Central Garden & Pet Q3 2026 Earnings Report

Central Garden & Pet EPS Results

• Actual EPS: $1.54
• Consensus EPS: $1.53
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $1.56

Central Garden & Pet Revenue Results

• Actual Revenue: $883.72 million
• Expected Revenue: $882.96 million
• Beat/Miss: Beat by +$752.00 thousand
• YoY Revenue Growth: -8.20%

Central Garden & Pet Announcement Details

• Quarter: Q3 2026
• Date: 8/5/2026
• Time: After Market Closes
• Conference Call Date: Wednesday, August 5, 2026
• Conference Call Time: 4:30PM ET

Central Garden & Pet (NASDAQ:CENT) (NASDAQ: CENT) is a leading North American specialty retailer, manufacturer and distributor serving the lawn and garden and pet supplies markets. The company operates through two primary segments: Pet and Garden. In the Pet segment, Central Garden & Pet offers a comprehensive range of products including pet food, treats, accessories, training products and habitat solutions for dogs, cats, birds, fish and small animals. The Garden segment encompasses a wide array of lawn, garden and outdoor living products, such as soils, fertilizers, planters, pest control solutions, landscape lighting and watering equipment.

Central Garden & Pet’s product portfolio includes both proprietary and branded offerings. In the pet category, the company markets well-known brands like Kaytee, Kaytee Exact, JW Pet and Redmon, as well as private-label items sold through retail partners. In the garden category, leading brands include BioAdvanced, Vigoro, Zia, Pennington and Boniato, among others. The company’s distribution network spans over 60 facilities across the United States and Canada, enabling it to supply independent garden centers, mass merchandisers, home improvement chains, e-commerce outlets and feed stores.

Founded in 1960 and headquartered in Walnut Creek, California, Central Garden & Pet has grown through a combination of organic expansion and strategic acquisitions. The company’s history of targeted acquisitions has broadened its product offerings and geographic reach, while maintaining a focus on innovation, customer service and supply chain efficiency. Under the leadership of Chairman, President and Chief Executive Officer William H. Post II, Central Garden & Pet continues to invest in manufacturing capabilities and digital initiatives to support retail partners and strengthen its market position.

Central Garden & Pet Q3 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Fiscal 2026 adjusted EPS guidance was raised to $2.85 or better, up from $2.70 or better, reflecting year-to-date performance and confidence in the fourth quarter.
• Positive Sentiment: Organic sales increased 2% in the quarter, while operating margin expanded 90 basis points to 15.4%; Garden sales rose 3% and benefited from strength in fertilizer, Wild Bird, grass seed, and eCommerce.
• Positive Sentiment: Management reported stabilization in Pet, with market-share gains in professional products, dog treats, rawhide, and flea and tick; online Pet sales grew 10% and Garden eCommerce sales increased more than 40%.
• Positive Sentiment: Central agreed to acquire an 80% stake in European pet supplies company TRIXIE for up to €400 million, creating a broader global platform with potential long-term benefits from international growth, innovation, sourcing, manufacturing, and logistics synergies.
• Neutral Sentiment: Reported revenue fell 8% because of the exit from the lower-margin pet distribution business, though management expects limited earnings impact; the TRIXIE deal is expected to close in the first half of fiscal 2027 and is excluded from current guidance.

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's Fiscal 2026 Third Quarter Earnings Call. My name is Cleo, and I will be your conference operator for today. At this time, all participants are in a listen-only mode.

[Operator]

Following the prepared remarks, we will hold a question and answer session. Instructions will be given at that time. If you require assistance at any point during the call, please press star followed by zero on your touch tone phone. As a reminder, this conference is being recorded. I would now like to turn the call over to Friederike Edelmann, Vice President, Investor Relations. Please go ahead.

[Friederike Edelmann, VP of Investor Relations at Central Garden & Pet]

Good afternoon, everyone, and thank you for joining Central's Third Quarter Fiscal 2026 Earnings Call. Joining me today are Niko Lahanas, Chief Executive Officer, Brad Smith, Chief Financial Officer, John Hanson, President of Pet Consumer Products, J.D. Walker, President of Garden Consumer Products, as well as Jason Barnes, EVP of Garden Consumer Products.

[Friederike Edelmann, VP of Investor Relations at Central Garden & Pet]

Niko will begin by highlighting today's key takeaways, followed by Brad, who will walk through our financial performance and the acquisition of TRIXIE in greater detail. After their prepared remarks, John, J.D., and Jason will join us for the Q&A session.

[Friederike Edelmann, VP of Investor Relations at Central Garden & Pet]

Before we get started, 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 those expressed or implied by these forward-looking statements today.

[Friederike Edelmann, VP of Investor Relations at Central Garden & Pet]

A detailed description of Central's risk factors can be found in our annual report filed with the SEC. Please note that Central undertakes no obligation to publicly update forward-looking statements to reflect subsequent information, future events, or other developments. You can find our press release and related materials at ir.central.com.

[Friederike Edelmann, VP of Investor Relations at Central Garden & Pet]

Finally, unless otherwise specified, all comparisons discussed during this call are made against the same period in the prior year. Should any question come up after the call or throughout the quarter, please feel free to contact me ir.central.com. With that, I'll turn the call over to Niko. Niko, the floor is yours.

