Executive Summary / Key Takeaways

• Central Garden & Pet ($CENT) demonstrated resilience in Q2 fiscal 2025, delivering GAAP and non-GAAP EPS growth despite a net sales decline, primarily driven by strong gross margin expansion.
• The company's multiyear Cost and Simplicity program is yielding tangible benefits through operational efficiencies, footprint consolidation, and portfolio optimization, contributing significantly to margin improvement.
• Management reaffirmed its fiscal 2025 non-GAAP EPS guidance of $2.20 or higher, balancing confidence in internal execution with anticipated headwinds from macroeconomic uncertainty, potential tariffs, consumer caution, and weather volatility.
• A strong balance sheet, highlighted by a low net leverage ratio and ample liquidity, positions Central Garden & Pet to pursue strategic, accretive M&A opportunities, particularly in high-growth consumable categories.
• Strategic investments in e-commerce, digital capabilities, and product innovation are key to offsetting pressures in traditional channels and adapting to evolving consumer behavior, contributing to market share gains in targeted areas.

The Dual Landscape of Central Garden & Pet

Central Garden & Pet Company, with roots tracing back to 1955 and incorporated in its current form in 1992, has established itself as a market leader across two distinct yet complementary industries: pet supplies and lawn & garden products. Operating primarily within the United States, the company serves consumers and customers through a diverse portfolio of brands, segmented into its Pet and Garden divisions. This dual-market presence provides a unique strategic positioning, allowing Central to leverage shared operational infrastructure while catering to distinct consumer needs and seasonal cycles.

The company's strategic journey has been significantly shaped by a history of targeted acquisitions, aimed at building scale, expanding product offerings, and enhancing capabilities. Notable recent examples include the acquisition of TDBBS, LLC in late 2023 to bolster its premium dog chew and treat business and enhance e-commerce capabilities, and earlier deals like DMO, which brought valuable fulfillment technology. These acquisitions have been instrumental in Central's growth, allowing it to enter new product areas and strengthen its position in core categories.

In recent years, Central has intensified its focus on operational efficiency and simplification through its multiyear "Cost and Simplicity" program. This initiative is a direct response to evolving market dynamics, aiming to streamline operations, optimize its physical footprint, and improve cost structures across the organization. This strategic pivot is not merely about cost-cutting; it is designed to enhance agility, drive margin expansion, and generate the financial capacity to reinvest in organic growth initiatives and strategic M&A.

Central operates within competitive landscapes characterized by both large, diversified players and specialized niche competitors. In the Garden segment, it competes with giants like Scotts Miracle-Gro (SMG), which holds a dominant market share in areas like fertilizers and seeds. While SMG often leads in market share and innovation speed, Central competes effectively through its established brands (like Pennington, Sevin), broad distribution, and a focus on operational efficiency. Central's integrated supply chain can offer cost advantages, positioning it as a value-focused competitor. However, it faces vulnerability to SMG's brand loyalty and innovation pace.

In the Pet segment, competition is fragmented, ranging from large retailers like Petco (WOOF) to online pure-plays like Chewy (CHWY) and diversified conglomerates like Spectrum Brands (SPB), as well as the increasing presence of large e-commerce platforms like Amazon (AMZN) offering low-priced imports. Central's Pet segment, with brands like Nylabone, Aqueon, and Kaytee, focuses heavily on consumables, which represent over 80% of its pet sales. This focus provides a degree of resilience compared to the more volatile durables market. Compared to CHWY, Central lags in e-commerce dominance but leverages its established brick-and-mortar relationships and diversified brand portfolio. While WOOF integrates services, Central differentiates through product manufacturing and quality. The rise of low-cost Asian imports, particularly impacting the durables market, presents a challenge, which recent policy changes regarding de minimis tariffs could potentially mitigate by leveling the playing field. Central's competitive advantages lie in its strong brand recognition, diversified product portfolio spanning two industries, and increasingly, its operational efficiency driven by the Cost and Simplicity program. However, it faces vulnerabilities related to customer concentration and supply chain dependencies for certain products.

