Central Garden & Pet Announces Strong Q1 2021 Results
February 03, 2021 at 16:01 PM EST
Central Garden & Pet Company (NASDAQ: CENT, CENTA) ("Central"), a market leader in the Garden and Pet industries, today announced financial results for its fiscal 2021 first quarter ended December 26, 2020.
“We delivered another quarter of strong financial results reflecting solid execution, robust consumer demand in Pet and Garden and the unwavering dedication of our employees,” said Tim Cofer, CEO of Central Garden & Pet. “I’m pleased with the continued progress against our Central to Home strategy and remain excited about the road ahead. Recent examples of our strategy in action include three acquisitions, which will build scale in our Garden segment, expand into attractive adjacencies and advance our omnichannel and digital capabilities.”
Fiscal 2021 First Quarter Financial Results
Total net sales increased 22.7% to $592.2 million compared to $482.8 million in the first quarter a year ago, driven by organic strength in both segments.
First quarter gross margin increased 70 basis points to 27.9%, driven by favorable mix of product sales and volume-related efficiencies partially offset by continued supply-chain constraints and inflationary pressures.
Operating income increased to $27.0 million from $2.1 million in the first quarter a year ago. Operating margin increased 420 basis points to 4.6% compared to 0.4% in the prior year quarter, driven by improved gross margin as well as operating efficiencies. EBITDA increased 162.8% to $40.0 million from $15.2 million in the first quarter a year ago.
Net interest expense increased to $20.8 million from $8.6 million in the first quarter a year ago, mainly due to incremental interest expense related to recognizing the impacts of the call premium, unamortized debt issuance cost and double interest on the debt retired during the quarter.
The Company's net income increased $10.0 million to $5.6 million from a net loss of $4.4 million in the first quarter a year ago. Diluted earnings per share for the quarter grew $0.18 to $0.10 from $(0.08) in the prior year quarter. This translates to non-GAAP diluted earnings per share of $0.29, up $0.37 from $(0.08) in the quarter a year ago, excluding the incremental interest expense related to debt refinancing and the loss on the sale of the Breeder's Choice business.
Garden Segment Fiscal 2021 First Quarter Results
First quarter net sales for the Garden segment increased 34.1% to $155.8 million, driven by strength across the portfolio, with particularly strong growth in distribution, wild bird feed, grass seed, controls and fertilizers and live plants.
Garden segment operating income increased $11.5 million to $4.7 million from an operating loss of $6.9 million in the prior year quarter, and operating margin rose 890 basis points to 3.0%. Garden segment EBITDA of $7.3 million was up from $(4.2) million in the prior year quarter, primarily driven by volume strength and gross margin improvement coupled with operating leverage.
Pet Segment Fiscal 2021 First Quarter Results
First quarter net sales for the Pet segment increased 19.0% to $436.4 million from $366.6 million in the first quarter a year ago, driven by strong growth across the segment, with notable contributions from dog and cat, distribution and small animal supplies.
Pet segment operating income increased to $43.5 million, up 51.5% compared to the first quarter a year ago, and operating margin rose 220 basis points to 10.0%. Pet segment EBITDA increased to $52.6 million from $37.8 million in the first quarter a year ago, primarily driven by stronger sales volume and favorable product mix as well as overhead efficiencies.
The Company's cash balance at the end of the quarter increased 36.4% to $608.3 million compared to $445.8 million in the first quarter a year ago. The Company used approximately $83 million of its cash to pay for the acquisition of DoMyOwn. Cash used by operations during the quarter was $36.1 million compared to $18.0 million in the first quarter a year ago. The increase was driven primarily by an increase in inventory due to the seasonal build in preparation for the lawn and garden season and the overall demand for the Company's products.
Total debt as of December 26, 2020 was $789.0 million compared to $693.4 million at December 28, 2019. The Company successfully refinanced its 2023 senior notes, raising an additional $100 million of debt. The Company's leverage ratio at the end of the first quarter, as defined in the Company's credit agreement, was 2.3x compared to 3.0x at the end of the prior year quarter.
The Company’s effective tax rate was 19.7% compared with 27.6% for the first quarter in the prior year.
On December 18, 2020, the Company closed the acquisition of DoMyOwn, a leading and fast-growing online retailer of professional-grade control products, strengthening the Company's position in the control product category. Further, on January 8, the Company closed the acquisition of Hopewell Nursery, a leading provider of live plants. The acquisition of Green Garden Products, a leading provider of vegetable, herb and flower seed packages and seed starters, is expected to close in the second quarter of fiscal 2021. These acquisitions are very recent and subject to purchase accounting. The Company will provide information as to management's expectations regarding the impact of the acquisitions on the Company's fiscal 2021 results during the Company's second quarter earnings call.
