CENTRAL GARDEN & PET CO Q4 2025 earnings call

Good afternoon, everyone, and thank you for joining Central's Fourth Quarter and Fiscal Year 2025 earnings call. Joining me today are Niko Lahanas, Chief Executive Officer; Brad Smith, Chief Financial Officer; John Hanson, President of Pet Consumer Products; and J.D. Walker, President of Garden Consumer Products. Niko will start by sharing today's key takeaways, followed by Brad, who will provide a more in-depth discussion of our results. After their prepared remarks, J.D. and John 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 risk 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 report filed with the SEC.

Please note that Central undertakes no obligation to publicly update these forward-looking statements to reflect new information, future events, or other developments. Our press release and related materials, including GAAP reconciliation for the non-GAAP measures discussed on this call, are available 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. If you have any questions after the call or at any time during the quarter, please do not hesitate to contact me directly. With that, let's get started. Niko?

Thank you, Friederike, and good afternoon, everyone. I'd like to begin by highlighting three themes we will focus on today. First, fiscal 2025 was a year of meaningful progress and tangible accomplishments across Central. Our record bottom line performance underscores the strength of our business model, the rigor of our execution, and the relentless commitment of Team Central. Second, we continue to strengthen our foundation by streamlining operations, consolidating facilities, optimizing our portfolio, and driving efficiencies that enhance our cost structure and position us for sustained profitable growth. Third, as we enter fiscal 2026, we're energized by our momentum and the opportunities ahead. Powered by our central-to-home strategy and sharp, disciplined execution, we're poised to accelerate our long-term agenda with even greater focus and agility. Now, let me expand on each of these points. First, our fiscal 2025 achievements.

Thanks to the hard work and dedication of our more than 6,000 employees, we closed the year with expanded gross margins, record EBITDA, and record earnings per share. These results underscore the strength and resilience of our business model, as well as the drive and commitment of our people. We delivered consistent performance while advancing portfolio optimization and maintaining disciplined cost management. Throughout the period, we upheld operational rigor, streamlined our footprint, and drove efficiency initiatives across both segments. We also navigated variable weather conditions by simplifying our business and tightly managing costs, actions that have made our model even more resilient and predictable. Results reflected the transition of two third-party product lines in our garden distribution business to a direct-to-retail model. At the same time, we continue to deliberately reduce our exposure to low-margin, durable products in both pet and garden.

A strategic move that, while creating short-term top-line pressure, strengthens our portfolio and positions us for sustainable, profitable growth. We ended the year with record results, a fortress balance sheet, and strong momentum as we head into fiscal 2026. Second, advancing our cost and simplicity agenda. Our initiatives continue to deliver measurable, sustainable benefits, enhancing productivity, expanding margins, and positioning us to fuel future growth. We have largely completed our multi-year supply chain network design project, a major milestone that has strengthened customer alignment, increased service speed, and improved cost efficiency across our logistics network. The project also established enterprise-wide e-commerce fulfillment capabilities and modernized our distribution footprint. Together with the sale of our garden distribution business and the intentional exit of the pottery business, this work has enabled us to close 16 legacy facilities to date.

By the end of the calendar year, we will be operating a modern, high-performing infrastructure anchored by DTC-enabled fulfillment centers in Salt Lake City, Eastern Pennsylvania, and Covington, Georgia. A network built for speed, efficiency, and growth. Across our footprint, systems and processes, we're streamlining operations, boosting productivity, and freeing up resources to reinvest in the business. These actions are making Central simpler, stronger, and better positioned to scale, creating a more resilient, cohesive, and predictable company that delivers consistent performance, adapts with flexibility, and is poised to capture the full potential of the opportunities ahead. Third, outlook for fiscal 2026. We entered the year with strong momentum, clear priorities, and a unified focus on delivering results. Our diversified portfolio, operational agility, and prudent cost management give us confidence in our ability to deliver profitable growth despite current global macro environment and policy shifts.

