Pet company Central Garden & Pet (NASDAQGS:CENT) reported results ahead of analysts' expectations in Q1 FY2024, with revenue up 1.1% year on year to $634.5 million. It made a GAAP profit of $0.01 per share, improving from its loss of $0.16 per share in the same quarter last year.
Central Garden & Pet (CENT) Q1 FY2024 Highlights:
- Revenue: $634.5 million vs analyst estimates of $617 million (2.8% beat)
- EPS: $0.01 vs analyst estimates of -$0.18 ($0.19 beat)
- Free Cash Flow was -$79.91 million, down from $141 million in the previous quarter
- Gross Margin (GAAP): 28.2%, up from 27.4% in the same quarter last year
- Organic Revenue was up 1% year on year
- Market Capitalization: $2.30 billion
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
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.Sales Growth
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 5.7% over the last three years was mediocre for a consumer staples business.
This quarter, Central Garden & Pet reported decent year-on-year revenue growth of 1.1%, and its $634.5 million in revenue topped Wall Street's estimates by 2.8%. Looking ahead, Wall Street expects revenue to decline 2.3% over the next 12 months, a deceleration from this quarter.
Gross Margin & Pricing Power
Gross profit margins tell us how much money a company gets to keep after paying for the direct costs of the goods it sells.
This quarter, Central Garden & Pet's gross profit margin was 28.2%, in line with the same quarter last year. That means for every $1 in revenue, a chunky $0.72 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 28.9% gross margin over the last two years. Its margin has also been consistent over the last year, suggesting it will take a fundamental shift in the business to change meaningfully.
Operating Margin
Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.
In Q1, Central Garden & Pet generated an operating profit margin of 1.3%, up 1.3 percentage points year on year. This increase was encouraging, and we can infer Central Garden & Pet was more efficient with its expenses because its operating margin expanded more than its gross margin.
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 6.2%. Its margin has also seen few fluctuations, meaning it will likely take a big change to improve profitability.EPS
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 Q1, Central Garden & Pet reported EPS at $0.01, up from negative $0.16 in the same quarter a year ago. This print easily cleared Wall Street's estimates, and shareholders should be content with the results.
Between FY2021 and FY2024, Central Garden & Pet's EPS grew 5.3%, translating into an unimpressive 1.7% compounded 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 7.9% 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 burned through $79.91 million of cash in Q1, in line with its cash burn last year. This result represents a negative 12.6% free cash flow 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 1.9%, subpar for a consumer staples business. However, its margin has averaged year-on-year increases of 13.3 percentage points over the last 12 months. Shareholders should be excited as this will certainly help Central Garden & Pet reach the next level of profitability.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).
Central Garden & Pet's five-year average ROIC was 9.6%, somewhat low compared to the best consumer staples companies that consistently pump out 20%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, over the last two years, Central Garden & Pet's ROIC has averaged a 3.8 percentage point decrease each year. In conjunction with its already low returns, these declines suggest the company's profitable business opportunities are few and far between.
Key Takeaways from Central Garden & Pet's Q1 Results
We liked how revenue beat on slightly positive organic revenue growth. Operating income beat convincingly, leading to an impressive EPS beat. Zooming out, we think this was a very solid quarter that should please shareholders. The stock is flat after reporting and currently trades at $46.94 per share.
Is Now The Time?
Central Garden & Pet may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for all companies serving consumers, but in the case of Central Garden & Pet, we'll be cheering from the sidelines. Its revenue growth has been a little slower over the last three years, and analysts expect growth to deteriorate from here. On top of that, its low free cash flow margins give it little breathing room, and its EPS growth over the last three years has been mediocre.
Central Garden & Pet's price-to-earnings ratio based on the next 12 months is 18.1x. While we've no doubt one can find things to like about Central Garden & Pet, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.
Wall Street analysts covering the company had a one-year price target of $47.40 per share right before these results (compared to the current share price of $46.94).
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