Central Garden & Pet Company (CENTA) Q2 2026 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Central Garden & Pet's Fiscal 2026 Second Quarter Earnings Call. My name is Kate, and I will be your conference operator for today. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Friederike Edelmann, Vice President, Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining Central's Second Quarter Fiscal 2026 Earnings Call. Joining me today are Niko Lahanas, Chief Executive Officer; Brad Smith, Chief Financial Officer; John Hanson, President, Pet Consumer Products; J.D. Walker, President, Garden Consumer Products; and last but not least, Jason Barnes, Executive Vice President, Garden Consumer Products. Niko will start by sharing today's key takeaways, followed by Brad, who will provide more details of our performance. After their prepared remarks, John, J.D., and Jason will join us for the Q&A session. Before they begin, I would like to remind everyone that all forward-looking statements made during this call are subject to risks and uncertainties that could cause our actual results to differ materially from what those forward-looking statements express or imply today. A detailed description of Central's risk factors can be found in our annual reports filed with the SEC. Please note that Central undertakes no obligation to publicly update forward-looking statements to reflect new information, future events, or other developments. You can find our press release and related materials at ir.central.com. Last but not least, unless otherwise specified, all comparisons discussed during this call are made against the same period in the prior year. Should any questions come up after the call or throughout the quarter, don't hesitate to contact me directly at ir@central.com. And with that, let's begin. Niko, over to you.

Thank you, Friederike, and good afternoon, everyone. I'll start with highlights from the second quarter and then walk through how we're thinking about the rest of the year. We delivered a record second quarter and a record first half with clear improvement across the board: higher sales, expanded operating margins, and stronger earnings per share versus last year. That performance reflects resilience across our key categories, the strength of our operating model, and the actions we've taken to sharpen execution. At the same time, we're continuing to simplify the business in ways that also strengthen our teams and execution. We've moved our DoMyOwn business into our Covington fulfillment center, which is improving speed, lowering costs, and increasing flexibility across the network. We're also consolidating the TDBBS manufacturing into our dog and cat platform in New Jersey to better leverage scale and what we believe are best-in-category capabilities. And subsequent to the quarter, we formed a joint venture with a leading U.S. pet food distributor, Phillips Pet Food & Supplies, where we'll retain a 20% ownership stake. This is a strategic step, which creates a stronger, more agile nationwide distribution network, reduces complexity, and allows us to focus more directly on growing our Central branded portfolio. These moves build on the cost and simplicity work we've been driving for several years. That work has fundamentally strengthened the business. Today, we're more efficient, more resilient, and a better-run organization. And that discipline is embedded in how we operate. With that foundation in place, our focus is squarely on growth and disciplined capital allocation. We're investing where we see the highest returns. And with our balance sheet and customer relationships, we're well positioned to execute. We also advanced our innovation pipeline this quarter. We're bringing forward new products, both branded and private label, that deepen retailer partnerships and connect with consumers. In pet, that includes Nylabone dog chews made with real meat and Farnam's Endure Gold Killer Fly & Mosquito Control Spray for horses. In garden, our recently launched The Rebel Sun & Shade extension in Grass Seed, and new private label programs are performing well and delivering above expectations. Turning now to our outlook. We enter the back half of the year with momentum and a clear focus on execution. Our diversified portfolio, operational flexibility, and disciplined approach to cost management and capital allocation position us well to deliver profitable growth as the macro backdrop continues to evolve. The retail environment remains dynamic, with consumers looking for value and performance and continued shifts towards e-commerce and, in some categories, private label. We're responding with targeted investments behind our strongest brands, innovation, and consumer insights, while continuing to strengthen our digital capabilities. These are the right investments. They are gaining traction, positioning us to drive both growth and margin expansion. While we are still early in our journey, innovation will become a more meaningful contributor as we continue to scale a more streamlined and efficient operating model. M&A remains a key lever. We're taking a disciplined, value-driven approach, focused on high-quality, margin-accretive opportunities that strengthen our portfolio. With our liquidity and flexibility, we're well positioned to act when the right opportunities arise. On the joint venture, as expected, it will reduce reported revenue in the second half by a low-teens percentage, but with minimal impact on earnings given the lower margin profile of that business. Based on our performance and outlook, we are maintaining our guidance for fiscal 2026 non-GAAP diluted EPS of $2.70 or better. That reflects both what we've delivered and our confidence in the path ahead. As always, this guidance excludes the impact of future acquisitions, divestitures, or restructuring actions. Before I hand it over to Brad, I just want to recognize our teams across Central. Their execution continues to set the pace for the organization. We've built a strong foundation, and we're moving forward with focus, discipline, and a confidence in our ability to deliver long-term growth and value. And with that, I'll turn it over to Brad. Brad?

