Central Garden & Pet Company (CENT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's Fiscal 2026 Third Quarter Earnings Call. My name is Cleo, and I will be your conference operator for today. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Friederike Edelmann, Vice President, Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining Central's Third Quarter Fiscal 2026 Earnings Call. Joining me today are Niko Lahanas, Chief Executive Officer; Brad Smith, Chief Financial Officer; John Hanson, President of Pet Consumer Products; J.D. Walker, President of Garden Consumer Products; as well as Jason Barnes, EVP of Garden Consumer Products. Niko will begin by highlighting today's key takeaways followed by Brad, who will walk through our financial performance and the acquisition of TRIXIE in greater detail. After their prepared remarks, John, J.D. and Jason will join us for the Q&A session. Before we get started, I would like to remind everyone that all forward-looking statements made during this call are subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements today. A detailed description of Central's risk factors can be found in our annual report filed with the SEC. Please note that Central undertakes no obligation to publicly update forward-looking statements to reflect subsequent information, future events or other developments. You can find our press release and related materials at ir.central.com. Finally, unless otherwise specified, all comparisons discussed during this call are made against the same period in the prior year. Should any questions come up after the call or throughout the quarter, please feel free to contact me at ir.central.com. And with that, I'll turn the call over to Niko. Niko, the floor is yours.

Thanks, Friederike, and good afternoon, everyone. I'll begin with our third quarter highlights and then share how we're thinking about the balance of the year. We delivered another solid quarter. Organic sales grew, operating margins expanded and our teams continued to execute well across the business. More importantly, our performance reflects the strength of the business we've been building over the past several years. We've consistently improved our execution, strengthened our operating model and enhanced our ability to invest behind the opportunities we believe will create the greatest long-term value. Those efforts are allowing us to deliver stronger financial performance while continuing to invest in the future. One example is Project Horizon, our multiyear effort to modernize our Garden logistics network. Since 2022, we've closed 13 facilities and opened 2, transforming what had been separate business unit distribution networks into a unified 4-node national network we call the Central Logistics Network. That program is now approximately 95% complete. The vast majority of projects have been delivered on schedule. Every project has been completed under budget, and we've accomplished all of this with minimal disruption to our customers. Since launch, we've shipped more than 1 million small parcel packages through the network and total shipments moving through those facilities are substantially higher. As utilization continues to increase, we're seeing meaningful improvements in productivity, service levels and customer responsiveness. Project Horizon reflects the kind of disciplined operational execution that strengthens our competitive position while creating capacity to invest in growth. Across Central, we're focused on making the business easier to operate, better serving our customers and allocating capital to the highest return opportunities. Today, that means investing behind our brands, strengthening our innovation pipeline, expanding our digital and e-commerce capabilities, improving our understanding of cost to serve and leveraging our strong balance sheet to pursue opportunities that enhance our portfolio. We believe these investments will support sustainable growth while continuing to improve our returns over time. That brings me to the announcement we made just last week. We entered into a definitive agreement to acquire an 80% interest in TRIXIE, a leading European pet supplies and pet snacks company. This is an important milestone in advancing our Central to Home strategy and significantly expands our presence in Europe. TRIXIE serves more than 30,000 pet retail stores worldwide with a