[Niko Lahanas, CEO at Central Garden & Pet]

Thanks, Friederike, and good afternoon, everyone. I'll begin with our third quarter highlights and then share how we're thinking about the balance of the year. We delivered another solid quarter. Organic sales grew, operating margins expanded, and our teams continued to execute well across the business. More importantly, our performance reflects the strength of the business we've been building over the past several years.

[Niko Lahanas, CEO at Central Garden & Pet]

We've consistently improved our execution, strengthened our operating model, and enhanced our ability to invest behind the opportunities we believe will create the greatest long-term value. Those efforts are allowing us to deliver stronger financial performance while continuing to invest in the future. One example is Project Horizon, our multi-year effort to modernize our garden logistics network.

[Niko Lahanas, CEO at Central Garden & Pet]

Since 2022, we've closed 13 facilities and opened two, transforming what had been separate business unit distribution networks into a unified four-node national network we call the Central Logistics Network. That program is now approximately 95% complete. The vast majority of projects have been delivered on schedule. Every project has been completed under budget, and we've accomplished all of this with minimal disruption to our customers.

[Niko Lahanas, CEO at Central Garden & Pet]

Since launch, we've shipped more than 1 million small parcel packages through the network, and total shipments moving through those facilities are substantially higher. As utilization continues to increase, we're seeing meaningful improvements in productivity, service levels, and customer responsiveness.

[Niko Lahanas, CEO at Central Garden & Pet]

Project Horizon reflects the kind of disciplined operational execution that strengthens our competitive position while creating capacity to invest in growth. Across Central, we're focused on making the business easier to operate, better serving our customers, and allocating capital to the highest return opportunities.

[Niko Lahanas, CEO at Central Garden & Pet]

Today, that means investing behind our brands, strengthening our innovation pipeline, expanding our digital and eCommerce capabilities, improving our understanding of cost to serve, and leveraging our strong balance sheet to pursue opportunities that enhance our portfolio. We believe these investments will support sustainable growth while continuing to improve our returns over time.

[Niko Lahanas, CEO at Central Garden & Pet]

That brings me to the announcement we made just last week. We entered into a definitive agreement to acquire an 80% interest in TRIXIE, the leading European pet supplies and pet snacks company. This is an important milestone in advancing our Central to Home strategy and significantly expands our presence in Europe. TRIXIE serves more than 30,000 pet retail stores worldwide with a portfolio that is approximately 90% branded products, a business built on strong customer relationships, differentiated products, and a long history of profitable growth.

[Niko Lahanas, CEO at Central Garden & Pet]

We expect the transaction to close during the first half of our fiscal 2027. Together, Central and TRIXIE will create a leading global pet supplies platform with a broader international footprint. Approximately 10% of combined sales generated outside the United States and an attractive platform from which to participate in the continued growth and consolidation of the European pet specialty market.

[Niko Lahanas, CEO at Central Garden & Pet]

Opportunities to acquire a profitable category leading company with TRIXIE scale, brand strength, innovation capabilities, and strong cultural alignment are uncommon. We believe this transaction meaningfully enhances our long-term growth opportunities, and we're excited to welcome the TRIXIE team to the Central family. Innovation is another area where TRIXIE excels, introducing hundreds of new products annually through its in-house design organization. That same commitment to innovation continues across our own portfolio.

[Niko Lahanas, CEO at Central Garden & Pet]

During the quarter, our recent product launches continued to perform well, including Nylabone dog chews made with real meat, Farnam Endure Gold Fly Killer and Mosquito Control Spray, the Rebel Sun & Shade Extension in grass seed, and several successful private label programs.

[Niko Lahanas, CEO at Central Garden & Pet]

Turning to our outlook. As we enter the fourth quarter, we do so with good momentum and a continued focus on disciplined execution. While the macroeconomic environment remains dynamic, our diversified portfolio, strong customer relationships, operational flexibility, and disciplined capital allocation position us well to continue delivering profitable growth.

[Niko Lahanas, CEO at Central Garden & Pet]

Consumers continue to seek value and performance, while eCommerce and, in certain categories, private label remain in important areas of growth. These investments are generating encouraging results today while positioning us to create sustainable growth and continued margin expansion over the long term.

[Niko Lahanas, CEO at Central Garden & Pet]

M&A remains an important component of our long-term strategy, and the announcement of TRIXIE doesn't change that. Even after funding this transaction in the coming months, our balance sheet remains strong and provides us meaningful flexibility to pursue additional high-quality opportunities that enhance our portfolio and create shareholder value. Our approach remains disciplined. We'll continue to focus on acquisitions that fit strategically, meet our financial return objectives, and strengthen our competitive position over the long term.

[Niko Lahanas, CEO at Central Garden & Pet]

Looking ahead, the exit of our pet distribution business will continue to reduce reported revenue over the next several quarters. Though the earnings impact will be minimal given the lower margin profile of that business. Once the TRIXIE transaction closes, it will contribute incremental sales and earnings, helping offset a portion of the reported revenue impact while further strengthening our overall business mix.

[Niko Lahanas, CEO at Central Garden & Pet]

Based on our performance year to date and our outlook for the fourth quarter, we are raising our guidance for fiscal 2026 non-GAAP diluted EPS from $2.70 or better to $2.85 or better. This increase reflects both the progress we've made through the first nine months of the year and our confidence in our ability to execute during the remainder of fiscal 2026.

