On Tuesday, Canaccord Genuity adjusted its outlook on Central Garden & Pet Co. (NASDAQ:CENT), reducing the price target to $45 from the previous $48, while still recommending a Buy for the stock. Central Garden & Pet reported its fourth-quarter earnings, which fell short of expectations, with sales approximately 5% under the consensus. The shortfall was attributed in part to a misalignment in financial modeling by analysts due to the company's comparison to a prior 53-week fiscal year.
The company saw each of its business segments miss analyst projections by more than 7%, which also contributed to lower-than-expected adjusted EBITDA and EPS. Central Garden & Pet noted ongoing challenges due to unfavorable weather conditions impacting its garden segment. However, management expressed a cautious optimism for the live goods sector in fiscal year 2025.
The pet durables category is anticipated to continue its decline in fiscal year 2025. Central Garden & Pet expects to perform slightly worse than the mid-single-digit percentage decline projected for the category, as it intends to phase out less profitable products. Despite these challenges, the company highlighted a positive aspect: the impact of tariffs is diminishing, with only 5% of its cost of goods sold (COGS) now sourced from China, down from 8%.
Looking ahead, the management team at Central Garden & Pet is actively seeking merger and acquisition opportunities. They are focused on high-growth consumable companies that could contribute to margin improvement, scale, entry into new categories, and provide essential capabilities. With pet adoption rates nearing a low point and the hope of better weather after three years of poor conditions, Canaccord Genuity anticipates a potential recovery in margins as sustainable growth and operating leverage return. The revised price target reflects these updated estimates and the firm's ongoing confidence in the company's stock.
In other recent news, Central has wrapped up its fiscal year 2024, navigating through a challenging period marked by a drop in demand in both the pet and garden segments. Despite these obstacles, the company reported noteworthy financial results, including a rise in non-GAAP EPS and a record high in operating cash flow. Central's net sales experienced a 3% dip to $3.2 billion, while non-GAAP gross profit reached $960 million. The company's non-GAAP EPS surpassed expectations, landing at $2.13, and operating cash flow hit an all-time high of $395 million.
Sales in the pet and garden segments saw significant declines of 10% and 12% respectively. However, Central's cost management and digital expansion strategies have set the stage for potential growth opportunities in the upcoming year. The company is looking forward to potential merger and acquisition activities, demonstrating confidence in its strong financial position to capitalize on these opportunities.
Central is projecting a non-GAAP EPS of $2.20 or higher for fiscal 2025, despite anticipating a challenging external environment. The company remains cautious about the pricing and promotional landscape, expecting consumer value-seeking behavior to persist.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on Central Garden & Pet Co.'s financial position and market performance. The company's market capitalization stands at $2.31 billion, with a P/E ratio of 12.19, indicating a relatively low valuation compared to earnings. This aligns with one of the InvestingPro Tips, which suggests that CENT is "Trading at a low P/E ratio relative to near-term earnings growth."
The company's revenue for the last twelve months as of Q3 2024 was $3.28 billion, with a modest growth of 0.42%. Despite the challenges mentioned in the article, Central Garden & Pet has maintained profitability, as confirmed by another InvestingPro Tip stating that the company has been "Profitable over the last twelve months."
Interestingly, while the article discusses recent earnings misses and sector challenges, CENT has shown strong recent performance in the market. An InvestingPro Tip highlights a "Strong return over the last month," which is supported by the data showing a 15.51% price total return over the past month. This recent uptick could reflect investor optimism about the company's future prospects, including potential M&A activities mentioned in the article.
For investors seeking a more comprehensive analysis, InvestingPro offers 6 additional tips for CENT, providing a deeper understanding of the company's financial health and market position.
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