portfolio that is approximately 90% branded products, a business built on strong customer relationships, differentiated products and a long history of profitable growth. We expect the transaction to close during the first half of our fiscal 2027. Together, Central and TRIXIE will create a leading global pet supplies platform with a broader international footprint. Approximately 10% of combined sales generated outside the United States and an attractive platform from which to participate in the continued growth and consolidation of the European pet specialty market. This acquisition also reflects the financial flexibility we've created through disciplined execution and a strong balance sheet. And opportunities to acquire a profitable category-leading company with TRIXIE's scale, brand strength, innovation capabilities and strong cultural alignment are uncommon. We believe this transaction meaningfully enhances our long-term growth opportunities, and we're excited to welcome the TRIXIE team to the Central family. Innovation is another area where TRIXIE excels, introducing hundreds of new products annually through its in-house design organization. That same commitment to innovation continues across our own portfolio. During the quarter, our recent product launches continued to perform well, including: Nylabone dog chews made with real meat; Farnam's Endure Gold Fly Killer & Mosquito Control Spray; the Rebel Sun & Shade extension in Grass Seed and several successful private label programs. Turning to our outlook. As we enter the fourth quarter, we do so with good momentum and a continued focus on disciplined execution. While the macroeconomic environment remains dynamic, our diversified portfolio, strong customer relationships, operational flexibility and disciplined capital allocation position us well to continue delivering profitable growth. Consumers continue to seek value and performance, while e-commerce, and in certain categories, private label remain an important areas of growth. These investments are generating encouraging results today while positioning us to create sustainable growth and continued margin expansion over the long term. M&A remains an important component of our long-term strategy, and the announcement of TRIXIE doesn't change that. Even after funding this transaction in the coming months, our balance sheet remains strong and provides us meaningful flexibility to pursue additional high-quality opportunities that enhance our portfolio and create shareholder value. Our approach remains disciplined. We'll continue to focus on acquisitions that fit strategically, meet our financial return objectives and strengthen our competitive position over the long term. Looking ahead, the exit of our Pet Distribution business will continue to reduce reported revenue over the next several quarters, though the earnings impact will be minimal given the lower margin profile of that business. Once the TRIXIE transaction closes, it will contribute incremental sales and earnings, helping offset a portion of the reported revenue impact while further strengthening our overall business mix. Based on our performance year-to-date and our outlook for the fourth quarter, we are raising our guidance for fiscal 2026 non-GAAP diluted EPS from $2.70 or better to $2.85 or better. This increase reflects both the progress we've made through the first 9 months of the year and our confidence in our ability to execute during the remainder of fiscal 2026. As always, this guidance excludes the impact of future acquisitions, including TRIXIE as well as any future divestitures or restructuring actions and any further tariff refunds. Before I hand it over to Brad, I just want to recognize our teams across Central. Their commitment, execution and focus continue to drive our performance. They've built a stronger company with a solid operating foundation and a culture that continues to embrace innovation, accountability and customer service. We're entering an exciting new chapter for Central. We have a stronger portfolio, greater financial flexibility, expanding international opportunities and a clear strategy for creating long-term value. While there's always more work to do, I'm encouraged by the momentum we've built and confident in our ability to continue delivering for our customers, our employees and our shareholders. And with that, I'll turn it over to Brad. Brad?