[Niko Lahanas, CEO at Central Garden & Pet]

As always, this guidance excludes the impact of future acquisitions, including TRIXIE, as well as any future divestitures or restructuring actions and any further tariff refunds. Before I hand it over to Brad, I just want to recognize our teams across Central. Their commitment, execution, and focus continue to drive our performance.

[Niko Lahanas, CEO at Central Garden & Pet]

They've built a stronger company with a solid operating foundation and a culture that continues to embrace innovation, accountability, and customer service. We're entering an exciting new chapter for Central.

[Niko Lahanas, CEO at Central Garden & Pet]

We have a stronger portfolio, greater financial flexibility, expanding international opportunities, and a clear strategy for creating long-term value. While there's always more work to do, I'm encouraged by the momentum we've built and confident in our ability to continue delivering for our customers, our employees, and our shareholders. With that, I'll turn it over to Brad. Brad?

[Brad Smith, CFO at Central Garden & Pet]

Thank you, Niko. Let me run through our third quarter results in more detail. I'll provide further comments on our recent TRIXIE acquisition. Net sales declined 8% to $882 million, driven by the exit of our pet distribution business at the beginning of Q3. In contrast, organic net sales, which exclude the pet distribution business, rose 2% to $862 million, reflecting organic growth in both garden and pet.

[Brad Smith, CFO at Central Garden & Pet]

Non-GAAP gross profit was $318 million, down 4%, with gross margin up 140 basis points to 36%. Non-GAAP SG&A was $182 million, down 6% year-over-year. As a percentage of net sales, SG&A rose to 20.6% from 20.1%. The lower SG&A spend and higher SG&A rate were primarily the result of exiting the pet distribution business, which carried a lower SG&A rate than the remaining portfolio.

[Brad Smith, CFO at Central Garden & Pet]

Non-GAAP operating income was $136 million, down 2%, with operating margin expanding 90 basis points to 15.4%. Higher corporate spend related to the TRIXIE acquisition and investments to improve our data capabilities accounted for more than 100% of the operating income decrease. Net interest expense was $8 million, below a year ago. Other income was $2 million, slightly above the prior year.

[Brad Smith, CFO at Central Garden & Pet]

Non-GAAP net income was $96 million, down 2%. Non-GAAP diluted EPS came in at $1.54, just shy of the $1.56 we posted last year. Adjusted EBITDA was $162 million versus $167 million a year ago, with margin expanding to 18.3% from 17.3%. Lastly, our effective tax rate for the quarter was 24.7% versus 25.1%. As a reminder, our tax rate in last year's third quarter was a bit higher than normal due to non-deductible losses incurred in the wind down of our U.K. business.

[Brad Smith, CFO at Central Garden & Pet]

On to the segments, starting with pet. Pet segment net sales were $400 million, down 19%, reflecting the exit of our pet distribution business. Organic sales rose 2% to $380 million, driven by broad gains across the majority of our portfolio, which offset lower Dog and Cat revenues that were primarily due to the timing of promotional events and related investment spending.

[Brad Smith, CFO at Central Garden & Pet]

Our online sales, a key barometer for the health of our business, were up 10% over prior year, helped by a record Prime Day. In addition, we delivered another quarter of record performance in our professional business, a key growth vertical for the segment, and an area where we continue to see significant opportunity. We continue to hold overall share in pet. We share gains in several categories, including professional, Dog Treats, Rawhide, and Flea and Tick.

[Brad Smith, CFO at Central Garden & Pet]

Segment non-GAAP operating income was $76 million, down 2%, with operating margin improving 320 basis points to 19%. The lower operating income but higher operating margin were primarily the result of our distribution exit, with continued improvements in margin mix and ongoing productivity benefits in the organic business offset primarily by higher materials and freight costs.

[Brad Smith, CFO at Central Garden & Pet]

Lastly, segment adjusted EBITDA was $86 million versus $88 million, with margin expanding to 21.4% from 17.9%. On to garden. Garden net sales were $482 million, up 3%, driven by meaningful distribution wins and strong consumer demand across fertilizer, Wild Bird, and grass seed. In fact, sales this year in both fertilizer and Wild Bird continue to be at record levels, a testament to the strength of our execution in these categories.

[Brad Smith, CFO at Central Garden & Pet]

Another highlight this year has been our eCommerce momentum with Q3 sales up over 40% year-over-year, reflecting strong growth across both our pure-play and omni-channel partners. Overall, garden continued to gain market share during the year, with third quarter gains led by fertilizer, Wild Bird, and grass seed. As we enter the final phase of the garden season, we remain well-positioned.

[Brad Smith, CFO at Central Garden & Pet]

Our teams have executed effectively throughout the season, partnering closely with our customers to optimize in-season performance and meet consumer demand. We continue to see solid support for our garden portfolio and remain focused on finishing the year strong. Garden non-GAAP operating income was $91 million, up 7%, with operating margin improving 70 basis points to 18.9%, driven by a favorable product mix and productivity improvements, which more than offset higher costs, particularly around freight and digital marketing spend.

[Brad Smith, CFO at Central Garden & Pet]

Finally, garden adjusted EBITDA was $101 million versus $96 million, with margin expanding to 20.9% from 20.4%. Let's shift to cash flows and the balance sheet. Cash provided by operations was $327 million this quarter versus $265 million last year, a record for the company. This quarter, CapEx was $13 million and depreciation and amortization was $20 million, both in line with the prior year.

