Central Garden & Pet Company

Transcription

1 February 11, 2015 Central Garden & Pet Company (CENT-NASDAQ) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 06/22/2014 Current Price (02/10/15) $9.13 Target Price $ Week High $ Week Low $6.61 One-Year Return (%) Beta 1.50 Average Daily Volume (sh) 33,964 Shares Outstanding (mil) 51 Market Capitalization ($mil) $466 Short Interest Ratio (days) 5.45 Institutional Ownership (%) 15 Insider Ownership (%) 15 SUMMARY Central Garden & Pet is revamping both its Pet and Garden segments. The company intends to have a balanced approach that encompasses revenue growth and cost reduction. The efforts facilitated the company to post a significantly narrower loss of $0.12 per share during first-quarter fiscal 2015 that fared better than the year-ago period and the Zacks Consensus Estimate. This is the second consecutive quarter that the company s bottom-line has surpassed the Estimate. The company s net sales also grew 5.8%, and came ahead of the Zacks expectation. However, going forward management remains concerned about the wild bird feed business, as its sales and margins are expected to be adversely impacted by lower product pricing on account of a fall in raw material costs and tough competition. Management hinted that this will weigh upon the company s second- and third-quarter performance. Currently, we stay Neutral on the stock. Risk Level * Average, Type of Stock Small-Value Industry Con Pr-Msc Disc Zacks Industry Rank * 181 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Dec) (Mar) (Jun) (Sep) (Sep) Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 1.4 Earnings Per Share (%) Dividend (%) N/A A 498 A 494 A 369 A 1,654 A A 502 A 438 A 374 A 1,604 A A 500 E 450 E 382 E 1,639 E E 1,673 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year using TTM EPS 19.4 (Dec) (Mar) (Jun) (Sep) (Sep) $0.32 A $0.46 A $0.28 A -$0.22 A $0.20 A using 2015 Estimate $0.26 A $0.43 A $0.28 A -$0.12 A $0.33 A using 2016 Estimate $0.12 A $0.43 E $0.31 E -$0.12 E $0.50 E $0.08 E $0.68 E Zacks Rank *: Short Term The quarterly figures may not add up to annuals due to rounding off 1 3 months outlook 2 - Buy Projected EPS Growth - Next 5 Years % 10 * Definition / Disclosure on last page 2015 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Central Garden & Pet Co. is a leading producer and marketer of premium and value-oriented products focused toward the lawn & garden and pet supplies markets in the U.S. The company offers its products to mass merchants, home improvement centers, lawn and garden nurseries, grocery stores, specialty pet stores, veterinarians municipalities, and other individual animal buyers. Central Garden & Pet has emerged as one of the largest suppliers of pet and garden products to Wal-Mart, Home Depot, Lowe s and PetSmart through a combination of strategic acquisitions and organic growth. The CA-based company has two operating segments: Pet Products and Garden Products. Pet Segment: This segment offers food and accessories for dogs, cats, birds, small animals, fishes, horses and livestock under brands, such as Adams, Aqueon, Avoderm, Bio Spot Active Care, Farnam, Four Paws, Kaytee, Nylabone, Pinnacle, TFH, Zilla, Altosid, Comfort Zone, Coralife, Interpet, Kent Marine, Oceanic Systems, Pet Select, Pre-Strike, Super Pet, and Zodiac. Garden Segment: This segment offers both proprietary and nonproprietary grass seeds, herbicides, insecticides, pesticides, decorative outdoor lifestyle and lighting products. The segment markets its products under brands such as AMDRO, GKI/Bethlehem Lighting, Ironite, Pennington, Sevin, Lilly Miller, Over-N-Out, Smart Seed and The Rebels. REASONS TO BUY Pet and Garden Segments Revamp: Central Garden & Pet is revamping both its Pet and Garden segments. The company intends to have a balanced approach that encompasses revenue growth as well as cost reduction. It also intends to launch several products that appeal to customers, as well as upgrade its customer service. Management expects its ongoing transformation efforts to yield results in the near future. The company intends to gain market share in the home centers, mass market, grocery, specialty pet store and other independent channels. Healthy Commercial Relationship: Being the leading producer of garden and pet supplies products in the U.S. with a diversified portfolio of brands has helped Central Garden & Pet to develop healthy commercial relationships with giant retailers such as Wal-Mart, Home Depot and Lowe s. We believe that this provides the company with a significant opportunity to drive growth. Wal-Mart accounted for approximately 17% of net sales in fiscal 2014, Home Depot accounted for approximately 8% and Lowe s accounted for approximately 7%. A Complete Metamorphosis: Central Garden & Pet s effective inventory management is helping it to optimize merchandise levels in accordance with sales trends and is also facilitating in optimum utilization of its working capital. Further, the company intends to evolve into an integrated, multi-brand company from a portfolio of stand-alone businesses, by restructuring and reorganizing operating units and consolidating facilities. Equity Research CENT Page 2