Thank you, Niko. Let me run through our third quarter results in more detail, and then I'll provide further comments on our recent TRIXIE acquisition. Net sales declined 8% to $882 million, driven by the exit of our Pet Distribution business at the beginning of Q3. In contrast, organic net sales, which exclude the Pet Distribution business, rose 2% to $862 million, reflecting organic growth in both Garden and Pet. Non-GAAP gross profit was $318 million, down 4%, with gross margin up 140 basis points to 36%. Non-GAAP SG&A was $182 million, down 6% year-over-year. As a percentage of net sales, SG&A rose to 20.6% from 20.1%. The lower SG&A spend and higher SG&A rate were primarily the result of exiting the Pet Distribution business, which carried a lower SG&A rate than the remaining portfolio. Non-GAAP operating income was $136 million, down 2%, with operating margin expanding 90 basis points to 15.4%. Higher corporate spend related to the TRIXIE acquisition and investments to improve our data capabilities accounted for more than 100% of the operating income decrease. Net interest expense was $8 million, below a year ago, and other income was $2 million, slightly above the prior year. Non-GAAP net income was $96 million, down 2%, and non-GAAP diluted EPS came in at $1.54, just shy of the $1.56 we posted last year. Adjusted EBITDA was $162 million versus $167 million a year ago, with margin expanding to 18.3% from 17.3%. Lastly, our effective tax rate for the quarter was 24.7% versus 25.1%. As a reminder, our tax rate in last year's third quarter was a bit higher than normal due to non-deductible losses incurred in the wind down of our U.K. business. Now on to the segments, starting with Pet. Pet segment net sales were $400 million, down 19%, reflecting the exit of our Pet Distribution business. Organic sales rose 2% to $380 million, driven by broad gains across the majority of our portfolio, which offset lower dog and cat revenues that were primarily due to the timing of promotional events and related investment spending. Our online sales, a key barometer for the health of our business, were up 10% over prior year, helped by a record Prime Day. In addition, we delivered another quarter of record performance in our Professional business, a key growth vertical for this segment and an area where we continue to see significant opportunity. We continue to hold overall share in Pet with share gains in several categories, including Professional, Dog Treats, Rawhide, and Flea & Tick. Segment non-GAAP operating income was $76 million, down 2%, with operating margin improving 320 basis points to 19%. The lower operating income but higher operating margins were primarily the result of our distribution exit with continued improvements in margin mix and ongoing productivity benefits in the organic business, offset primarily by higher materials and freight costs. Lastly, segment adjusted EBITDA was $86 million versus $88 million with margin expanding to 21.4% from 17.9%. Now on to Garden. Garden net sales were $482 million, up 3%, driven by meaningful distribution wins and strong consumer demand across Fertilizer, Wild Bird, and Grass Seed. In fact, sales this year in both Fertilizer and Wild Bird continue to be at record levels, a testament to the strength of our execution in these categories. Another highlight this year has been our e-commerce momentum with Q3 sales up over 40% year-over-year, reflecting strong growth across both our pure-play and omnichannel partners. Overall, Garden continued to gain market share during the year with third quarter gains led by Fertilizer, Wild Bird, and Grass Seed. As we enter the final phase of the garden season, we remain well positioned. Our teams have executed effectively throughout the season, partnering closely with our customers to optimize in-season performance and meet consumer demand. We continue to see solid support for our Garden portfolio and remain focused on finishing the year strong. Garden non-GAAP operating income was $91 million, up 7%, with operating margin improving 70 basis points to 18.9%, driven by a favorable product mix and productivity improvements, which more than offset higher costs, particularly around freight and digital marketing spend. Finally, Garden adjusted EBITDA was $101 million versus $96 million, with margin expanding to 20.9% from 20.4%. Let's shift to cash flows and the balance sheet. Cash provided by operations was $327 million this quarter versus $265 million last year, a record for the company. This quarter, CapEx was $13 million and depreciation and amortization was $20 million, both in line with the prior year. We're now planning approximately $50 million of CapEx for the full year, mostly maintenance plus targeted productivity and growth spending in both segments. We bought back a small amount of shares this quarter, about 26,000 shares, leaving $128 million remaining on our current authorization. Cash and cash equivalents ended the quarter at just shy of $1 billion, $997 million to be exact, up $284 million, making Q3 the 14th consecutive quarter of year-over-year cash improvement. Total debt stood at $1.2 billion, in line with last year with no drawdowns on our credit facility. Gross leverage was 2.8x, slightly below a year ago and below our 3x to 3.5x target. Net leverage was 0.5x, an all-time low for the company. It's important to note that these ratios exclude the impact of funding TRIXIE as we expect the transaction to close in the first half of fiscal 2027. That said, we do not expect funding of the transaction to have a meaningful impact on our leverage ratios next year. As a reminder, the transaction is structured as an 80% stake for EUR 340 million at closing, plus up to EUR 60 million in additional earn-out consideration, so up to EUR 400 million in total at a high single-digit EBITDA multiple. One final comment on TRIXIE. This acquisition is the most exciting opportunity in pet supplies I've seen during my 9 years at Central. By uniting the premier U.S. and European leaders in pet supplies, we capture a rare and powerful opportunity to expand our access to over 100 million pet owning households across Europe, a market whose demographic and spending trends around pet ownership closely mirror ours in the U.S. Together, we will be well positioned to consolidate a fragmented European market, expand our consumables offering, increase online penetration and unlock meaningful commercial and supply chain synergies. This partnership marks a bright future that we believe will benefit our retail partners, consumers, employees and shareholders alike. Before we open it up for questions, I want to thank our more than 6,000 employees across Central. Our strong financial performance and improved outlook for the year are a direct result of your dedication and hard work. And with that, operator, please open the line for questions.