The Company continues to project fiscal 2021 EPS to be at or above $1.90, as compared to prior year EPS of $2.20. This guidance does not include the impact of its recent acquisitions or additional acquisitions that may close during fiscal 2021. As previously stated, the projected decline compared to fiscal 2020 reflects additional investments in capacity expansion, brand building and eCommerce as the Company continues to invest in sustainable growth, increasing labor and freight and key commodity costs in addition to resuming more normal levels of promotional activity and travel. The Company also anticipates second-half headwinds associated with lapping almost ideal weather for the gardening season and the COVID-19 tailwinds in fiscal 2020. In addition, the Company incurred non-GAAP expenses in the first quarter of fiscal 2021 related to its recent debt refinancing as well as the loss on the sale of the Breeder's Choice business, which impacts EPS by $(0.15) and $(0.04), respectively.
The Company will host a conference call today at 4:30 p.m. Eastern Time (1:30 p.m. Pacific Time) to discuss its first quarter fiscal 2021 results. The conference call will be accessible on the investor relations section of the Company's website http://ir.central.com.
Alternatively, to listen to the call by telephone, dial (201) 689-8345 (domestic and international) using confirmation #13714995. A replay of the call will be available for three days by dialing (201) 612-7415 and entering confirmation #13714995.
The Company has also made available an Investor Presentation on the investor relations section of the Company's website http://ir.central.com.
About Central Garden & Pet
Central Garden & Pet (NASDAQ: CENT, CENTA) understands that home is central to life and has proudly nurtured happy and healthy homes for over 40 years. With 2020 net sales of $2.7 billion, Central is on a mission to lead the future of the pet and garden industries. The Company’s innovative and trusted products are dedicated to help lawns grow greener, gardens bloom bigger, pets live healthier and communities grow stronger. Central is home to a leading portfolio of more than 65 high-quality brands including Pennington, Nylabone, Kaytee, Amdro and Aqueon, strong manufacturing and distribution capabilities and a passionate, entrepreneurial growth culture. Central Garden & Pet is based in Walnut Creek, California and has over 6,300 employees across North America and Europe. For additional information about Central, please visit the Company’s website at www.central.com.
Safe Harbor Statement
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: The statements contained in this release which are not historical facts, including expectations for increased levels of investment to drive capacity expansion, brand building and eCommerce, increases in labor and freight cost as well as key commodities, in addition to resuming more normal levels of travel and promotional activity and their impact on future growth, and earnings guidance for fiscal 2021, are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. All forward-looking statements are based upon the Company’s current expectations and various assumptions. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this release including, but not limited to, the following factors:
These risks and others are described in the Company’s Securities and Exchange Commission filings. The Company undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events or otherwise. The Company has not filed its Form 10-Q for the fiscal quarter ended December 26, 2020, so all financial results are preliminary and subject to change.
Use of Non-GAAP Financial Measures
We report our financial results in accordance with accounting principles generally accepted in the United States (GAAP). However, to supplement the financial results prepared in accordance with GAAP, we use non-GAAP financial measures including non-GAAP net income and diluted net income per share, EBITDA and organic sales. Management believes these non-GAAP financial measures that exclude the impact of specific items (described below) may be useful to investors in their assessment of our ongoing operating performance and provide additional meaningful comparisons between current results and results in prior operating periods.
EBITDA is defined by us as income before income tax, net other expense, net interest expense and depreciation and amortization (or operating income plus depreciation and amortization expense). We present EBITDA because we believe that EBITDA is a useful supplemental measure in evaluating the cash flows and performance of our business and provides greater transparency into our results of operations. EBITDA is used by our management to perform such evaluation. EBITDA should not be considered in isolation or as a substitute for cash flow from operations, income from operations or other income statement measures prepared in accordance with GAAP. We believe that EBITDA is frequently used by investors, securities analysts and other interested parties in their evaluation of companies, many of which present EBITDA when reporting their results. Other companies may calculate EBITDA differently and it may not be comparable.
We have also provided organic net sales, a non-GAAP measure that excludes the impact of businesses purchased or exited in the prior 12 months, because we believe it permits investors to better understand the performance of our historical business without the impact of recent acquisitions or dispositions.
The reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in the tables below. We have not provided a reconciliation of non-GAAP guidance measures to the corresponding GAAP measures on a forward-looking basis due to the potential significant variability and limited visibility of the excluded items. We believe that the non-GAAP financial measures provide useful information to investors and other users of our financial statements by allowing for greater transparency in the review of our financial and operating performance. Management also uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating our performance, and we believe these measures similarly may be useful to investors in evaluating our financial and operating performance and the trends in our business from management's point of view. While our management believes that non-GAAP measurements are useful supplemental information, such adjusted results are not intended to replace our GAAP financial results and should be read in conjunction with those GAAP results.
Non-GAAP financial measures reflect adjustments based on the following items:
From time to time in the future, there may be other items that we may exclude if we believe that doing so is consistent with the goal of providing useful information to investors and management.
The non-GAAP adjustments reflect the following:
Organic Net Sales Reconciliation
We have provided organic net sales, a non-GAAP measure that excludes the impact of recent acquisitions and dispositions, because we believe it permits investors to better understand the performance of our historical business. We define organic net sales as net sales from our historical business derived by excluding the net sales from businesses acquired or exited in the preceding 12 months. After an acquired business has been part of our consolidated results for 12 months, the change in net sales thereafter is considered part of the increase or decrease in organic net sales.