3 REASONS TO SELL Competitive Pressure: Central Garden & Pet operates in a highly competitive pet and lawn and garden products industry. The company faces stiff competition from companies such as Spectrum Brands, Hartz Mountain, Animal Supply Co. and Phillips Pet Food & Supplies. The company also competes with a number of regional and private label brands offered by other suppliers. Thus in order to gain market share, the company may resort to aggressive pricing keeping its margin at stake. Seasonality of Garden Segment: Gardening is generally limited between spring to summer, which makes the garden business highly seasonal in nature. A major part of the sales occurs during the second and third fiscal quarters. In fiscal 2014, nearly 65% of the Garden Segment s net sales and 59% of total net sales were generated in these two quarters. Failure to perform during the season is likely to have a significant impact on the company s yearly financial performance. Decline in Consumers Discretionary Spending: The company s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn the company s top and bottom lines. RECENT NEWS Central Garden & Pet's Q1 Loss Narrower than Expected February 3, 2015 Central Garden & Pet Co. recorded loss per share of $0.12 in first-quarter fiscal 2015, significantly narrower than the Zacks Consensus Estimate of a loss of $0.22 and year-ago loss of $0.26. Higher sales across the Pet and Garden segments and improved margins provided cushion to the bottom line. The company s net sales grew 5.8% year over year to $307.3 million and came ahead of the Zacks Consensus Estimate of $292 million. Gross profit increased 10.3% to $88 million, while gross margin expanded 120 basis points (bps) to 28.6%. Selling, general and administrative expenses (SG&A) declined 1.4% to $86.8 million, whereas as a percentage of sales, SG&A shrunk 200 bps to 28.3%, thereby favorably impacting results. Central Garden & Pet reported operating income of $1.1 million as against a loss of $8.4 million in the prior-year quarter on the back of higher profitability across its Pet and Garden segments. Segment Details Net sales at the Garden segment grew 2% year over year to $108 million, driven by higher sales of other manufacturers products and increased fertilizer and controls sales, partially offset by a fall in seasonal décor and wild bird feed sales. Despite being marked as a soft quarter for the segment due to the seasonal nature of the lawn and garden category, the company achieved incremental sales. Sales across the segment s branded product and other manufacturers products came in at $90.3 million and $17.7 million, respectively. The segment delivered an operating loss of $3.5 million compared to an operating loss of $6.2 million in the year-ago period. The Pet segment s net sales climbed 8% year over year to $199.3 million, reflecting increased sales of other manufacturers products, and a rise in flea & tick and professional revenues. The sales across the Equity Research CENT Page 3

4 segment s branded product and other manufacturers products came in at $146.7 million and $52.6 million, respectively. The segment s operating income came in at $20.6 million, up 43.1% from the prior-year quarter due to higher sales and improved gross margins. The segment s operating margin expanded 250 bps. Going forward, the company remains concerned about the wild bird feed business, as its sales and margins are expected to be adversely impacted by lower product pricing on account of a fall in raw material costs and tough competition. Management hinted that this will weigh upon the company s second- and third-quarter performance. Other Financial Details The company ended the quarter with cash and cash equivalents of $79.6 million, total debt of $450.2 million and shareholders equity of $474.8 million, excluding non-controlling interest. Equity Research CENT Page 4

5 VALUATION Central Garden & Pet s current trailing 12-month earnings multiple is 19.4X compared with 24.5X industry average and 18.8X for the S&P 500. Over the last five years, Central Garden & Pet s shares have traded in a wide range of 9.6X to 70.6X trailing 12-month earnings. The stock is trading at a discount to the industry average based on forward earnings estimates. Our target price of $9.60, nearly 19.2X 2015 EPS, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Central Garden & Pet Company (CENT) Industry Average S&P Central Garden & Pet Company (CENTA) Hypermarcas S.A. (HYPMY) The Container Store Group, Inc. (TCS) Blyth, Inc. (BTH) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Central Garden & Pet Company (CENT) Industry Average S&P Equity Research CENT Page 5

6 Earnings Surprise and Estimate Revision History Equity Research CENT Page 6

7 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of CENT. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform %, Neutral %, Underperform 7.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research CENT Page 7