[Operator Instructions] Our first question is from Brad Thomas with KeyBanc Capital Markets.

It's Taylor Zick on for Brad. Maybe just to start off here on the Pet side, the segment kind of has a lot of moving parts with the Pet JV, distribution JV. I think we're lapping some exits of lower-margin Pet durables last year. And then you have the Champion cattle business, which was acquired in December, though that may be relatively small. But you noted organic growth about 2% in the quarter which -- it did accelerated slightly from kind of that plus 1% you had in first half. So I guess, Niko, what do you kind of think the underlying trends are within the Pet segment here in the first quarter?

Well, we think there's a real stabilization going on in Pet right now. I'll make some overarching comments, and then I'll turn it over to John to give a little more color. But our Pro business was strong. equine continues to be strong. Believe it or not, small animal, avian small animal had an excellent quarter. Our normally very strong dog and cat business had a little bit of a hiccup. They had some supply issues where one of the plants down in South America had burned down. So we had to sort of triage that to get the supply up here, but that was more of an internal issue as opposed to what I would call systemic. But overall, we're encouraged with kind of what we've been saying all along that we feel like there's some real nice stabilization going on in Pet. And then we're taking market share in some key areas as well. So we feel really good about that. And we've got some nice momentum going on in some of our higher-margin businesses is what I would say. But John, anything?

No, I think you handled it well and answered it well, Niko. We feel really good about the stabilization we're seeing, household penetration buy rate. We got a small animal business, live animal business that is up low single digits. And that's been, I think, the third quarter. It's been stabilized to slightly up. So we feel good about that. Overall, we think we're holding market share, but we're taking market share in key businesses like Rawhide, Dog Treats, Flea & Tick and our Professional business, and we feel real good where we're at.

Yes. And I would say, too, that pretty intentionally, we did the JV with [indiscernible] and we've talked about it here and there, but these types of moves allow us to focus on the businesses that we want to drive. So we're taking a lot of noise out of the business and simplifying what we're doing, and it brings a lot of focus around what's truly important for us.

Yes. That's great. And then maybe one more if I can, on the Garden side. Garden, I think, was up -- you called out 3% here for 3Q. I think it's pretty much in line with kind of where the first half ended up here. And I guess, at the same time, we've kind of heard others in the industry talk about weather kind of being a drag here in the spring selling season. So, just kind of curious on what you all saw during the quarter. And then maybe just kind of how that informs fourth quarter because I believe we had a pretty strong fourth quarter of the prior year. Curious on how you feel about lapping that and maybe how retail inventories kind of head end of year.

Yes. Great question. This is Jason. I'll take that question. I'll start with the quarter. We had a bit of a mixed bag in weather. So we started out the quarter with a little bit of cold and wet that translated into a heat dome in the middle of the quarter that then translated into just an extended heat throughout the quarter. But I think what you saw in the results is, like you said, up low-single-digits. But if you look at our brands within that mix, we were up mid-to-high single digits for the quarter on our brands and our manufactured products. We're seeing really good strength within that portfolio dragged down slightly by our vendor partner distribution business as we talked about some of the losses within that segment. Looking forward into Q4, we started out with a lot of the same momentum, seeing really good strength and growth within the brands despite some challenging weather to start out June, particularly heat, smoke from Canadian wildfires and other headwinds, we've been able to offset those. So, feeling really good. And I think that's translated into share within those brands, so particularly Grass Seed, Fertilizer and Wild Bird where we continue to pick up share in the market. And then your last question on inventories, we feel really good about where we're sitting on retailer inventories. In fact, if you net the impact of our new fertilizer distribution, we're actually negative at retailer inventories in terms of what our inventory position looks like. So just feeling very good there about our ability to ship into the Q and then into '27 and beyond. And then a final comment on inventory. I'd say we're doing a great job internally of managing Garden inventories internally and continue making good progress about bringing those down year-over-year as well.

I would say -- I would just add, you guys are doing a great job just running the business in general because we know it wasn't an optimal weather quarter, I should say, and yet it was a record for the Garden business. So kudos to the entire team over there for just crushing it in the quarter when weather was less than perfect. And then I would just call out, I think Jason did call it out, but Wild Bird and Grass Seed just absolutely had great quarters.

Niko, I think you're spot on there. I think when I talk to the Garden team, we say that weather was less than perfect, as you said, particularly in that late April, May time frame, which is critical for our Lawn & Garden business. But I think aside from that, the team has managed to produce good results, right? So kudos to the team.

Can't underscore that enough.

One thing, too, [ Zick ], that I would call out just as an umbrella statement related to Q3 that really reflects the health of our business and where we're at. Every single business within Garden and Pet was up or at least flat versus prior with the exception of vendor partner, which you mentioned, Jason, and dog and cat, which we talked about. So I mean, very broad, very broad.

