Central Garden Kept at Neutral - Analyst Blog
November 28 2011 - 11:09AM
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 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 a growth of 8.6% to $376.9 million in the fourth quarter
of 2011, reflecting increased sales in the garden products segment.
Moreover, the reported net sales surpassed the Zacks Consensus
Revenue Estimate of $360 million.
Garden Products segment sales jumped 24% to $165.1 million;
however, Pet Products segment sales inched down 1% to $211.8
million.
Bottom-Line Struggling, Margins Under
Pressure
Despite witnessing a growth in the top line, Central Garden
& Pet posted disappointing bottom-line results, battered by
higher input costs and increased sales products carrying lower
margins.
The company’s quarterly loss of 21 cents a share widened from a
loss of 2 cents in the prior-year quarter. The analyst covered by
Zacks had expected the company to incur a loss 6 cents.
During the quarter under review, gross profit dropped 5.1% to
$98.2 million, whereas gross margin contracted 370 basis points to
26.1%. The fall reflected a 14.4% rise in the cost of goods sold.
Total operating loss for the quarter was $4.6 million, indicating a
significant decline from an operating income of $7.4 million in the
year-ago quarter.
Gross margin has portrayed improvement from fiscal 2004 through
fiscal 2010 but shriveled in fiscal 2011. 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
As Central Garden & Pet enters into fiscal 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 a 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 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 $8.25. However, Central
Garden & Pet holds a Zacks #4 Rank that translates into a
short-term Sell rating and well defines the depressed third-quarter
2011 results.
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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