[Brad Smith, CFO at Central Garden & Pet]

We're now planning approximately $50 million of CapEx for the full year, mostly maintenance plus targeted productivity and growth spending in both segments. We bought back a small amount of shares this quarter, about 26,000 shares, leaving 128 million remaining on our current authorizations. Cash and cash equivalents into the quarter at just shy of a billion dollars, $997 million to be exact, up $284 million, making Q3 the 14th consecutive quarter of year-over-year cash improvement.

[Brad Smith, CFO at Central Garden & Pet]

Total debt stood at $1.2 billion, in line with last year, with no drawdowns on our credit facility. Gross leverage was 2.8x, slightly below a year ago, and below our 3x-3.5x target. Net leverage was 0.5x, an all-time low for the company. It's important to note that these ratios exclude the impact of funding TRIXIE, as we expect the transaction to close in the first half of fiscal 2027.

[Brad Smith, CFO at Central Garden & Pet]

We do not expect funding of the transaction to have a meaningful impact on our leverage ratios next year. As a reminder, the transaction is structured as an 80% stake for €340 million at closing, plus up to €60 million in additional earn-out consideration. Up to €400 million in total at a high single-digit EBITA multiple. One final comment on TRIXIE.

[Brad Smith, CFO at Central Garden & Pet]

This acquisition is the most exciting opportunity in pet supplies I've seen during my nine years at Central. By uniting the premier U.S. and European leaders in pet supplies, we capture a rare and powerful opportunity to expand our access to over 100 million pet-owning households across Europe, a market whose demographic and spending trends around pet ownership closely mirror ours in the U.S.

[Brad Smith, CFO at Central Garden & Pet]

Together, we will be well-positioned to consolidate a fragmented European market, expand our consumables offering, increase online penetration, and unlock meaningful commercial and supply chain synergies. This partnership marks a bright future that we believe will benefit our retail partners, consumers, employees, and shareholders alike. Before we open it up for questions, I want to thank our more than 6,000 employees across Central. Our strong financial performance and improved outlook for the year are a direct result of your dedication and hard work.

[Brad Smith, CFO at Central Garden & Pet]

With that, operator, please open the line for questions.

[Operator]

Thank you. Our first question is from Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.

[Taylor Zick, Analyst at KeyBanc Capital Markets]

Hey, good afternoon, everyone. It's Taylor Zick for Brad. Thanks for taking our question. To start off here on the pet side. The segment kind of has a lot of moving parts with the pet JV, distribution JV. I think we're lapping some of the exits of lower-margin pet durables last year, then you have the Champion USA business, which was acquired in December, though that may be relatively small.

[Taylor Zick, Analyst at KeyBanc Capital Markets]

You noted organic growth about 2% in the quarter, which did accelerate slightly from that +1 you had in the first half. I guess, Niko, what do you think the underlying trends are within the pet segment here in the first quarter?

[Niko Lahanas, CEO at Central Garden & Pet]

Well, we think there's a real stabilization going on in pet right now. I'll make some overarching comments, and I'll turn it over to John Hanson to give a little more color. Our pro business was strong. Equine continues to be strong. Believe it or not, avian small animal had an excellent quarter. Our normally very strong dog and cat business had a little bit of a hiccup.

[Niko Lahanas, CEO at Central Garden & Pet]

They had some supply issues where one of the plants down in South America had burned down, so we had to sort of triage that to get the supply up here. That was more of an internal issue as opposed to what I would call systemic. Overall, we're encouraged with what we've been saying all along, that we feel like there's some real nice stabilization going on in pet.

[Niko Lahanas, CEO at Central Garden & Pet]

Then we're taking market share in some key areas as well. We feel really good about that, and we've got some nice momentum going on in some of our higher-margin businesses, is what I would say. John Hanson, anything you want to add?

[John Hanson, President of Pet Consumer Products at Central Garden & Pet]

No, I think you handled it well, and answered it well, Niko. We feel really good about the stabilization we're seeing. Household penetration, buy rate. We've got a small animal business, live animal business that is up low single digits, and that's been, I think, the third quarter-

[Niko Lahanas, CEO at Central Garden & Pet]

Yeah

[John Hanson, President of Pet Consumer Products at Central Garden & Pet]

it's been stabilized to slightly up. We feel good about that. Overall, we think we're holding market share, but we're taking market share in key businesses like Rawhide, Dog Treats, Flea & Tick, and our professional business, and we feel real good where we're at.

[Niko Lahanas, CEO at Central Garden & Pet]

Yeah. I would say, too, that pretty intentionally, we did the JV with Phillips, and we've talked about it here and there, but these types of moves allow us to focus on the businesses that we want to drive. We're taking a lot of noise out of the business and simplifying what we're doing, and it brings a lot of focus around what's truly important for us.

[Taylor Zick, Analyst at KeyBanc Capital Markets]

Yeah. That's great. Then maybe one more, if I can, on the garden side. Garden, I think was up, you called out 3% here for Q3. I think it's pretty much in line with where the first half ended up here. I guess at the same time, we've heard others in the industry talk about weather kind of being a drag here in the spring selling season.

