Central Garden & Pet Company (NASDAQ: CENT) (NASDAQ: CENTA) (“Central”), a market leader in the Pet and Garden industries, today announced its third quarter fiscal 2023 financial results for the period ended June 24, 2023.
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“We delivered record operating income and earnings per share in the third quarter while expanding gross margin, growing market share and significantly improving our cash position. We are also pleased with the progress we are making on our cost and simplicity program,” said Tim Cofer, CEO of Central Garden & Pet. “Given our record Q3 performance, coupled with the early visibility we have into the fourth quarter, we are raising our outlook for the full year.”
Fiscal 2023 Third Quarter Financial Results
Net sales increased 1% to $1,023 million from $1,015 million a year ago.
Gross margin expanded by 80 basis points to 31.1% from 30.3% a year ago, and by 160 basis points to 31.9% on a non-GAAP basis. The gross margin expansion was driven by improved pricing, cost management and favorable product mix.
Operating income increased 8% to $123 million from $114 million a year ago, and 20% to $137 million on a non-GAAP basis. Operating margin expanded by 80 basis points to 12.0% from 11.2% in the prior year, and by 220 basis points to 13.4% on a non-GAAP basis. The operating margin expansion was driven by improved gross profit and reduced commercial spend to align with demand.
Net interest expense was $13 million compared to $14 million in the prior year quarter.
The Company's net income increased 10% to $83 million from $75 million a year ago, and 24% to $94 million on a non-GAAP basis. Earnings per share increased $0.17 to $1.56 from $1.39 in the prior year, and $0.36 to $1.75 on a non-GAAP basis. Adjusted EBITDA increased 17.3% to $166 million from $141 million in the prior year.
The Company’s effective tax rate was 24.4% compared to 23.7% in the prior year quarter.
Pet Segment Fiscal 2023 Third Quarter Results
Net sales for the Pet segment of $503 million were essentially flat compared to $505 million in the prior year. Strength in Dog & Cat Treats & Toys as well as Bird was offset by lower sales in Outdoor Cushions and lower demand for durable pet products.
Pet segment operating income was $60 million compared to $63 million a year ago and increased 18% to $74 million on a non-GAAP basis. Operating margin was 11.9% compared to 12.4% in the prior year. On a non-GAAP basis, operating margin increased by 230 basis points to 14.7% driven by improved pricing and cost management. Pet segment adjusted EBITDA was $84 million compared to $72 million a year ago.
Garden Segment Fiscal 2023 Third Quarter Results
Net sales for the Garden segment increased 2% to $520 million from $511 million a year ago. Strength in Live Goods, Packet Seed and Wild Bird was partly offset by lower sales in Distribution and Grass Seed.
Garden segment operating income increased 17% to $88 million from $76 million a year ago, and operating margin increased by 210 basis points to 16.9% from 14.8% in the prior year. The increase in operating margin was mainly driven by improved pricing, favorable product mix and cost management. Garden segment adjusted EBITDA increased 17% to $99 million from $85 million in the prior year quarter.
Additional Information
The Company's cash balance at the end of the quarter was $333 million compared to $196 million a year ago. Cash provided by operations during the quarter was $325 million compared to $190 million a year ago. The increase in cash provided by operations was driven by a reduction in inventory as the Company converted inventory to cash.
Total debt as of June 24, 2023 and June 25, 2022 was $1.2 billion. The Company's leverage ratio, as defined in the Company's credit agreement, at the end of the third quarter was 3.1x compared to 2.9x at the end of the prior year quarter. The Company repurchased approximately 466,011 shares or $16.7 million of its stock during the quarter.
Cost and Simplicity Program
The Company continues to progress its multi-year cost and simplicity program consisting of a pipeline of projects across a number of key areas including procurement, manufacturing, logistics, portfolio management and administrative costs to simplify its business and improve efficiency across the organization. In the third quarter fiscal 2023, as expected, the Company incurred $14 million of one-time charges related to the closure of its pet bedding facility in Texas, the majority of which were non-cash.
Earlier this week, the Company completed the sale of its independent garden center distribution business to reduce complexity and improve margins. The Company will retain its third-party distribution business with its largest three retail partners and select other national accounts. The Company will share more details on its earnings call.
