximately $75 million of fiscal 2021 capital expenditures, including investments in facilities and enterprise information technology.
In October 2020, the Company issued $500 million of 4.125% senior notes due 2030 and used proceeds to redeem its $400 million of 6.125% senior notes due 2023. The refinancing increased debt but extended maturities and reduced the coupon on the refinanced principal. The transaction generated approximately $10.0 million of first-quarter interest expense, including the redemption premium, overlapping interest and write-off of deferred financing costs.
The $400 million asset-based revolving credit facility matures in September 2024 and had $400 million of net availability at quarter-end. No borrowings or letters of credit were outstanding under the facility, although $2.4 million of other letters of credit were outstanding. Management stated that liquidity should be adequate for at least the next 12 months and that the Company was in compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Sales growth was broad-based and supported by increased pet ownership, home gardening, e-commerce demand and favorable fall garden weather during the COVID-19 period.
- Organic sales increased 23.0%, including 19.6% in Pet and 33.8% in Garden.
- Gross margin improved because of favorable mix, volume efficiencies, pricing and Garden fixed-cost leverage, partly offset by higher commodity, ocean freight and labor costs.
- Operating income improved substantially, with Garden moving from an operating loss to operating income.
- Net interest expense increased materially due primarily to the senior-note refinancing and lower interest income.
- Cash used in operating and investing activities increased because of inventory buildup, higher capital spending and the approximately $83 million acquisition of DoMyOwn.
- The Company sold its Breeder’s Choice business for $2.4 million of proceeds and recorded a $2.6 million loss. The business generated approximately $28 million of fiscal 2020 revenue.
- Total assets increased to $2.45 billion from $2.14 billion, while equity increased to $1.09 billion from $973.2 million.
Guidance, outlook, risks and unusual items
The filing does not provide formal full-year revenue or earnings guidance. Management expects approximately $75 million of fiscal 2021 capital expenditures and believes available cash, operating cash flow, supplier arrangements and revolving-credit capacity will fund anticipated needs.
COVID-19 continued to support demand in many pet and garden categories but created supply-chain, labor, logistics and forecasting challenges. Management expects demand patterns to remain volatile and cautions that categories benefiting from the pandemic may experience future reductions in demand. The Company also reported higher commodity, freight and labor costs and may not be able to pass through cost increases timely.
Subsequent events included the approximately $81 million acquisition of Hopewell Nursery on December 31, 2020 and a definitive agreement to acquire Green Garden Products for approximately $532 million, expected to close in February 2021. These transactions will increase acquisition activity and financing requirements.
Material contingencies include a patent and related litigation matter with a reduced judgment of approximately $12.4 million, currently on appeal, and continuing state unclaimed-property examinations. The Company also had approximately $10 million of costs in excess of insurance proceeds related to prior fires at a Texas facility; management believes insurance coverage is sufficient for remaining covered losses and business interruption losses.
Other relevant risks include seasonality, dependence on major customers, raw-material and energy-price volatility, supply shortages, tariffs, retail consolidation, competition, acquisition integration, goodwill and intangible-asset impairment, product liability and recalls, cybersecurity, regulatory matters, and the transition away from LIBOR.
Most important facts for investors to verify
- Whether pandemic-driven demand in pet, e-commerce and home-gardening categories persists or normalizes.
- Inventory levels, working-capital conversion and operating cash flow as the business enters its peak Garden selling season.
- Integration and performance of DoMyOwn, Hopewell Nursery and the proposed Green Garden Products acquisition.
- Leverage, interest expense and liquidity after the $500 million note issuance and planned acquisition spending.
- Exposure to commodity, freight and labor inflation and the Company’s ability to recover those costs through pricing.
- Resolution and potential financial impact of the Nite Glow litigation and unclaimed-property examinations.
- Whether supply-chain disruptions, employee absences or COVID-19-related operating costs materially affect future results.
- Changes in segment trends after the outdoor cushion reclassification and the impact of the Breeder’s Choice divestiture.