Thank you, Niko. I'll take a few minutes to walk through how the second quarter came together and share what we're seeing as we move through the year. Net sales were $906 million, a 9% year-over-year increase, driven by growth across both segments and reflecting solid underlying demand, the anticipated shift of shipments from the first quarter into the second, and the benefits of actions we've taken to strengthen the business. Gross profit increased to $300 million from $273 million, with gross margin improving by 30 basis points to 33.1%. The prior year included a onetime inventory charge related to the wind-down of our U.K. operations. Excluding this charge, gross margin was essentially consistent year-over-year, supported by productivity gains across both segments and a favorable mix in pet, which helped offset higher manufacturing costs and a lower-margin sales mix in Garden. SG&A expense was $186 million, up 3% versus the prior year. As a percentage of sales, SG&A was 20.5%, down from 21.6%, reflecting the improved sales leverage, prudent cost management, and ongoing simplification of the organization while continuing to reinvest in key growth initiatives. Operating income was $114 million compared with $93 million, and operating margin was 12.6% compared with 11.2%. It's important to step back and look at the first half as a whole, which helps smooth out the noise related to the timing shifts between Q1 and Q2. For the first half, our sales were up 2%, gross margin increased by 70 basis points, and operating income grew 8% versus last year. Both segments contributed to that performance in driving growth in both the top line and bottom line, and together, delivering record operating income for the company, a clear reflection of the strong execution we're seeing across the business. Below operating income, the picture remains stable and consistent with solid underlying profitability. Second quarter net interest expense of $9 million was consistent with the prior year. Other expense was $351,000 compared with $744,000 of other income in the prior year. Net income totaled $79 million compared with $64 million a year ago. We delivered record Q2 diluted earnings per share of $1.28, exceeding both prior year and our expectations, reflecting strong execution and the underlying strength of the business. Adjusted EBITDA for the quarter was $139 million compared to $123 million. Adjusted EBITDA margin for the quarter was 15.4% compared to 14.8%. Our effective tax rate for the quarter was 23.5%, in line with the prior year. With that context, let me turn to the segments, starting with Pet. Net sales for the Pet segment came in at $477 million, up 5% year-over-year, primarily driven by the continued strength in our core consumables portfolio, along with the expected shift of outdoor cushion orders from the first quarter into the second. On a first-half basis, sales for Pet were up 1% versus last year. In the quarter, we continued to see healthy demand across our consumables categories, particularly in our higher-margin dog and cat, equine, and professional product lines, where innovation and execution are driving top line growth. Across the Pet segment, we held share overall with gains in key categories, including rawhide, dog treats, flea and tick, pet bird, and professional, areas aligned with our growth and margin priorities. We were also encouraged by the distribution gains we achieved during the quarter across a range of categories. Operating income for the segment was $78 million in the quarter compared with $61 million. Operating margin improved to 16.3% from 13.4%, reflecting sales leverage, mix improvement, portfolio optimization, and solid execution across the segment. Adjusted EBITDA for the segment was $89 million compared with $75 million, and adjusted EBITDA margin for the segment was 18.6% compared with 16.6%. Now turning to Garden. Net sales for the Garden segment were $425 million, up 13%. As expected, Q2 benefited from the timing of initial retailer shipments for the 2026 season and relatively low retailer on-hand inventories entering the quarter. In addition, the quarter benefited from meaningful distribution gains, particularly in grass seed and fertilizer. That said, for the first half, sales were up 4% over last year. Overall, we gained market share in Garden in the second quarter with strength across several key categories, including grass seed, fertilizer, and wild bird. As we enter the garden season, our businesses are well positioned to deliver a solid year, supported by strong preparation and close alignment with our retail partners. We remain encouraged by the continued support of our customers across our garden categories and brands. Operating income for the Garden segment in the second quarter increased to $66 million, up from $59 million in the prior year. Operating margin was 15.4%, remaining relatively consistent with last year's performance as strong sales volume growth and productivity improvements helped offset the impact of a lower-margin sales mix and higher manufacturing costs. Adjusted EBITDA totaled $76 million compared with $69 million, and adjusted EBITDA margin for the segment was 17.7% compared with 18.2%. Let me close with cash and the balance sheet, which remain a key source of strength and provide flexibility to invest in growth. Cash used by operations was $50 million for the quarter compared with $47 million a year ago. CapEx for the quarter was $10 million and depreciation and amortization totaled $21 million, both consistent with the prior year. We continue to expect to invest approximately $50 million to $60 million in CapEx this fiscal year with a focus on maintenance and targeted productivity and growth initiatives across both segments. During the quarter, we repurchased approximately 110,000 shares for $3.4 million, with $128 million remaining under our share repurchase authorizations as of quarter end. At quarter end, cash and cash equivalents and short-term investments totaled $653 million, an increase of $137 million despite the acquisition of Champion USA in the first quarter, reflecting strong liquidity and cash generation. Total debt was $1.2 billion, unchanged from the prior year. Gross leverage ended the quarter at 2.8x compared with 2.9x in the prior year, and below our target range of 3x to 3.5x. Net leverage was approximately 1.3x, supported by our strong cash position, and we had no borrowings outstanding under our credit facility. Our fortress balance sheet gives us flexibility to continue investing in organic growth, pursuing value-creating M&A, and returning capital to shareholders while maintaining a strong financial position. Before opening for questions, I want to echo Niko and thank our employees. Their work is driving our performance and positioning the business for continued success. And with that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Brad Thomas with KeyBanc Capital Markets Inc.

