Central Garden (CENT) Down 6.5% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Central Garden (CENT). Shares have lost about 6.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Central Garden due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Central Garden & Pet Beats Q3 Earnings & Sales

Central Garden & Pet reported better-than-expected results in third-quarter fiscal 2020, wherein both top and bottom lines improved on a year-over-year basis. Results primarily benefited from strong organic growth across segments as well as gains from recent acquisitions.

The company reported adjusted earnings of $1.32 per share, substantially higher than 80 cents reported in the year-ago period. Moreover, the figure surpassed the Zacks Consensus Estimate of 82 cents.

The California-based company reported net sales of $833.5 million, beating the Zacks Consensus Estimate of $728 million. Further, the top line improved 18% from the year-ago period on organic gains in the Garden and Pet segments as well as contribution from the C&S acquisition. Total organic sales grew 16.5%.

Gross profit increased 19.5% to $262.1 million, with gross margin expansion of 40 basis points (bps) to 31.4%.

Operating income was $104.6 million, up 51.8% from the prior-year quarter, while operating margin expanded 290 bps to 12.6%. Operating margin growth was primarily attributed to gross margin expansion coupled with improved overhead leverage and reduced promotional activity, mainly related to the pandemic. SG&A expenses of $157.4 million rose nearly 5% from the prior-year quarter.

Segment in Detail

Net sales at the Pet segment grew 18% year over year to $413.3 million, driven by the acquisition of C&S. Organic sales increased 15%, driven by strength in dog treats and chews, pet distribution, small animal food and supplies, and animal health categories. This was partly offset by weak live fish sales due to the exit of a major retailer in this category during fiscal 2019 as well as shipment and supply restrictions for live animals due to the COVID-19 outbreak.

The segment’s operating income grew 44.8% year over year to $50.8 million, backed by the C&S acquisition and organic sales growth. Operating margin expanded 230 basis points to 12.3%, while organic operating margin was up 220 bps to 12.2%.

At the Garden segment, net sales advanced 17.9% year over year to $420.2 million, driven by robust portfolio strength, with gains in garden distribution, controls and fertilizers, wild bird feed, and grass seed. Organic sales for the segment improved 17.9%. The segment reported an operating income of $77.8 million, up 46.5% from $53.1 million in the year-ago quarter. Also, operating margin expanded 360 basis points to 18.5%.

Financial Details

Central Garden & Pet ended the quarter with cash and cash equivalents of $495.3 million and total debt of $694 million compared with $445.6 million and $693.1 million, respectively, in the prior-year period. Shareholders’ equity at the end of the quarter was $1,059.4 million, excluding non-controlling interest.

Cash provided by operations during the quarter was $181.6 million compared with $172.1 million a year ago, driven by EBITDA gains, offset by changes in working capital mostly associated with robust demand trends in the reported quarter. Net interest expenses increased to $11.5 million in the reported quarter, up from $8.5 million in the prior-year period.

Moreover, the company bought back shares worth $5.1 million during the fiscal third quarter. As of Jun 27, it had $100 million remaining under its share repurchase program. Additionally, it has 600,000 shares remaining under the board’s equity dilution authorization.

Outlook

Driven by strong year-to-date performance and anticipated investments in the fiscal fourth quarter, the company projects earnings per share at or above $1.90 for fiscal 2020. This suggests growth of nearly 18% from the year-ago quarter’s earnings of $1.61. However, the company informed that the fiscal fourth quarter generally attracts smaller earnings, which coupled with increased investments in the period, is likely to result in delivering a slight loss in fourth-quarter fiscal 2020.

Additionally, the company expects to provide its refreshed long-term strategy, called the Vision2025, at a virtual Investor Day to be held in conjunction with its fiscal 2020 earnings release in late November 2020.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -159.38% due to these changes.

VGM Scores

Currently, Central Garden has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Central Garden has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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