Operational Efficiency and Digital Evolution

Central's strategic response to market pressures and its path to sustainable growth are intrinsically linked to its operational advancements and digital transformation. The multiyear Cost and Simplicity program is a cornerstone of this effort. Recent achievements highlight the tangible progress being made. In the Garden segment, the company has consolidated distribution facilities, including replacing seven legacy facilities with a new center in Covington, Georgia, and is consolidating four other locations into a new Georgia-based fulfillment center. A new research location in Texas for the plant science center aims to reduce reliance on third-party testing and consolidate operations. In the Pet segment, significant steps include integrating businesses like Arden, Dogbed, and K&H by consolidating manufacturing facilities and opening a new 300,000 sq ft dog and cat distribution center in New Jersey designed for enhanced efficiency and DTC capabilities. The decision to wind down UK operations and transition to a direct export model is another facet of this global streamlining effort. These initiatives, while sometimes incurring one-time costs (like the $5.3 million related to the UK wind-down in Q2 FY25), are designed to reduce operational complexity, lower costs, and improve overall profitability and agility.

Beyond physical footprint optimization, Central is making targeted investments in digital capabilities and operational technology. The expansion of e-commerce operations, including adding direct-to-consumer (DTC) capabilities to distribution centers in Eastern Pennsylvania and planning a new DTC-enabled facility in Salt Lake City, underscores the company's commitment to this growing channel. E-commerce represented 27% of pet sales in Q2 FY25 and is a key area for growth and market share gains, fueled by investments in new products, optimized retail media, and enhanced conversion rates. While less developed, Garden e-commerce is also seeing double-digit growth. Operational technology improvements include the rollout of a corporate transportation management system and centralized load planning, aimed at reducing costs and improving delivery reliability. Product innovation is also leveraging technology, such as the Aqueon BlueIQ app for smart aquarium care, demonstrating a focus on enhancing the consumer experience through digital integration.

These operational and digital advancements are critical competitive levers. The Cost and Simplicity program directly addresses cost leadership, aiming to improve margins (Q2 FY25 gross margin expanded 180 bps) and counter inflationary pressures and the need for increased promotional activity in a value-seeking consumer environment. The digital investments are vital for competing with e-commerce focused rivals like Chewy and adapting to changing consumer purchasing habits, helping to offset softness in traditional brick-and-mortar channels. While the company may not possess a single, unique manufacturing technology moat like some industrial peers, its strategic focus on optimizing its operational footprint, enhancing digital capabilities, and integrating technology into product offerings collectively contributes to its competitive positioning and efficiency gains.

Financial Performance and Outlook

Central Garden & Pet reported a solid second quarter for fiscal 2025, demonstrating the impact of its operational focus despite top-line pressures. Net sales for the three months ended March 29, 2025, decreased 7.4% to $833.5 million compared to $900.1 million in the prior year period. This decline was attributed primarily to the timing of customer orders shifting sales into the first quarter, unfavorable weather delaying the garden season, and the loss of two third-party distribution product lines in the Garden segment. Pet segment net sales decreased 5.5% to $453.7 million, while Garden segment net sales decreased 9.5% to $379.8 million.

Despite lower sales, gross profit decreased by a smaller margin (2.1% to $273.1 million), resulting in a notable 180 basis point expansion in gross margin to 32.8%. This margin improvement was a direct result of productivity gains from the Cost and Simplicity program and moderating inflation. Selling, general, and administrative expenses decreased by 3.1% to $179.8 million, although they increased as a percentage of sales due to the lower revenue base. Operating income remained relatively flat at $93.3 million, with the improved gross margin offsetting the impact of lower sales and increased SG&A as a percentage of revenue. Pet segment operating income decreased slightly (3.3% to $60.6 million), while Garden segment operating income increased (3.0% to $58.7 million), reflecting the Garden segment's improved gross margin and lower SG&A.

For the first six months of fiscal 2025, net sales decreased 2.9% to $1.49 billion. However, gross profit increased 2.4% to $468.8 million, and gross margin improved 170 basis points to 31.5%. Operating income increased significantly by 19.1% to $121.3 million, with operating margin expanding to 8.1%. Net income attributable to Central Garden & Pet for the six months increased to $77.6 million, or $1.19 per diluted share, compared to $62.4 million, or $0.93 per diluted share, in the prior year period. This performance underscores the positive impact of operational efficiencies and margin management in the face of revenue headwinds.

