Central Garden & Pet: All About Growth

Keeping up the appearance of your home is what they refer to as “pride of ownership”. Whether you are attempting to sell your home or just keep up with the yearly maintenance, one basic and inexpensive option to make your property look better is to seed your lawn rather than paying a landscaper or laying out expensive sod. Central Garden & Pet Co. (CENT) released their numbers on February 4 and the stock has acted just as smart as all you “do it yourselfers”. They also sell pet food. About a 51/49% revenue split respectively.

F1Q (Dec) losses were ($0.09) vs ($0.11) in the company's seasonally slowest quarter. Sales of $292.5

MM, -6.8%, were modestly below consensus expectations for a decline of -3.3%. Management stated this decline was from purchase delays by retailers during the quarter in both lawn and garden and pet segments and that the next quarter is looking good because of this.

After going through the conference call transcript and the analyst reports, it’s clear that management is doing a very solid job by cutting costs. They have lowered their investment in working capital by $48MM due to improved inventory management and shaved off $8MM in SG&A and are improving gross margins.

Management noted that this was a tough time for the pet food business. People are spending a little less these days, including on their pet food. No surprise here. One analyst has their pet food sales going from 898M in 2008 to 875.0M in 09 to 881.9 on 2010. Have our beloved pets stopped eating? Cross checking pet food stocks like PETM, things are starting to pick back up. I firmly believe this is where the margin expansion will pick back up and we will see this in the quarters to come in 2009. Not to mention the seed business.

A look at CENT’s 1 year chart shows a stock ready to break out with a move through $8.15:

click to enlarge

Speaking of cross checking this business type, check out Scotts Miracle Grow (SMG). It released a very upbeat report on February 3, 2009. They beat by .11 and gave greatly improved guidance of $2.1-$2.3 from the $2.00-$2.09 consensus. Growth of up to 20% relative to 2008. In the conference call, the Chairman and Chief Executive Officer James Hagedorn stated:

In North Carolina which has been hammered by two years of drought and has one of the top ten unemployment rates in the U.S., consumer purchases in the quarter rose by 19%.

The two states he mentioned that were down were Florida and California. Clearly those states are having a rough time but people are spending on their homes.

Between their two spaces, CENT has the products that are somewhat insulated from this recession. The management has proven to be able to guide them through this difficult time. There is “pride in ownership” still. It’s part of the American dream. Having a yard with green grass and a pet ranks right up there with apple pie. People want their homes to look good. Picking up a bag of seed and spreading it around your yard isn’t that much work for the results. And I know my dog has to eat. Speaking of, it’s dinner time.

Disclaimer: The author is long CENT and plans to add to his position on a move through $8.15.

Comments

[broxton street:]

You kind of miss the main point that cent is a vertically integrated manufacturer of a number of products that operates a distribution comany, which I believe is the largest pet product distributor to wmt
timing a disciplined buy at 8.15 very smart...look at the 2000-2005 price move pretty damn huge

Mar 27 03:06 PM

[Derrick:]

As a former stockbroker I can say with certainty that I wouldn't touch Central Garden & Pet's (central.com) stock with a ten foot pole! One of their divisions produces a toxic product which almost killed my dog Sadie, who weighs 85 pounds. After ingesting a very small quantity of Farnam's (farnam.com) Alfalfa Pellet Wormer (A Central G & P product) my dog had to spend 5 nights at a local animal hospital. Needless to say, she almost died. Because their was no warning on this product and the product is proven to be toxic to dogs, cats and small children, this product (without a warning on the packaging) is a lawsuit waiting to happen, which means the stock could tank! The management of the company was contacted and repeatedly asked to put a warning on their product, but after more than 10 letters they have yet to respond.

Nov 02 11:35 AM