Central Garden Stays Neutral - Analyst Blog
March 02 2012 - 11:38AM
Zacks
Central Garden & Pet Company (CENT) is a
leading producer and marketer of premium and value-oriented
products focused on the lawn and garden as well as pet supplies
markets in the U.S. On the one hand, the company is witnessing
increased sales but on the other hand it is reporting dismal
bottom-line results due to rising costs of raw materials that are
weighing upon margins.
Top Line Sustaining Momentum
The company’s diversified portfolio of brands has helped it to
develop a healthy commercial relationship with giant retailers such
as Wal-Mart Stores Inc. (WMT), The Home
Depot Inc. (HD) and Lowe’s Companies Inc.
(LOW). This provides a significant upside potential for the
company.
This was quite evident from the company’s top line that
registered growth of 7% to $302.1 million in the first quarter of
2012, reflecting increased sales in the garden and pet products
segments. Moreover, reported net sales surpassed the Zacks
Consensus Revenue Estimate of $290 million.
Garden Products segment sales increased 8% year over year to
$102.8 million, whereas Pet Products segment sales increased 7% to
$199.3 million.
Bottom Line Struggling, Margins Under
Pressure
However, despite witnessing a growth in the top line, Central
Garden & Pet’s posted disappointing bottom-line results,
battered by higher input costs, change in product mix and
seasonality of business.
The company’s quarterly loss of 27 cents a share widened from a
loss of 16 cents in the prior-year quarter. The analysts covered by
Zacks had expected the company to incur a loss of 26 cents per
share in the reported quarter.
During the quarter under review, gross profit shrunk 2.8% to
$80.7 million, whereas gross margin contracted 280 basis points to
26.7%. The decline reflected a rise in raw material costs and sales
of lower margin products. Total operating loss for the quarter was
$11.3 million, indicating a significant widening of loss from $6.5
million in the year-ago quarter.
We believe that the sale of innovative products carrying higher
margins, a reasonable price increase and cost containment efforts
may improve gross and operating margins.
Strategies to Step Up
For 2012, the company’s primary focus is on streamlining its
cost structure and increasing operating efficiencies in order to
improve its margins. Management hinted of gross margin improvement
and bottom-line performance to improve in the second half of
calendar 2012.
The company’s long-term target is to attain growth of at least
10% in the top line, and achieve operating margins in the range of
10% to 15%. The company also targets a $30 million yearly savings
in cost as it exits 2012.
The company intends to transform into an integrated, multi-brand
company from a portfolio of stand-alone businesses, by
restructuring and reorganizing operating units and consolidating
manufacturing facilities and logistics centers.
Central Garden & Pet has lowered the count of sales and
logistics warehouses to 27 in fiscal 2011 from 34 in fiscal 2008
and expects to further consolidate about 6 facilities during the
first half of fiscal 2012, and intends to decrease its inventory
level by approximately $60 million to $70 million by the end of
fiscal year in order to manage working capital effectively. Another
significant area of savings is the SKU rationalization, and the
company aims to lower its total SKU count by at least 30% to
35%.
Let’s Conclude
Given the pros and cons, we prefer to maintain our Neutral
rating on the stock with a price target of $9.50. However, Central
Garden & Pet holds a Zacks #2 Rank that translates into a
short-term Buy rating and well defines the initiatives undertaken
to salvage the company from waning margins and dismal bottom-line
performance.
CENTRAL GARDEN (CENT): Free Stock Analysis Report
HOME DEPOT (HD): Free Stock Analysis Report
LOWES COS (LOW): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis Report
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