[Taylor Zick, Analyst at KeyBanc Capital Markets]

Just kind of curious on what you all saw during the quarter. Then maybe just how that informs fourth quarter, because I believe we had a pretty strong fourth quarter of the prior year. Curious on how you feel about lapping that and maybe how retail inventories had ended here.

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

Yeah. Great question. This is Jason Barnes. I'll take that question. I'll start with the quarter. We had a bit of a mixed bag in weather. We started out the quarter with a little bit of cold and wet that translated into a heat dome in the middle of the quarter.

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

That then translated into just an extended heat throughout the quarter. I think what you saw in the results is, like you said, up low single digits. If you look at our brands within that mix, we were up mid to high single digits for the quarter on our brands and our manufactured products. We're seeing really good strength within that portfolio, dragged down slightly by our vendor partner distribution business as we talked about some of the losses within that segment.

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

Looking forward into Q4, we've started out with a lot of the same momentum, seeing really good strength and growth within the brands, despite some challenging weather to start out June, particularly heat, smoke from Canadian wildfires, and other headwinds. We've been able to offset those with doing really good, and I think that's translated into share within those brands.

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

Particularly grass seed, fertilizer, and Wild Bird, where we continue to pick up share in the market. Your last question on inventories, we feel really good about where we're sitting on retailer inventories. In fact, if you net the impact of our new fertilizer distribution, we're actually negative at retailer inventories in terms of what our inventory position looks like.

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

Just feeling very good there about our ability to ship into the Q and then into the 27 and beyond. A final comment on inventory, I'd say we're doing a great job internally of managing garden inventories internally and continuing making good progress about bringing those down year-over-year as well.

[Niko Lahanas, CEO at Central Garden & Pet]

I would just add, you guys are doing a great job just running the business in general, because we know it wasn't an optimal weather quarter, I should say, and yet it was a record for the garden business. Kudos to the entire team over there for just crushing it in the quarter when weather was less than perfect. I would just call out, I think Jason did call it out, but Wild Bird and Grass Seed just absolutely had great quarters.

[J.D. Walker, President of Garden Consumer Products at Central Garden & Pet]

Yeah. Niko, I think you're spot on there. I think when I talk to the garden team, we say that weather was less than perfect, as you said-

[Niko Lahanas, CEO at Central Garden & Pet]

Yeah

[J.D. Walker, President of Garden Consumer Products at Central Garden & Pet]

particularly in that late April, May timeframe, which is critical for our lawn and garden business. I think aside from that, the team has managed-

[Niko Lahanas, CEO at Central Garden & Pet]

Yeah

[J.D. Walker, President of Garden Consumer Products at Central Garden & Pet]

to produce good results, right?

[Niko Lahanas, CEO at Central Garden & Pet]

Yeah.

[J.D. Walker, President of Garden Consumer Products at Central Garden & Pet]

Kudos to the team.

[Niko Lahanas, CEO at Central Garden & Pet]

Can't underscore that enough.

[Brad Smith, CFO at Central Garden & Pet]

One thing too, Zick, that I would call out just as an umbrella statement related to Q3 that really reflects the health of our business and where we're at. Every single business within Garden and Pet was up or at least flat versus prior year, with the exception of vendor partner, which you mentioned, Jason, and Dog and Cat, which we talked about. Very broad.

[J.D. Walker, President of Garden Consumer Products at Central Garden & Pet]

Yep. The last thing I would add, just regarding a forward look at the business for Q4 and beyond, this heat dome that Jason talked about, the intense heat that we've seen in a lot of markets across the country during the summer, that bodes well for our grass seed business. That typically means a good overseeding business for grass seed and then fertilizer for the fall season.

[Taylor Zick, Analyst at KeyBanc Capital Markets]

Yeah. Good to hear. I'll pass it along to others. Thanks so much.

[Brad Smith, CFO at Central Garden & Pet]

Thanks.

[Operator]

Thank you. Our next question is from Bob Labick with CJS Securities. Please proceed with your question.

[Will Gildea, Analyst at CJS Securities]

Hi, this is Will in for Bob. Thanks for taking our questions. You all have done a great job reshaping the portfolio recently, higher margins, et cetera. Given the current composition, how should we think about organic growth rates in both Pet and Garden going forward?

[Niko Lahanas, CEO at Central Garden & Pet]

I think we've talked about this a lot over the year. We're coming out of that trough from post-COVID, sort of that hangover. We have every intention of getting back to our long-term growth rates. If you think of Pet being anywhere from 1%-4% and then Garden being a little bit lower, anywhere from 1%-2%, maybe.

[Niko Lahanas, CEO at Central Garden & Pet]

You're starting to see that materialize a little bit in the last few quarters. A lot of that is really internal, because again, we want to get back to more of a growth mindset. We've been talking a lot about Cost and Simplicity over the years, and I think this year we started talking a little bit more about growth and innovation and things like that.

[Niko Lahanas, CEO at Central Garden & Pet]

I think we'd love to get back to those long-term growth rates and then layer on top of that some nice M&A work that you're starting to see happen now.

[Will Gildea, Analyst at CJS Securities]

Thank you. That's super helpful. With significant C&S initiatives accomplished, how should we think about margin growth from here? What are the potential synergies with TRIXIE, beyond sales and cross-sell? Is there any opportunity to enhance margins there?

