Central Garden & Pet Co. (CENT, Financial), a producer of quality products for the pet and lawn and garden supplies markets, reported strong fiscal first-quarter 2017 results on Feb. 2.
The company sells its products to specialty independent and mass retailers. It is a professional producer of lawn and garden products as well as pet care products. Its brands include Kaytee, All-Glass Aquarium, Oceanic, Kent Marine, Zodiac, Pre-Strike, Altosid, Nylabone, TFH and Four Paws.
In its report, the company boasted strong organic sales growth and market share increases. Operating income and the operating margin increased during the quarter due to acquisitions and growth in company's pet segment.
Fiscal 2017 first-quarter performance
Net sales increased 16.6% to $419.5 million, up from $359.8 million in the prior-year quarter. Branded product sales were $332.9 million for the quarter, a 20.4% increase from the prior year. Sales of other manufacturers’ products were $86.7 million, an increase of 4.1% from the prior-year quarter. Organic sales increased 7%.
The gross margin increased by 110 basis points from the prior-year quarter to 28.8%.
GAAP operating income was $19.9 million, up from $8.8 million the year before. Non-GAAP operating income increased to $17.9 million from $8.8 million in the prior-year quarter.
The GAAP operating margin increased 240 basis points during the quarter to 4.8%, compared to 2.4% the year before. The non-GAAP operating margin also increased 190 basis points to 4.3%.
GAAP Net income for the quarter was $7.6 million, up from a loss of $8.6 million in the prior-year quarter. Non-GAAP net income was $6.3 million, an increase from $0.3 million in the prior-year quarter).
GAAP EPS increased to 15 cents from a loss of 18 cents in the prior-year quarter. Non-GAAP EPS was 12 cents, an increase from one cent the year before.
Total debt as of Dec. 24, 2016 was $395.4 million, down from $436.2 million in the previous year.
Net interest expense was $6.8 million, down from $22.1 million in the prior-year quarter.
The effective tax rate for the first quarter of 2017 was 35.8%, compared to 37.6% in the prior-year period.
Approximately $35 million remains available under the board-approved share repurchase program. The company did not buy back any shares.
Segment performance
Pet segment
Net sales during the first quarter increased 22.2% to $304 million. Pet organic sales increased 6.1%. The segment’s branded product sales during the quarter were $246.4 million, an increase of 30.6% from the same quarter a year ago. Operating income increased 27.5% to $33.4 million. Â The operating margin increased to 11%.
Garden segment
Net sales for the garden segment increased 4.0% to $115.5 million. Sales of other manufacturers’ products increased 25% to $29 million. Operating income during the quarter was $2.7 million, up from a loss of $3.3 million in the prior-year quarter. The operating margin improved 520 basis points to 2.3% for the quarter.
Expectations
The company guided non-GAAP EPS of $1.34 or higher for fiscal 2017. This represents an increase of at least 6% from 2016.
Focus
- Product innovation.
- Cost curtailment.
- Emphasis on both top and bottom line.
- Positioning its business portfolio in a positive light.
- Accelerating growth momentum in the portfolio.
- Productivity improvements.
Conclusion
It is estimated the total pet food, treats and supplies industry in 2015 was worth approximately $50.8 billion in annual retail sales. With its diversified portfolio of brands, the company is poised to grow.
With the rise in organic gardening, the company has a lot of opportunities for growth in the future. It is focusing on specific balance sheet metrics to reduce working capital investments. It is also leveraging the marketing, manufacturing and sales capabilities to improve operational efficiencies. The company has an impressive track record of earnings and has been increasing its earnings estimates.
Central Garden & Pet is pursuing strategic acquisitions to grow its profitability. The acquisitions are adding to the top and bottom line. The organic sales growth in 2016 made it a good year for the company. In addition, the operating margin increased 100 basis points and the free cash flow almost doubled. Since the company continues to leverage the strength of its existing brands, I believe adding Central Garden & Pet to your portfolio will reap profitable returns.
Disclosure: I do not hold any position in the company.
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