We expect consumers to remain focused on value and performance with a promotionally active but stable retail environment and continue channel shifts from pet specialty to e-commerce. We're delivering with precision to offset cost inflation, tariffs, and supply chain complexity through productivity gains driven by our cost and simplicity agenda and pricing discipline. After incorporating these factors and our operating plans, we expect fiscal 2026 non-GAAP earnings per share to be $2.70 or better, supported by margin expansion and operational performance. As always, our outlook excludes potential impacts from acquisitions, divestitures, or restructuring actions, including activities related to our ongoing cost and simplicity agenda. We remain confident that the central-to-home strategy is the right path and the foundation for long-term value creation.

We're combining the agility of a startup with the strength and scale of a category leader, empowering business units to innovate quickly while leveraging Central's operational and financial capabilities to accelerate growth. By sharing tools, data, and talent across the organization, we're building a connected enterprise, one that learns faster, executes smarter, and compounds its competitive advantage over time. This approach enables us to bring new ideas to the consumer faster, capture opportunities sooner, and scale what works across our platform. Looking ahead, we'll continue to balance sensible cost and cash management with targeted investments that fuel organic growth, particularly in innovation, e-commerce, and digital technology. A key priority is making our data AI-ready, improving accessibility, quality, and integration to generate deeper insights and unlock meaningful value and competitive advantage across the business. These strategic investments are already translating into stronger innovation momentum.

Recent launches highlight how we're combining insights, performance, sustainability, and consumer impact. Examples include Wild Bird Feed, our redesigned Pennington Feeding Frenzy, and 3D Pro Lines that elevate visibility and engagement both online and at retail, supported by a robust digital marketing program. Worry-Free 30% Vinegar, a high-performance, multi-purpose cleaner, six times stronger than standard vinegar. Farnam Endure Gold Fly Spray, a next-generation EPA-approved formula that delivers long-lasting and highly effective fly control, bringing advanced performance and care to horse owners. In parallel, M&A remains a strategic lever for growth. We're actively pursuing margin-accretive consumable businesses that complement our portfolio and expand our presence in attractive categories. While market engagement has increased, deal flow in our core categories remains somewhat limited. We expect activity to accelerate as market conditions continue to improve. I want to thank our team across Central for a record year of meaningful progress and unwavering focus.

We've done a tremendous amount of foundational work, and as a result, we're entering fiscal 2026 with a business performing at a very high level. With strong financial flexibility and an improving M&A landscape, we're confident in the road ahead. That confidence is reinforced by the strength of our retail partnerships, which continue to deepen and drive mutual growth. As recognition of that strength, we were honored to be named Lowe's Lawn & Garden Vendor Partner of the Year, and KT was recently recognized with the NCAPPS 2025 Pet Amazon Best in Class PDP Award for excellence in product content and presentation. With that, I'll hand it over to Brad. Brad?

Thank you, Niko. Building on Niko's remarks, I will begin with our fiscal 2025 results. Net sales were $3.1 billion, a decrease of two percent. While variable weather and softer demand in pet durables created meaningful headwinds, the overall sales decline for the year was driven entirely by two key factors. First, our proactive decision to reduce exposure to lower-margin businesses, including pet and garden durables, as well as our U.K. operations. This step is part of our ongoing effort to optimize the portfolio, improve margins, and strengthen the foundation for sustainable growth. Second, the transition of two third-party product lines in our garden distribution business to a direct-to-retail model. Importantly, our remaining portfolio grew slightly for the year and delivered record sales across several key businesses, including wild bird, dog treats, equine, and our professional portfolio.