Fiscal 2023 Guidance
Taking the record Q3 performance into account, coupled with the early visibility into the fourth quarter, the Company now expects fiscal 2023 non-GAAP EPS of $2.55 or better. This outlook reflects the macroeconomic uncertainty, cost inflation, evolving consumer behavior and unfavorable retailer inventory dynamics, as well as pricing actions and productivity initiatives across the Company's portfolio. The Company anticipates capital spending significantly below fiscal 2022 levels. Fiscal 2023 will have 53 weeks compared to 52 weeks in fiscal 2022. This outlook excludes the impact of any acquisitions, divestitures or restructuring activities that may occur during fiscal 2023, including any projects under the cost and simplicity program.
Conference Call
The Company's senior management will hold a conference call today at 4:30 p.m. Eastern Time (1:30 p.m. Pacific Time) to discuss its third quarter fiscal 2023 financial results and provide a general business update. The conference call and related materials can be accessed at http://ir.central.com.
Alternatively, to listen to the call by telephone, dial (201) 689-8345 (domestic and international) using confirmation #13738720.
About Central Garden & Pet
Central Garden & Pet Company (NASDAQ: CENT) (NASDAQ: CENTA) understands that home is central to life and has proudly nurtured happy and healthy homes for over 40 years. With fiscal 2022 net sales of $3.3 billion, Central is on a mission to lead the future of the Pet and Garden industries. The Company’s innovative and trusted products are dedicated to helping lawns grow greener, gardens bloom bigger, pets live healthier and communities grow stronger. Central is home to a leading portfolio of more than 65 high-quality brands including Amdro®, Aqueon®, Cadet®, Farnam®, Ferry-Morse®, Four Paws®, Kaytee®, K&H®, Nylabone® and Pennington®, strong manufacturing and distribution capabilities and a passionate, entrepreneurial growth culture. Central is based in Walnut Creek, California and has over 7,000 employees across North America and Europe. Visit www.central.com to learn more.
Safe Harbor Statement
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: The statements contained in this release which are not historical facts, including statements concerning cost inflation, evolving consumer behavior and unfavorable retailer inventory dynamics, pricing actions, productivity initiatives and reduced capital spending, and earnings guidance for fiscal 2023, are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. All forward-looking statements are based upon the Company’s current expectations and various assumptions. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this release including, but not limited to, the following factors:
- high inflation, rising interest rates, a potential recession and other adverse macro-economic conditions;
- fluctuations in market prices for seeds and grains and other raw materials;
- our ability to pass through cost increases in a timely manner;
- fluctuations in energy prices, fuel and related petrochemical costs;
- declines in consumer spending and increased inventory risk during economic downturns;
- the potential for future reductions in demand for product categories that benefited from the COVID-19 pandemic, including the potential for reduced orders as retailers work through excess inventory;
- adverse weather conditions;
- the success of our Central to Home strategy and our Cost and Simplicity program;
- risks associated with our acquisition strategy, including our ability to successfully integrate acquisitions and the impact of purchase accounting on our financial results;
- restructuring activities to improve long-term profitability;
- supply chain delays and disruptions resulting in lost sales, reduced fill rates and service levels, and delays in expanding capacity and automating processes;
- seasonality and fluctuations in our operating results and cash flow;
- supply shortages in pet birds, small animals and fish;
- dependence on a small number of customers for a significant portion of our business;
- consolidation trends in the retail industry;
- risks associated with new product introductions, including the risk that our new products will not produce sufficient sales to recoup our investment;
- competition in our industries;
- continuing implementation of an enterprise resource planning information technology system;
- potential environmental liabilities;
- risks associated with international sourcing;
- impacts of tariffs or a trade war;
- access to and cost of additional capital;
- potential goodwill or intangible asset impairment;
- our dependence upon our key executives;
- our ability to recruit and retain new members of our management team to support our growing businesses and to hire and retain employees;
- our ability to protect our trademarks and other proprietary rights;
- litigation and product liability claims;
- regulatory issues;
- the impact of product recalls;
- potential costs and risks associated with actual or potential cyberattacks;
- potential dilution from issuance of authorized shares;
- the voting power associated with our Class B stock; and
- the impact of new accounting regulations and the possibility our effective tax rate will increase as a result of future changes in the corporate tax rate or other tax law changes.
These risks and others are described in the Company’s Securities and Exchange Commission filings. The Company undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events or otherwise. The Company has not filed its Form 10-Q for the fiscal quarter ended June 24, 2023, so all financial results are preliminary and subject to change.