And the last thing I would add is just regarding a forward look at the business in the -- for Q4 and beyond, the heat dome that Jason talked about, the intense heat that we've seen in a lot of markets across the country during the summer. That bodes well for our Grass Seed business. That typically means a good overheating business for Grass Seed and then fertilizer for the fall season.

Our next question is from Bob Labick with CJS Securities.

This is Will on for Bob. You've all done a great job reshaping the portfolio recently, higher margins, et cetera. But given the current composition, how should we think about organic growth rates in both Pet and Garden going forward?

I think we've talked about this a lot over the year. We're coming out of that trough from post-COVID sort of that hangover. But we are -- we have every intention of getting back to our long-term sort of growth rates. If you think of Pet being anywhere from 1% to 4% and then Garden being a little bit lower, anywhere from 1% to 2% maybe. So you're starting to see that materialize a little bit in the last few quarters. A lot of that is really internal because, again, we want to get back to a -- more of a growth mindset. We've been talking a lot about cost and simplicity over the years. And I think this year, we started talking a little bit more about growth and innovation and things like that. So I think we'd love to get back to those long-term growth rates and then layer on top of that some nice M&A work that you're starting to see happen now.

That's super helpful. And with significant CNS initiatives accomplished, how much margin growth -- how should we think about margin growth from here? And what are the potential synergies with TRIXIE beyond sales and cross-sell? And is there any opportunity to enhance margins there?

Yes. I mean there's a lot there. I'll talk TRIXIE here for just a sec. They do a lot of sourcing from China. I think there's an opportunity for us to add the manufacturing margin and start moving product over to Europe from our manufacturing facilities, particularly dog and cat. It's largely a dog and cat business. We think that's a huge opportunity. They have an incredible team over there that does a tremendous job with product development. So we're kind of licking our chops in terms of being able to collaborate, come out with even more innovation because as we mentioned on the call, they add about a few hundred products every year because they've got a pretty robust team there. So, innovation, manufacturing margin, we think sourcing is another area where we can get better. Believe it or not, their logistics facility is nothing short of amazing. We've got a lot to learn from them in terms of automation and just engineering. We're going to have to get their folks over here to help us out. But we got very excited when we saw that as well. So there's a lot. That's just first blush. There's going to be a whole lot more that we can do.

This is Brad. I would just add to that, that from a synergy perspective in terms of the timing of that, I wouldn't expect it within the first year. It's really the second year that we would start to expect synergies. We need to let the dust settle and work together to kind of come up with the right plan.

Our next question comes from Brian McNamara with Canaccord Genuity.

I got one on Garden and one on Pet. I'll start with Garden. I think 3 months ago, you said that retailers were a little bit light on inventories. I'm curious kind of what drove the results. Was it better replenishment in Q2? And I think you had mentioned that they're currently a little light on fertilizers. Any color there would be helpful.

Yes. Brian, this is Jason. I can take that. I mean the biggest driver was not inventory lows. I'd say that our shipments versus consumption were relatively close. The biggest drivers were the Grass Seed and Fertilizer over delivery in terms of their retail sell-through and then Wild Bird. We also had some strength and controls in the period. And then the other thing I'd mention would be e-commerce. We had really strong continued e-commerce results in the period, as Brad mentioned in his script. That continues to be a key driver for us. And I'd say that in general, inventory change from Q2 to Q3, we feel about the same that we did in Q2 that we feel still well positioned, not overburdened in any specific categories or particularly light in any. I feel like we're in a pretty good spot as we head into Q4.

Great. And then secondly, on Pet, Niko, I think you mentioned a facility fire in LatAm. I was just curious if you guys could quantify, I'm assuming you left some sales on the table there, if that's possible to quantify?

We haven't. We have not quantified it. We not only left some sales on the table, but also margin because we had to -- and I give the team there a lot of credit for triaging that. They had to go find other supply sources and then actually airship product up. So it actually caused margins to contract a little. But again, it's sort of a one-time kind of hit. It's not something that's, like I said, systemic. So we'll get through it. We didn't quantify it. Normally, that business is up. It was a little down-ish this quarter.

Brian, just to add to that on dog and cat. I mean when we look at the sales decline, roughly about 2/3 of it was actually just normal timing differences related to promotional events and whatnot. So it was down a bit more than normal top line this quarter. But to Niko's point, the business continues to perform well. And actually, the results that we saw in July were encouraging. So, yes, I think we're in good shape.