A clear sign that our underlying business is strong and that our strategy is working. Non-GAAP gross profit was $1 billion, up 4.5%, and non-GAAP gross margin expanded 210 basis points to 32.1%, largely supported by productivity initiatives. Both segments contributed to the improvement. Non-GAAP SG&A expense was $738 million, roughly in line with the prior year. As a percentage of sales, non-GAAP SG&A was 23.6%, compared with 23%, mostly due to lower volume and the sequencing of productivity and commercial investments. Throughout the year, we balanced sensible cost management with continued investment and long-term growth drivers. Non-GAAP operating income for the year increased to $265 million from $223 million, and non-GAAP operating margin expanded to 8.5% from seven percent, supported by structural cost improvements and overall strong execution. Non-GAAP adjustments totaled $15 million in fiscal 2025, all related to our cost and simplicity agenda.

In our garden segment, these adjustments largely reflected the consolidation of two legacy distribution facilities, one in Ontario, California, and another in Salt Lake City, Utah, into a single, larger, and more modern site in Salt Lake City. That work began in the third quarter and continued into the fourth quarter, resulting in $5 million in SG&A charges. In our pet segment, the adjustments were mainly related to the strategic wind down of our U.K. operations and the transition to a more profitable direct export-only model. This initiative spanned the second through fourth quarters and resulted in $10 million in total charges, $6 million in cost of goods, and $4 million in SG&A. Below the line, net interest expense was $33 million compared with $38 million, helped by higher interest income from larger average cash balances.

Other expense was $500,000 compared with $5.1 million as we lapped the prior year impairment charge on two minority investments. Non-GAAP net income totaled $174 million, up 22%. We delivered record GAAP and non-GAAP earnings per share of $2.55, up $0.93, and $2.73, up $0.60, respectively, exceeding both our guidance and last year's performance. Adjusted EBITDA for the year was $371 million compared to $334 million. Our effective tax rate for the year was 24.4% compared to 23.2%, due primarily to the non-deductibility for tax purposes of losses incurred in connection with the wind down of our U.K. operations. Now turning to the consolidated financials for the fourth quarter. Fourth quarter net sales were $678 million, up 1% versus the prior year, led by strength in garden.

Non-GAAP gross profit for the quarter was $197 million compared with $174 million, and non-GAAP gross margin expanded 310 basis points to 29.1%. It's worth noting that we lapped a significant grass seed inventory charge that was taken in last year's fourth quarter. Excluding the impact of that charge, our gross margin rate was consistent with the prior year as productivity improvements effectively offset the initial impact of tariffs. Most of our actions to mitigate tariff-related cost increases are only now beginning to flow through the P&L, positioning us for additional benefit going forward. Non-GAAP SG&A expense for the quarter was $198 million, a seven percent increase, and as a percentage of net sales was 29.2% compared with 27.7%. The increase largely reflects the cadence of investments tied to our productivity and commercial initiatives.

Non-GAAP operating loss for the quarter was $649,000 compared with $11 million, and non-GAAP operating margin improved to negative 0.1% from negative 1.7%. Non-GAAP adjustments for the quarter totaled $6 million, including $3 million related to our U.K. operations and $3 million associated with the garden facility consolidation. Of the total, $5 million was recorded in SG&A and $1 million in cost of goods. Below the line, net interest expense was in line with the prior year. Other expense for the quarter was $600,000 compared with $6 million. Non-GAAP net loss for the quarter was $5 million compared with $12 million. GAAP loss per share was 16 cents compared with 51 cents, and non-GAAP loss per share was 9 cents compared with 18 cents. Adjusted EBITDA for the quarter was $26 million compared with $17 million. Now, let me provide highlights from the fourth quarter from our two segments starting with pet.

Net sales for the pet segment was $428 million, a decrease of two percent due to the closure of our U.K. operations and lower durable sales, both the result of deliberate actions to simplify the business and enhance profitability. These impacts were partially offset by strong growth in our animal health businesses, particularly within our professional portfolio and Equine. While demand for durables remained soft, consumables performance continued to be relatively stable, supported by positive point-of-sale trends in the fourth quarter. Consumables now represent roughly 84% of total pet segment sales, an all-time high, highlighting the strength and resilience of our core business. Across the pet segment overall, we maintained our market share and delivered gains in dog chews, pet bird, Equine, and flea and tick, as well as in our professional portfolio.