Nice quarter here. I want to start off with a question for Niko and J.D., I think, to some extent. And the question is really about in this all-important spring selling season, clearly you had a great quarter in terms of sell-in. Just curious if you can give us any thoughts on how sell-through is shaping up and how you're thinking about that for 3Q.

Hey, Brad, it's J.D. Thanks for the question. I'll start, and then I'll ask Jason to comment on that as well from a consumption standpoint. I'd say going back to Q2, what we saw in March of Q2 is the weather started to improve. We saw favorable weather, particularly in Southern markets. Consumption was great. And that pattern has carried into April, and we certainly saw strong consumption throughout the month of April. I think from my perspective, when the weather is favorable, the consumers are very engaged in our categories. Our retailers are very engaged and excited about the categories. So we have every right to believe that if weather cooperates and is favorable, we'll continue to see that strength throughout the season. But I'd say we're cautiously optimistic. And Jason, I don't know if you have anything to add to that.

Yes. I think the only thing that I'd add is that we see strength across the portfolio. So we've got a pretty broad assortment of categories we participate in. And it's not 1 or 2 categories that we saw strength in, in March. It was basically across the entire portfolio, and that has continued into April when the weather has been there for us. So I agree.

But also, it's the great work you guys have done with customers. We have more points of sale, right, compared to prior year. So that's played a role, too.

It has. And Brad referenced the ship-in. Some of that was timing. Some of that was low retailer inventories. Some of that was new points of distribution year-over-year. So we did a nice job of shipping in. And then the consumption piece of it is still going to be tied to weather to a large degree. But where we see the weather, we've seen robust consumption.

That's great. And if I could ask a follow-up just about the guidance at a high level. Pretty normal for you all to be reiterating guidance. If we just do some back-of-the-envelope math, you've had a strong first half of the year. If you were just to hit that $2.70 number, that would imply that the second half could be lower by about $0.25 from what you did in the second half last year. I know you tend to give a wide range here, but just wondering if in broad strokes, you could maybe talk about how you're thinking about the ability to drive profit or earnings growth in the second half.

Sure. I'll give it a crack, Brad. Yes, I mean, your point is well taken. We have started pretty strong. And as J.D. alluded to, April so far, ships look pretty good. In terms of guiding, we don't -- we still need to see the season play out. As everybody knows, we're very weather-dependent. And that really means May. May is that critical month, I would say, April and May. May is very important to the live goods business. So before we can give the all-clear signal and take guide up, we really need to see that play out. And I think if you look at our history, we usually do that in early-to-mid June once we're comfortable with May. But what I would say is we feel really good about the business. As everyone knows, it started very slow in Q1, and it played out exactly the way we thought. A lot of these sales slipped into Q2, and then we had some really nice weather, and that momentum has continued into April. So we are very cautiously optimistic that the momentum will continue, but we just don't know for sure to the point where we're willing to move on guidance just yet.