CENTRAL GARDEN & PET COMPANY | |||||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||||||
(in thousands, except share and per share amounts, unaudited) | |||||||||||
ASSETS | June 24, 2023 | June 25, 2022 | September 24, 2022 | ||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 333,139 | $ | 195,791 | $ | 177,442 | |||||
Restricted cash | 13,542 | 12,676 | 14,742 | ||||||||
Accounts receivable (less allowances of $29,245, $28,106 and $26,246) | 492,850 | 505,896 | 376,787 | ||||||||
Inventories, net | 865,496 | 882,522 | 938,000 | ||||||||
Prepaid expenses and other | 36,655 | 36,359 | 46,883 | ||||||||
Total current assets | 1,741,682 | 1,633,244 | 1,553,854 | ||||||||
Plant, property and equipment, net | 392,332 | 390,326 | 396,979 | ||||||||
Goodwill | 546,436 | 511,973 | 546,436 | ||||||||
Other intangible assets, net | 512,175 | 490,959 | 543,210 | ||||||||
Operating lease right-of-use assets | 172,379 | 193,627 | 186,344 | ||||||||
Other assets | 54,943 | 125,797 | 55,179 | ||||||||
Total | $ | 3,419,947 | $ | 3,345,926 | $ | 3,282,002 | |||||
LIABILITIES AND EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 198,406 | $ | 241,093 | $ | 215,681 | |||||
Accrued expenses | 247,517 | 228,882 | 201,783 | ||||||||
Current lease liabilities | 50,209 | 45,860 | 48,111 | ||||||||
Current portion of long-term debt | 255 | 352 | 317 | ||||||||
Total current liabilities | 496,387 | 516,187 | 465,892 | ||||||||
Long-term debt | 1,187,498 | 1,185,842 | 1,186,245 | ||||||||
Long-term lease liabilities | 132,419 | 155,002 | 147,724 | ||||||||
Deferred income taxes and other long-term obligations | 156,537 | 136,490 | 147,429 | ||||||||
Equity: | |||||||||||
Common stock, $0.01 par value: 11,098,584, 11,322,012 and 11,296,351 shares outstanding at June 24, 2023, June 25, 2022 and September 24, 2022 | 111 | 113 | 113 | ||||||||
Class A common stock, $0.01 par value: 40,986,336, 41,745,551 and 41,336,223 shares outstanding at June 24, 2023, June 25, 2022 and September 24, 2022 | 410 | 417 | 413 | ||||||||
Class B stock, $0.01 par value: 1,602,374, 1,612,374 and 1,612,374 at June 24, 2023, June 25, 2022 and September 24, 2022 | 16 | 16 | 16 | ||||||||
Additional paid-in capital | 588,731 | 581,060 | 582,056 | ||||||||
Retained earnings | 858,217 | 771,341 | 755,253 | ||||||||
Accumulated other comprehensive loss | (1,955 | ) | (1,924 | ) | (4,145 | ) | |||||
Total Central Garden & Pet Company shareholders’ equity | 1,445,530 | 1,351,023 | 1,333,706 | ||||||||
Noncontrolling interest | 1,576 | 1,382 | 1,006 | ||||||||
Total equity | 1,447,106 | 1,352,405 | 1,334,712 | ||||||||
Total | $ | 3,419,947 | $ | 3,345,926 | $ | 3,282,002 | |||||
CENTRAL GARDEN & PET COMPANY | |||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||||||||
(in thousands, except per share amounts, unaudited) | |||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||
June 24, 2023 | June 25, 2022 | June 24, 2023 | June 25, 2022 | ||||||||||||
Net sales | $ | 1,023,269 | $ | 1,015,378 | $ | 2,559,936 | $ | 2,631,146 | |||||||
Cost of goods sold | 705,217 | 707,752 | 1,810,547 | 1,838,532 | |||||||||||
Gross profit | 318,052 | 307,626 | 749,389 | 792,614 | |||||||||||
Selling, general and administrative expenses | 195,222 | 193,547 | 548,112 | 545,476 | |||||||||||
Operating income | 122,830 | 114,079 | 201,277 | 247,138 | |||||||||||
Interest expense | (14,542 | ) | (14,422 | ) | (43,887 | ) | (43,633 | ) | |||||||
Interest income | 1,408 | 87 | 2,287 | 188 | |||||||||||
Other income (expense) | 853 | (759 | ) | 3,147 | (1,337 | ||||||||||
