Central Garden & Pet Company Q2 FY2026 earnings call

Delivered record second quarter and first half. Moved Do My Own business to Covington Fulfillment Center. Consolidated TDBVS manufacturing. Formed joint venture with Phillips Pet Food and Supplies. Advanced innovation pipeline. Focus on growth and disciplined capital allocation.

Pet segment: Net sales were $477 million, up 5% year over year. Operating income was $78 million in the quarter, with operating margin improving to 16.3%. Garden segment: Net sales were $425 million, up 13%. Operating income for the garden segment in the second quarter increased to $66 million, with operating margin 15.4%.

Maintaining guidance for fiscal 2026 non-GAAP diluted EPS of $2.70 or better. Joint venture will reduce reported revenue in second half by a low single-digit percentage with minimal impact on earnings.

Forward-looking statements subject to risks and uncertainties. Detailed risk factors in annual report filed with SEC.

Q: Hey, good afternoon, everyone. Thanks for taking the questions. And congrats on the strong results here. So three months ago, I guess from your comments, it sounded like, you know, PET was at or near a bottom. And obviously Q1, I think this is your first quarter of growth in this segment out of the last five and second out of the last seven. So like, How should we think about the back half? I know you guys don't guide the revenue, but is growth continuing a reasonable expectation, and what drives that?