[Niko Lahanas, CEO at Central Garden & Pet]

Yeah, there's a lot there. I'll talk TRIXIE here for just a sec. They do a lot of sourcing from China. I think there's an opportunity for us to add the manufacturing margin and start moving product over to Europe from our manufacturing facilities, particularly Dog and Cat. It's largely a Dog and Cat business. We think that's a huge opportunity. They have an incredible team over there that does a tremendous job with product development.

[Niko Lahanas, CEO at Central Garden & Pet]

We're kind of licking our chops in terms of being able to collaborate, come out with even more innovation, because as we mentioned on the call, they add about a few hundred products every year because they've got a pretty robust team there. Innovation, manufacturing margin, we think sourcing is another area where we can get better. Believe it or not, their logistics facility is nothing short of amazing.

[Niko Lahanas, CEO at Central Garden & Pet]

We've got a lot to learn from them in terms of automation and just engineering. We're going to have to get their folks over here to help us out. We got very excited when we saw that as well. There's a lot. That's just first blush. There's going to be a whole lot more that we can do.

[Brad Smith, CFO at Central Garden & Pet]

This is Brad. I would just add to that from a synergy perspective, in terms of the timing of that, I wouldn't expect it within the first year. It's really the second year that we would start to expect synergies. We need to let the dust settle and work together to come up with the right plan.

[Will Gildea, Analyst at CJS Securities]

I'll leave it there. Thank you.

[Operator]

Thank you. Our next question comes from Brian McNamara with Canaccord Genuity. Please proceed with your question.

[Brian McNamara, Analyst at Canaccord Genuity]

Hey, good afternoon, guys. Thanks for taking the questions. I got one on Garden and one on Pet. I'll start with Garden. I think three months ago you said that retailers were a little bit light on inventories. I'm curious what drove the results. Was it better replenishment in Q2? I think you had mentioned that they're currently a little light on fertilizers. Any color there would be helpful. Thank you.

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

Yeah. Hey, Brian, this is Jason. I can take that. The biggest driver was not inventory lows. I'd say that our shipments versus consumption were relatively close. The biggest drivers were the grass seed and fertilizer over-delivery in terms of their retail sell-through and then Wild Bird. We also had some strength in controls in the period.

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

The other thing I'd mention would be eCommerce. We had really strong continued eCommerce results in the period, as Brad mentioned in his script. That continued to be a key driver for us.

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

I'd say that in general, inventory change from Q2 to Q3, we feel about the same that we did in Q2, that we feel still well-positioned, not overburdened in any specific categories or particularly light in any. I feel like we're in a pretty good spot as we head into Q4.

[Brian McNamara, Analyst at Canaccord Genuity]

Great. Secondly on Pet, Niko, I think you mentioned a facility fire in [Lat Am]. I am just curious if you guys could quantify. I am assuming you left some sales on the table there, if that is possible to quantify.

[Niko Lahanas, CEO at Central Garden & Pet]

We have not. We have not quantified it. We not only left some sales on the table, but also margin, because we had to, and I give the team there a lot of credit for triaging that. They had to go find other supply sources and then actually airship product up.

[Niko Lahanas, CEO at Central Garden & Pet]

It actually caused margins to contract a little. Again, it is sort of a one-time kind of hit. It is not something that is, like I said, systemic. We will get through it. We did not quantify it. Normally, that business is up. It was a little down this quarter.

[Brad Smith, CFO at Central Garden & Pet]

Brian, just to add to that on Dog and Cat, when we look at the sales decline, roughly about two-thirds of it was actually just normal timing differences related to promotional events and whatnot. It was down a bit more than normal top line this quarter, but to Niko's point, the business continues to perform well. Actually, the results that we saw in July were encouraging.

[Niko Lahanas, CEO at Central Garden & Pet]

Yeah

[Brad Smith, CFO at Central Garden & Pet]

I think we are in good shape.

[Niko Lahanas, CEO at Central Garden & Pet]

Yep.

[Brian McNamara, Analyst at Canaccord Genuity]

Appreciate the color. Thanks, guys. Best of luck.

[Niko Lahanas, CEO at Central Garden & Pet]

Thank you.

[Operator]

Thank you. Our next question comes from Shovana Chowdhury with JPMorgan. Please proceed with your question.

[Shovana Chowdhury, Analyst at JPMorgan]

Hi. Thanks for taking our question. I was just wondering if you can add more color on the consumer behavior, especially as it relates to trading down within our portfolio from branded to private label. If you're seeing that, can you add more details on what are some of the categories, especially within Pet, that is more observable? Thanks.

[Niko Lahanas, CEO at Central Garden & Pet]

I'll kick it off, and then I'll let our Pet and Garden specialists elaborate. What we've seen is there's some trade-down going on, but it's really finding that value equation that resonates with the consumer. We've seen it in both segments where we've nailed it in certain areas. On the Garden side, if you look at, for instance, Rebel Grass Seed, which is a real value brand, but a great product.

[Niko Lahanas, CEO at Central Garden & Pet]

We've seen that really take off because the consumers are more discerning, and that's one where we really got it right on the value equation. We're seeing more and more where we get it right, we see demand really jump. That would be one example on the Garden side. On the Pet side, we have our Bully Hide product, and that competes with bully sticks, but it's at a much lower price point.

[Niko Lahanas, CEO at Central Garden & Pet]

Just as much fun for the dogs to chew on, has all the benefits that a bully stick does. It's just quite a bit less from a price point standpoint. That's also something that's really taken off. We innovated on that a couple of years ago, and it's just a matter of getting that kind of value equation right for the consumer. Those would be two examples. I'll kick it over to our industry guys.