E-commerce continues to play an important role in our channel mix, representing 27% of total pet segment sales, consistent with the prior two quarters and reflecting steady consumer engagement across digital platforms. Non-GAAP operating income was $31 million compared with $35 million due to slightly lower volumes combined with the timing of investments and productivity and commercial initiatives. Non-GAAP operating margin contracted to 7.2% from eight percent. Adjusted EBITDA for the segment was $41 million compared with $45 million. Now, moving to garden. Net sales for the garden segment were $250 million, a seven percent increase. We benefited from an extended selling season driven by favorable fourth-quarter weather following a cool and wet third quarter. We also saw improved sell-through aided by additional product placements, strong retail execution, and disciplined inventory management.

Our wild bird, grass seed, fertilizer, and packet seed businesses delivered particularly strong quarters with growth in both sales and share across retailers and channels. The strong fourth-quarter rebound made this our biggest point-of-sale year ever in garden, despite the reduction in our distribution business, variable weather earlier in the year, and lower home center traffic, a testament to the agility of our teams and the strength of our retail partnerships in garden. Garden e-commerce sales grew at a double-digit rate across every category, surpassing 10% of total segment sales for the first time. Enhanced product content, improved videos, and targeted new item introductions increased click-through, add-to-cart, and conversion rates across retailer platforms. Results remained especially strong in wild bird and grass seed, where we continue to lead the category and deliver robust growth across both PurePlay and Omnichannel partners.

Given the garden industry's relatively low digital penetration today, we see significant runway for sustained online growth across our categories in future quarters. Non-GAAP operating income came in at $1 million, an increase of $26 million, with non-GAAP operating margin expanding to a +0.4% from a -10.6%. Adjusted EBITDA totaled $11 million, an improvement of $25 million, underscoring the strong finish to the year. Turning now to the balance sheet and cash flows. Cash flow from operations was $333 million in fiscal 2025 compared with $395 million a year ago. Our ongoing focus on working capital efficiency resulted in an additional $36 million reduction in inventory, our 10th straight quarter of year-over-year improvement. CapEx for the year was $41 million, about four percent lower than last year, reflecting prudent investments primarily in productivity-enhancing initiatives and essential maintenance projects.

Depreciation and amortization were $85 million, seven percent below prior year, consistent with our focus on efficient capital deployment. At year-end, cash and cash equivalents totaled $882 million, up $129 million, underscoring our strong liquidity and consistent cash generation. Total debt was $1.2 billion, unchanged from the prior year. Gross leverage ended the year at 2.8x, both below last year and our target range of 3-3.5x. Net leverage was approximately 0.8, supported by our solid cash position, and we had no borrowings outstanding under our credit facility at year-end. This balance sheet strength provides the flexibility to invest in growth, maintain financial resilience, and return value to shareholders. Looking ahead to fiscal 2026, and as Niko mentioned earlier, we are guiding non-GAAP EPS to $2.70 a share or better, reflecting continued focus on operational excellence, margin expansion, and disciplined cost management.

While the tariff environment remains fluid, we currently project incremental year-over-year gross tariff exposure of roughly $20 million over the next 12 months. The majority of the exposure is within the pet segment. We are expecting to offset most of the tariffs through pricing and portfolio and supply chain actions. We plan to invest approximately $50 million-$60 million in CapEx, primarily in maintenance and productivity initiatives across both segments, underscoring our commitment to high-return projects that strengthen operations and enhance profitability. For the first quarter, we expect non-GAAP earnings per share of approximately 10 cents-15 cents, consistent with normal seasonal trends. It's important to note that last year's first quarter benefited meaningfully from favorable timing of both shipments and promotional activity. This year, we also have one less shipping day between Christmas and the end of our fiscal quarter ending December 27.