The company's balance sheet remains robust, providing a strong foundation for future initiatives. As of March 29, 2025, cash and cash equivalents stood at $516.7 million, a significant increase from $301.3 million a year prior.

Total debt was $1.19 billion, largely unchanged year-over-year. The company's gross leverage ratio was 2.9x, below its target range of 3.0x to 3.5x, and the net leverage ratio was approximately 1.7x, reflecting its substantial cash position. Central has no borrowings outstanding under its $750 million asset-based revolving credit facility, with approximately $706 million in net availability as of March 29, 2025. This strong liquidity position is a key asset, enabling the company to fund operations, invest in the business (with planned CapEx of approximately $60 million in FY25), and pursue strategic M&A. Share repurchases also remain part of the capital allocation strategy, with $38.7 million spent between quarter-end and April 30, 2025, and $62.5 million remaining under authorization.

Looking ahead, Central Garden & Pet reaffirmed its fiscal 2025 non-GAAP EPS guidance of $2.20 or higher. This outlook incorporates expectations for continued macroeconomic and geopolitical uncertainty, potential inflationary pressures (particularly in Pet) if current tariff rates persist, increased consumer focus on value, a competitive and promotional retail environment, and weather variability. The company anticipates a softer second quarter compared to the prior year due to the timing shifts experienced in Q1 but remains confident in achieving its full-year target through continued execution of its strategy, particularly the benefits from the Cost and Simplicity program and investments in growth areas like e-commerce.

Risks and Challenges

Despite strategic progress and operational improvements, Central Garden & Pet faces several notable risks and challenges that could impact its performance and the investment thesis. Macroeconomic uncertainty, including potential recessionary pressures and geopolitical tensions, can weigh on consumer spending, particularly for discretionary items like certain pet durables and garden products. The company is exposed to the impact of tariffs and risks associated with international sourcing, especially from China, which could lead to increased costs and require pricing adjustments or supply chain shifts.

Weather conditions remain a significant, unpredictable risk for the highly seasonal Garden segment. Adverse weather, such as the cold/wet spring followed by intense heat experienced in Q3 FY24 which severely impacted the live goods business, can significantly depress sales and profitability. Fluctuations in raw material prices, including seeds and grains, also pose a risk, as demonstrated by the grass seed inventory write-down in Q4 FY24 due to falling market prices.

Competition is intense across both segments, characterized by promotional activity and pressure on pricing. The rise of low-cost imports via e-commerce channels, particularly affecting the pet durables market, adds another layer of competitive complexity. Consolidation trends in the retail industry and dependence on a small number of large customers also present risks, potentially impacting distribution and terms.

Operational risks include the ongoing implementation of the ERP system and the successful integration of acquired companies. While the Cost and Simplicity program aims to mitigate some of these, execution risks remain. Litigation, such as the ongoing Nite Glow case, could also result in expenses exceeding management expectations.

Management acknowledges these headwinds and is actively working to mitigate them through disciplined cost management, supply chain optimization, strategic investments in digital capabilities, and focusing the portfolio on higher-margin, less volatile areas like pet consumables. However, the external environment remains challenging, and the ability to successfully navigate these risks will be critical to achieving the stated outlook and driving long-term value.

Conclusion

Central Garden & Pet is strategically positioning itself for long-term profitable growth by focusing on operational efficiency, digital expansion, and portfolio optimization, even as it contends with a challenging external environment. The Cost and Simplicity program is proving to be a powerful lever, driving margin expansion and generating significant cash flow, which reached a record high in fiscal 2024. This financial strength provides the company with the flexibility to invest in key capabilities like e-commerce and pursue accretive M&A opportunities, particularly in the resilient pet consumables market. While near-term headwinds from macroeconomic uncertainty, weather volatility, and competitive pressures are expected to persist, the company's reaffirmed fiscal 2025 non-GAAP EPS guidance reflects confidence in its ability to execute its strategy and manage through these challenges. Investors should monitor the continued progress of the Cost and Simplicity initiatives, the performance of strategic investments in digital channels, and the impact of external factors like weather and consumer spending trends, all of which will shape Central Garden & Pet's trajectory in the coming year.