And Niko, I think what I would add to those comments is, yes, May is critically important. And what I failed to mention in the last question that Brad asked is we still have a number of markets that haven't come on board yet. So a lot of the northern markets are just now -- I was in Boston last week, and it was still winter. So as those markets come on, we'll feel a lot more confident in making a call going forward. But as Niko said, we really need to see how May plays out.

Yes. And as you know, we give ourselves a very wide aperture by saying $2.70 or better. And again, we really like the momentum that we're seeing and the teams are executing. So we do feel really good. But again, we need to see it play out for a few more weeks.

Our next question comes from the line of Brian McNamara with Canaccord Genuity.

Hey, good afternoon, everyone. Congrats on the strong results here.

Thanks.

So 3 months ago, I guess, from your comments, it sounded like 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 5 and second out of the last 7. So how should we think about the back half? I know you guys don't guide to revenue, but is growth continuing a reasonable expectation and what drives that?

Yes, I can take it. This is John. We feel really good about where we're at. 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, we believe the category has stabilized. We still feel that way. We did have the help in the 5% this time of some timing on our cushions business that slid from Q1 to Q2. But even if you back that out, we feel pretty good about the organic piece of the growth in the business. It's a little difficult to have a crystal ball and say what the balance of the year is going to look like. But I would say we're cautiously optimistic.

And we're talking excluding distribution.

Excluding distribution. Excluding distribution. Just to be super clear on that.

Yes. I think the same can be said for the Pet side of the business, which we're seeing some really nice execution there and some market share gains in some key categories. And so, we expect that to continue. 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 then 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.

Yes. 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...

Yes. We felt good about our consumable performance in Q2. It was up mid-single digits. Certainly, that is a higher-margin piece of our business and a good mix play and our focus area.

But durables were up quite a bit in Q2 largely because of the Cushions shift.

That's why I suggested looking at it...

That's right. It takes the noise out.

Understood. And then just a last one on the distribution and the JV there. One, what drove the decision? And two, clearly, you've had that business for other things other than it's a lower-margin business and all that, where 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 at the apple there with this setup? And secondly, on the same point, why wouldn't earnings benefit from it rather than just 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 listening to investors and analysts question our margins, and we always had this overhang of the distribution business that 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 that business had 26,000 SKUs, and it had a lot of ship points and trucks and employees. And so 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 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 noncash impact as well that will flow through earnings. So our estimate on the back half in terms of a financial impact to Central is conservatively $0.03 to $0.05 a share dilutive. And then 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.

Our next question comes from the line of Bob Labick with CJS Securities.

This is Will on 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 urea. Now one of the benefits we have is we do a -- we prebuild a lot of our 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, if we start our prebuild for 2027, it will have an impact on our fertilizer cost. 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 urea 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, we're seeing -- 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. We'll have to see what the duration of this looks like, how long it goes and how deep it is. And if there's pricing needed to 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.

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.

Your last question comes from the line of Andrea Teixeira from JPMorgan.

This is Shovana Chowdhury on for Andrea. 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 can kick it off and then I'll have J.D. and John give a little more color. Yes, 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 J.D. to give a little more color on what they're seeing.

Yes, I think just to add to it on the Pet side, I think we're seeing a bit of a channel shift. I think the consumer is going into mass and club and e-comm to some degree, even more so to get the value pricing, but the value seeking is there. But I think we're seeing branded do pretty well yet, pretty solid, but it is much more of a channel shift.

And 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, as I mentioned earlier, when the weather is good, we're seeing robust consumption, and they are seeking value. And this was a good year for us to pick up some meaningful private label business, which we did this year, fortunately, across many retailers. And that business is performing extremely well. As John mentioned, it's not just the private label, it's our branded products as well. We're seeing consumption across all categories, which is encouraging. Yes, I'd say the health of -- 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. And Jason, I don't know if you'd add anything to that.

The only thing I might add is to John's point about channel shifts. We continue to see e-commerce grow as a percentage of our business. And I'd say that we're well positioned there and believe we're stealing share online as well. So I think that's the only thing to add to where we're seeing value.

Maybe one last comment, and that is 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.

We do have one additional question coming from Brian McNamara with Canaccord Genuity.

At Global Pet, it sounded like everybody was going after cat. That's a hole in your portfolio, for lack of a better term. How would you characterize the current M&A environment relative to 3 months ago and maybe a year ago? It sounds like things have been heating up a little bit in terms of activity.

Very much. Yes. We're seeing things really pick up just in terms of conversations and deal flow. A lot of the bankers were telling us a year ago that '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 M&A environment that's really picking up right now.

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.