Pet company Central Garden & Pet (NASDAQGS:CENT) announced better-than-expected results in Q4 FY2023, with revenue up 6% year on year to $750.1 million. Turning to EPS, Central Garden & Pet made a GAAP profit of $0.05 per share, improving from its loss of $0.04 per share in the same quarter last year.
Central Garden & Pet (CENT) Q4 FY2023 Highlights:
- Revenue: $750.1 million vs analyst estimates of $735.1 million (2.1% beat)
- EPS: $0.05 vs analyst expectations of $0.06 (11.8% miss)
- Free Cash Flow of $141 million, down 55.1% from the previous quarter
- Gross Margin (GAAP): 26.3%, down from 28.2% in the same quarter last year
Enhancing the lives of both pets and homeowners, Central Garden & Pet (NASDAQGS:CENT) is a leading producer and distributor of essential products for pet care, lawn and garden maintenance, and pest control.
The company was founded in 1980 and has a plethora of brands under its belt. In its pet care division, it serves pets of all kinds through its comprehensive range of products, including pet food, treats, toys, accessories, and healthcare solutions.
Central Garden & Pet is also equally recognized for its pest control and lawn and garden care expertise, providing a wide array of products such as fertilizers, pesticides, grass seed, and gardening tools. These products empower homeowners and gardeners to maintain lush lawns, vibrant gardens, and pest-free outdoor spaces.
Each brand, whether it be Kaytee for pet care products or Amdro for pest control solutions, caters to a specific niche within the pet care and lawn and garden markets. Many brands often hold market-leading positions and are recognized for their quality.
While headquartered in the United States, Central Garden & Pet’s products are distributed internationally, serving customers around the world. To reach its customer base, the company utilizes an extensive distribution network. Products are available through a wide range of channels, including major retail chains, independent pet stores, garden centers, and online platforms.
Household products companies engage in the manufacturing, distribution, and sale of goods that maintain and enhance the home environment. This includes cleaning supplies, home improvement tools, kitchenware, small appliances, and home decor items. Companies within this sector must focus on product quality, innovation, and cost efficiency to remain competitive. Household products stocks are generally stable investments, as many of the industry's products are essential for a comfortable and functional living space. Recently, there's been a growing emphasis on eco-friendly and sustainable offerings, reflecting the evolving consumer preferences for environmentally conscious options.Competitors in the pet care space include Hill's Science Diet (owned by Colgate-Palmolive, NYSE:CL) and private companies Mars Petcare, Nestlé Purina while pest control and lawn and garden competitors include Scotts Miracle-Gro (NYSE:SMG) and Spectrum Brands (NYSE:SPB) along with private company Terminix.
Central Garden & Pet is larger than most consumer staples companies and benefits from economies of scale, giving it an edge over its smaller competitors.
As you can see below, the company's annualized revenue growth rate of 7.1% over the last three years was decent for a consumer staples business.
This quarter, Central Garden & Pet reported solid year-on-year revenue growth of 6%, and its $750.1 million in revenue outperformed Wall Street's estimates by 2.1%. Looking ahead, analysts expect sales to grow 1.6% over the next 12 months.
Gross Margin & Pricing Power
This quarter, Central Garden & Pet's gross profit margin was 26.3%. down 1.9 percentage points year on year. That means for every $1 in revenue, a chunky $0.74 went towards paying for raw materials, production of goods, and distribution expenses.
Central Garden & Pet has subpar unit economics for a consumer staples company, making it difficult to invest in areas such as marketing and talent to grow its brand. As you can see above, it's averaged a 29.1% gross margin over the last two years. Its margin has also been trending down over the last year, averaging 3.8% year-on-year decreases each quarter. If this trend continues, it could suggest a more competitive environment where Central Garden & Pet has diminishing pricing power and less favorable input costs (such as raw materials).
Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.
This quarter, Central Garden & Pet generated an operating profit margin of 1.2%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.Zooming out, Central Garden & Pet was profitable over the last two years but held back by its large expense base. It's demonstrated mediocre profitability for a consumer staples business, producing an average operating margin of 6.5%. On top of that, Central Garden & Pet's margin has slightly declined by 1.1 percentage points on average each year. This shows Central Garden & Pet has faced some speed bumps along the way.
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q4, Central Garden & Pet reported EPS at $0.05, up from negative $0.04 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-term EPS growth rather than short-term movements.
Between FY2020 and FY2023, Central Garden & Pet's adjusted diluted EPS grew 6.1%, translating into an unimpressive 2% average annual growth rate.
On the bright side, Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 35.5% year-on-year increase in EPS.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Central Garden & Pet's free cash flow came in at $141 million in Q4, up 344% year on year. This result represents a 18.8% margin.
Over the last eight quarters, Central Garden & Pet has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 1.3%, subpar for a consumer staples business. However, its margin has averaged year-on-year increases of 13.1 percentage points. Shareholders should be excited as this will certainly help Central Garden & Pet reach the next level of profitability.
Return on Invested Capital (ROIC)
We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.
Central Garden & Pet's decent track record of profitable investments over the last five years gives it the flexibility to engage with financiers if it wants to raise or borrow capital. Its five-year average ROIC was 10.5%, slightly better than the broader consumer staples sector.
Key Takeaways from Central Garden & Pet's Q4 Results
Sporting a market capitalization of $2.21 billion, Central Garden & Pet is among smaller companies, but its more than $502.9 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
It was good to see Central Garden & Pet beat analysts' revenue expectations this quarter, driven by better-than-expected performance in its pet segment (which overshadowed its underperformance in the garden segment). On the other hand, its operating margin, adjusted EBITDA, and EPS missed analysts' expectations. Its full-year EPS guidance also underwhelmed. Overall, this was a mediocre quarter for Central Garden & Pet. The stock is flat after reporting and currently trades at $43.66 per share.
Is Now The Time?
Central Garden & Pet may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
Central Garden & Pet isn't a bad business, but it probably wouldn't be one of our picks. Although its projected EPS growth for the next year implies the company's fundamentals will improve, the downside is that its estimated revenue for the next 12 months is weak. On top of that, its operations are burning a modest amount of cash.
Central Garden & Pet's price-to-earnings ratio based on the next 12 months is 14.7x. We don't really see a big opportunity in the stock at the moment, but in the end, beauty is in the eye of the beholder. If you like Central Garden & Pet, it seems to be trading at a reasonable price.
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