[John Hanson, President of Pet Consumer Products at Central Garden & Pet]

Yeah. For Q3 on the Pet side, we actually saw our branded outperform private label, which was nice to see. What I think we're seeing a little bit more on the Pet side is the super premium products get more trade down. Many of our brands sit in that good and better brand positioning, and offer a really strong value and attracts mainstream consumers.

[John Hanson, President of Pet Consumer Products at Central Garden & Pet]

We're going to be close to it. We're going to stay close to it. We're going to make sure we monitor that because consumers are very much challenged right now. For Q3, we feel really good about the performance of our branded business, especially as it compares to private label.

[Brad Smith, CFO at Central Garden & Pet]

I think too, what we've seen in pet, it's been very noticeable, is a channel shift over to club Walmart. You think Costco, for example. That's been pretty profound, and we expect that to continue.

[John Hanson, President of Pet Consumer Products at Central Garden & Pet]

Yeah. We do have strong positions in those channels. We had a good quarter on e-com too.

[Niko Lahanas, CEO at Central Garden & Pet]

Yeah.

[John Hanson, President of Pet Consumer Products at Central Garden & Pet]

E-com was up 10%. As a percent of mix, it was above prior year. I think we're managing a lot of facets of it really well, but it's something we're going to have to stay really close to.

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

Yeah. I think all of those comments echo really closely to garden and Niko. I think you covered it well. I think we see more of an intent by consumers to find value rather than to trade down. That might be trading into a grass product that's a combination product that has mulch, fertilizer, and seed all in one.

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

That might be a more expensive single retail, but does provide a lot of value. We do have a significant private label portfolio as well that we have seen perform very well in this environment. Fertilizer is typically a two-brand strategy. There's a national brand and a private label. In that environment where there's only two choices, we have started to see some trade into private label. Where there's multiple choices, value seems to be the first search.

[Niko Lahanas, CEO at Central Garden & Pet]

Like pet, I think the garden portfolio does particularly well when the consumer is seeking value.

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

Yeah.

[John Hanson, President of Pet Consumer Products at Central Garden & Pet]

Yeah.

[Niko Lahanas, CEO at Central Garden & Pet]

Our value equation is not just price, it's price and quality.

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

Performance too, right?

[Niko Lahanas, CEO at Central Garden & Pet]

Efficacy-

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

Yeah

[Niko Lahanas, CEO at Central Garden & Pet]

performance.

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

Exactly.

[Niko Lahanas, CEO at Central Garden & Pet]

Typically, we're priced at a value to the leading national brand, and that's a good spot to be in.

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

Yes.

[Shovana Chowdhury, Analyst at JPMorgan]

Thank you. Very helpful. I'll pass that on.

[Niko Lahanas, CEO at Central Garden & Pet]

Thank you.

[Operator]

Thank you. Our next question comes from Jim Chartier with Monness, Crespi, Hardt. Please proceed with your question.

[Jim Chartier, Analyst at Monness, Crespi, Hardt]

Thanks. My question, you talked about Project Horizon on the garden side being largely complete. Just curious where the overall Cost and Simplicity initiatives stand, how much more opportunity do you see going forward from that place?

[Niko Lahanas, CEO at Central Garden & Pet]

We've made some big moves. I would say a lot of the large moves are behind us. That said, we're already looking at ways to improve efficiency and performance in those facilities. I think the next phase is going to be really looking at AI, robotics, things like that. We talked about the TRIXIE acquisition and having a look at their facility and how advanced it was.

[Niko Lahanas, CEO at Central Garden & Pet]

We've got some things to learn there. We think there's always going to be room for improvement. In terms of the footprint, a lot of the big work has been done. I would also point out, we wanna continue to acquire, and that's going to mean bringing more businesses in, more supply chain networks, and then integrating those.

[Niko Lahanas, CEO at Central Garden & Pet]

I don't think there's going to be a real shortage of targets for us given how we run the business with M&A and really what's coming at us from a technology standpoint. We think there's more to come.

[John Hanson, President of Pet Consumer Products at Central Garden & Pet]

The only other thing I would add on the pet side is Cost and Simplicity is really embedded in our culture now.

[Niko Lahanas, CEO at Central Garden & Pet]

Yeah.

[John Hanson, President of Pet Consumer Products at Central Garden & Pet]

It's really part of the muscle and the fabric of how we build our business plans and execute our plans. We still have upside. As Niko said, many of the big projects have been addressed. There'll be more to come. The muscle and how we go about our business, and Cost and Simplicity is part of it every single day.

[Niko Lahanas, CEO at Central Garden & Pet]

There's still opportunity right now to integrate more of pet and garden, right?

[John Hanson, President of Pet Consumer Products at Central Garden & Pet]

Yeah.

[Niko Lahanas, CEO at Central Garden & Pet]

We're doing a little bit of it now.

[John Hanson, President of Pet Consumer Products at Central Garden & Pet]

Yeah.

[Niko Lahanas, CEO at Central Garden & Pet]

There's also a lot more opportunity there as well.

[John Hanson, President of Pet Consumer Products at Central Garden & Pet]

There sure is.

[Niko Lahanas, CEO at Central Garden & Pet]

I think we're just early stages there.