A: Yeah, I can take it. This is John. You know, we feel really good about where we're at. You know, we showed 5% top line growth, and I think we said in the last call that from everything we can see from household penetration and buy rate and even our live animal sales, You know, we believe the category is stabilized. We still feel that way. You know, we did have the help, you know, in the 5% this time of some timing on our cushions business, you know, that slid from Q1 to Q2. But even if you back that out, you know, we feel pretty good about the organic piece of the growth and the business. You know, it's a little difficult to have a crystal ball and say what the balance of the year is going to look like, you know, but I would say we're cautiously optimistic. And we're talking excluding distribution. Excluding distribution. Yeah. Excluding distribution. Yeah. I think, you know, the same can be said for the pet side of the business, which, you know, we're seeing some really nice execution there and, you know, some market share gains and some key categories. And so we expect that to continue, you know. And then the other part, too, will be pet is a little bit weather dependent going into the summer with flea and tick. And so we still want to see that play out. And apologies if I missed this, but what was the Durables-Consumables mix for the quarter, and how did Durables do? Cushions probably helped there, obviously. Yeah, I would look at it, given the timing noise, I would look at it on a first-half basis, and I would say Durables was 18% of sales for the first half in PET. I know John and I continue to believe that that is going to go down in time, given the rate of performance on our Consumables business. But it did – it was relatively resilient there. Yeah, you know, we felt good about our consumable performance in Q2. You know, it was up mid-single digits. You know, certainly that, you know, was a higher margin piece of our business and a good next play in our focus area. Yeah, but durables were up quite a bit in Q2 largely because of the shift in the Q2. Yeah, that's right. It takes the noise out. Yeah. Understood. And then just a last one on the distribution and the JV there. One, what kind of drove the decision? And two, like, you know, clearly you've had that business for, you know, other things other than, you know, it's a lower margin business and all that. Like when you get insight into consumer trends, it strengthens your customer relationships and category management. You get access to emerging brands for M&A among other things. Do you still get two bites of the apple there with this setup? And secondly, on the same point, why wouldn't earnings benefit from it rather than just kind of being a net neutral for the back half? Well, I mean, what I would say is we still own 20%. And the way we viewed it was access versus ownership. We still have access to the channel. We just don't own the whole business. there were a lot of factors that drove this. It was everything from, you know, listening to investors and analysts, you know, question our margins. And, you know, we always had this overhang of the distribution business that, you know, everyone knew was lower margin, but we would have to explain it over and over. I would say also that it really is in line with our cost and simplicity program. So, you know, we, that business had, you know, 26,000 SKUs and it had a lot of ship points and trucks and employees. And so, you know, we're looking to really streamline the business so we can focus our energy around products and businesses that are higher margin, that really move the needle rather than managing this crazy level of complexity. And so that really drove it. And then, you know, you look at the independent channel, which is really what the distribution business serves and That's been a challenge. And we knew that in order to give us the best chance of success, that it made sense to do a JV with another player. And that player is actually very strong in food, whereas we were more on the supply side. So we think the combination really made a lot of sense. And then from a financial perspective, to answer your other question, I mean, It was making money when we sold it, not a lot, but a little bit. So we lose that in the back half. When you look at the equity that we score for our 20% of the joint venture in the back half, we're currently projecting that there will be some initial losses. They will not yet be in a position to start to unlock the synergies. And then there's going to be a fair amount of purchase accounting attached to it, which will have a non-cash impact as well that'll flow through earnings. So, you know, our estimate on the back half in terms of a financial impact to Central is conservatively three to five cents a share dilutive. And then, you know, as we get into next year and the following year, as we start to unlock synergies, we should start to see some positive results at some point. All right. Very helpful. Thank you, guys. I'll pass it Our next question comes from the line of Bob Labeck with CJS Securities. Please go ahead. Hi, this is Willem for Bob. Congrats on the strong quarter. Thank you. So from raw materials and plastic sourcing just with the war, have raw material prices impacted the garden segment at all so far? we've seen some inflation particularly as it relates to um urea now uh one of the benefits we have is we do a we pre-build a lot of our uh materials for the year so we're going to see some impact late in this year but it will be a manageable number a smaller number certainly for next year as we start our pre-build for 2027 it will have an impact on our fertilizer costs But that is something that is widely known and it's already been discussed with our customers. It's fluid right now, and we'll have to see where this goes. So we haven't taken pricing, but most likely next year we will be forced to take pricing as a result of it. For this year, 2026, no pricing plan and a manageable or smaller number due to the impact, due to the inflation. And I think I would just add on your, Rhea, that it is a very small piece of the garden business. I mean, from a COGS perspective, it's 1%. So it's not like some of our other competition and what they're exposed to. I think that's fair. And then from a fuel standpoint, it's similar. We're managing through that as we speak. A lot of our customers pick up their product at our facilities right now. So that, too, is fluid. have to see what the duration of this looks like how long it goes and how deep it is and you know if there's pricing needed to to uh cover costs in that area but to date we've been able to manage through it our cost and simplicity initiatives help us offset some of these impacts that we're seeing that is super helpful thank you and how is pricing in the garden industry in general are retailers raising prices Retailers coming into this year, there haven't been wholesale price increases. I think for next year, depending on input costs, if the manufacturers have to take pricing, then the retailer will have to take pricing. But for this year, no, I think it's been fairly stable. We're seeing it fairly promotional in the marketplace right now. But that was something that we anticipated and planned for. Thank you. Thank you. Your last question comes from the line of Andrea Teixeira from J.P. Morgan. Please go ahead. Hi, this is Shabana Chodhuran for Andrea. Thanks for taking our question. You commented that consumption stays robust throughout April. And we were just wondering, can you add more color on the health of the consumer? Are they more value-seeking? And if you're seeing any trade down to private label, also, what is the level of promotions that you are seeing? I mean, I can kick it off, and then I'll have J.D. and John give a little more color. Yeah, we're seeing on the garden side really nice consumption when the weather is good. We absolutely, across the board, are seeing consumers that are value-seeking. They want performance. They want it at a reasonable price. Our grass seed brand, The Rebels, has done really well because it strikes that balance of being affordable and a great product. So we're seeing those areas really, really take off. But I'll defer to John and JD to give a little more color. Yeah, I think, you know, just to add to it on the pet side, I think we're seeing a bit of a channel shift. You know, I think the consumer is going into mass and club and, you know, e-com to some degree even more so to get the value pricing. But the value seeking is there. But I think we're seeing, you know, branded do pretty well yet, pretty solid. But it is much more of a channel shift. On the garden side, I'd say it's very similar. First of all, the retailers count on lawn and garden to drive footsteps into the store at this time of the year. So they've been very promotional and very engaged in the category. From a consumer standpoint, we're certainly seeing, I mentioned earlier, when the weather's good, we're seeing robust consumption. And they are seeking value. year fortunately across many retailers and that business is performing extremely well uh as john mentioned it's not just you know the private label it's our branded products as well we're seeing consumption across you know all categories which is encouraging um yeah i'd say the health of the i'm not so concerned about the health of the consumer right now i think it's there when the weather is favorable and i think the retailers are ready Jason, I don't know if you'd add anything to that. I mean, the only thing I might add is to John's point about channel shifts. I mean, we continue to see e-commerce grow as a percentage of our business. And I'd say that we're well positioned there and we were stealing share online as well. So I think that's the one thing to add to where we're seeing value. Maybe one last comment. And that is, you know, we've commented in previous calls about footsteps at retail, particularly in home centers and things like that, tailing off over the last few years. We've seen that stabilize and start to increase again. which is encouraging for us. Thank you for all the color. I'll pass it on. We do have one additional question coming from Brian McNamara with Canaccord Genuity. Please go ahead. You know, at Global Pet, it sounded like everybody was going after CAT. That's a, you know, a hole in your portfolio, for lack of a better term. Like, how would you characterize the current M&A environment relative to, you know, three months ago and maybe a year ago? It sounds like things have been heating up a little bit in terms of activity. Very much, yeah. We're seeing things really pick up just in terms of conversations and deal flow. And, you know, we – A lot of the bankers were telling us a year ago that, you know, 25 was going to be the year. And that ended up being a lot more talk. I think this year you really feel that the conversations are a lot more sincere. We're seeing processes kick off with some really nice assets. And we ourselves have several conversations going on right now. So we're very encouraged by the environment, the M&A environment that's really picking up right now. Great. That's all I got. Thanks, guys. Thank you. Well, this was our last question. Thanks, everyone, for joining us today. Please reach out to us with any additional questions you may have. Thanks. Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.