CENTRAL GARDEN & PET CO Q2 2026 earnings call

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 report 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. With that, let's begin. Niko, over to you.

Thank you, Friederike, 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 in what we believe are best-in-category capabilities.

Subsequent to the quarter, we formed a joint venture with the 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 Rebels Sun & Shade Grass Seed Mix 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 %, 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 wanna recognize our teams across Central. Their execution continues to set the pace for the organization. We've built a strong foundation, we're moving forward with focus, discipline, and a confidence in our ability to deliver long-term growth and value. 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 one-time 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 cost 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%. 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. The quarter benefited from meaningful distribution gains, particularly in grass seed and fertilizer. 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 in 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-$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 3.0x-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. With that, operator, please open the line for questions.