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

I'd say that roughly 10 times the amount of volume this year as of Pet has flown through that logistics network versus time last year.

[Niko Lahanas, CEO at Central Garden & Pet]

Yeah.

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

That's a great example of that collaboration.

[Niko Lahanas, CEO at Central Garden & Pet]

Great example.

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

Cross-segment communications working out.

[Niko Lahanas, CEO at Central Garden & Pet]

Yeah. Which we'd never done before.

[Jason Barnes, EVP of Garden Consumer Products at Central Garden & Pet]

That's right.

[Niko Lahanas, CEO at Central Garden & Pet]

Yeah.

[Jim Chartier, Analyst at Monness, Crespi, Hardt]

It sounds like you're pretty optimistic on the M&A front. Can you just talk about what you're seeing in terms of the number of deals that are out there, the quality, and the valuations?

[Niko Lahanas, CEO at Central Garden & Pet]

Yeah. We hinted at it the last two quarters. You didn't see anything happen, but we could see the pipeline filling up, the quality of deals. We felt like people were finding more religion around valuation. We felt it was more tangible than in the past. Again, this by no means what we're done.

[Niko Lahanas, CEO at Central Garden & Pet]

This is a really nice deal, won't close till early next year, but we've got other ones that we're looking at right now that we'd like to close. We're good from a liquidity standpoint. You can see we're just shy of $1 billion in cash. We'd love to do more. We feel like we've got some really nice momentum right now. In the world of deals begets deals, right?

[Niko Lahanas, CEO at Central Garden & Pet]

People see you make an announcement and all of a sudden you're getting a lot more inquiries on other deals. We feel like we've got some really strong momentum right now.

[Brad Smith, CFO at Central Garden & Pet]

Just getting done with the TRIXIE deal, I would comment that Europe is a very fertile hunting ground for M&A, on the pet side in particular. We're very bullish on that. It's an area of focus for us in addition to the U.S. in terms of additional M&A. In addition to the decent amount of good opportunities over there, the multiples are relatively lower than in the U.S., which is encouraging.

[Jim Chartier, Analyst at Monness, Crespi, Hardt]

Great. Thank you.

[Operator]

Thank you. Our next question is from Hale Holden with Barclays. Please proceed with your question.

[Hale Holden, Analyst at Barclays]

Hey, good afternoon. I just had two quick ones just as a follow-up on the M&A question. Is there anything about the TRIXIE integration that would cause you to pause either from a management bandwidth or otherwise other transactions? Do you think you could move relatively quickly even before TRIXIE is closed?

[Niko Lahanas, CEO at Central Garden & Pet]

Let me make sure I understood the question. Are you asking whether we would do other deals or?

[Hale Holden, Analyst at Barclays]

No, I'm asking if the integration for TRIXIE, either for a European deal or for a U.S. deal, if you need some time to season that asset before you would pursue another M&A transaction?

[Niko Lahanas, CEO at Central Garden & Pet]

No

[Hale Holden, Analyst at Barclays]

or if it's a standalone asset and doesn't require any integration.

[Niko Lahanas, CEO at Central Garden & Pet]

No. We're actually looking at a few deals right now that we're going to move forward on, assuming we can agree on terms and everything. No, absolutely not. It has a whole separate work stream and we've got bandwidth to do more, and we want to do more. We want to get more aggressive. Absolutely not. The only thing that's going to cause us to pause is we don't want to screw a great business up. They have a great business.

[Niko Lahanas, CEO at Central Garden & Pet]

We're going to be really thoughtful about how we approach it. By the way, culturally, we are such a great fit with that business as well. When we met that team, it was like we'd known each other for 10 years. I think the biggest issue is going to be just being thoughtful about what we're doing there so we don't break anything.

[Niko Lahanas, CEO at Central Garden & Pet]

It doesn't preclude us from other deals, no.

[Hale Holden, Analyst at Barclays]

Great. My second question is, you guys had an amazing sort of cash flow from operations sprint this quarter. I was wondering if there were any drivers specifically that helped you do that, or it was just an overall good cash conversion quarter?

[Brad Smith, CFO at Central Garden & Pet]

Yeah, it was an overall good cash conversion quarter, and then that was further helped by the fact that we unwound a lot of inventory getting out of distribution, and then we also worked through a lot of inventory on grass seed as well, which helped. Those were the big drivers.

[Hale Holden, Analyst at Barclays]

Great. Thank you very much. I appreciate it.

[Friederike Edelmann, VP of Investor Relations at Central Garden & Pet]

This was our last question. Thank you everyone for joining us today. Please reach out to us with any additional questions and have a good rest of the day.

[Operator]

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines and have a wonderful day.

Participants

Executives

• Friederike Edelmann, VP of Investor Relations
• Niko Lahanas, CEO
• Brad Smith, CFO
• John Hanson, President of Pet Consumer Products
• Jason Barnes, EVP of Garden Consumer Products
• J.D. Walker, President of Garden Consumer Products

Analysts

• Taylor Zick, Analyst at KeyBanc Capital Markets
• Will Gildea, Analyst at CJS Securities
• Brian McNamara, Analyst at Canaccord Genuity
• Shovana Chowdhury, Analyst at JPMorgan
• Jim Chartier, Analyst at Monness, Crespi, Hardt
• Hale Holden, Analyst at Barclays