Central Garden & Pet Company Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Cost and Simplicity Program: Progress includes e-commerce expansion (consolidating distribution centers), footprint optimization (selling U.K. operations' aquatic brands, transitioning U.S. Pet brands to direct export), streamlining operations (consolidating 20 locations into 5 hubs), and strengthened operations in Live Plants (streamlining assortment, exiting unprofitable markets).
• Innovation: Launches include Zilla Turtle Sticks, Adams Botanicals Spray, Aqueon SMART LED Lights, Nylabone ocean chew toys, Best Bully Sticks, and KT brand's All About the Little Things campaign.
• M&A Strategy: View M&A as a strategic lever, disciplined in pursuit of margin accretive opportunities, plan to accelerate M&A efforts in 2026.
• Community Support: Collaboration to support animal welfare organizations impacted by flooding in Texas, providing pet supplies and cash donations.

Segment Performance

• Pet Segment: Net sales totaled $493 million, down 3%. Consumables now represent 82% of total Pet sales (up from 79% a year ago). Non-GAAP operating income was $78 million, down 6% compared to the prior year's record third quarter. Adjusted EBITDA for the Pet segment was $88 million, a $6 million decline year-over-year.
• Garden Segment: Net sales were $468 million, down 4% due to exit of product lines and weather impacts. However, Wild Bird, Fertilizer, and Packet Seeds businesses showed strong performance. Non-GAAP operating income for the Garden segment rose to $85 million, up $12 million, and adjusted EBITDA was $96 million, an improvement of $11 million year-over-year.

Guidance

• Reaffirmed fiscal 2025 non-GAAP EPS guidance of approximately $2.60.
• Anticipate tariff-related inflationary pressures to intensify, especially in the Pet segment.
• Outlook excludes potential impacts from acquisitions, divestitures, or restructuring initiatives in Q4.

Risks

• Macroeconomic uncertainty due to tariff developments and geopolitical tensions.
• Consumer value consciousness and increased promotional activity across retail channels.
• Ongoing pressure in pet specialty brick-and-mortar space.
• Uncertainty around SKU rationalization and its impact on top line.
• Fluctuating tariff rates and their impact on margins and pricing.

Question and Answer

Q: Around strong profitability and Cost and Simplicity program, how to think about keeping improving margins and potential margin recovery?

A: Company has ingrained Cost and Simplicity, focusing on simplification, portfolio optimization, SKU rationalization, and innovation. Margin improvement is ongoing with continuous improvement mindset, and work never done as they intend to acquire more businesses.

Q: Tariff implications, timing of incremental inventory flowing through and pricing impact?

A: Most tariff hit expected in Q4, working on pricing actions, already seeing benefits from sourcing changes, but specific pricing impact not given, with bulk of tariff impact hitting in Q4.

Q: Pet trends, category and business?

A: Pet Consumable sales stable, durables declined double digits due to category softness and assortment rationalization. Consumables now 82% of Pet sales, higher margin.

Q: Garden categories driving EPS upside?

A: Wild Bird food, Fertilizer, Grass Seed, and Packet Seeds businesses drove performance, with Live Plants team improving operational efficiency despite weather challenges.

Q: Impact of exited product lines on sales?

A: Exited product lines had top line pressure, but were lower margin businesses, and gross margin improved. Q4 will be first quarter Enerpet is out of mix, impacting top line only.

Q: SKU rationalization impact on top line and lap time?

A: Unclear yet, plans for next year still being put together, more guidance in November during year-end call.

Q: Tariffs and their impact on next year run rate?

A: Situation fluid, need to revisit after year-end, working on supply side mitigation, likely working with customers on pricing.

Q: Private label growth and floor space allocation?

A: Combination of picking up private label from competition and excellent retail merchandising execution increasing off-shelf activity for private label.

Q: Long-term growth rate expectation for Pet consumables?

A: Believes Pet consumables category can grow low to mid-single digits long-term, with pet ownership stabilizing and Live Animal business stabilizing.