Central Garden & Pet's Q4 2025 Earnings Call: Contradictions Emerge on Tariff Pricing, Pet Ownership Trends, and Garden Segment Weather Risks

Date of Call: None provided

Financials Results

• Revenue: Q4 net sales $678M, up 1% vs prior year; FY'25 net sales $3.1B, down 2% YOY
• EPS: FY GAAP EPS $2.55, up $0.93 YOY; FY non-GAAP EPS $2.73, up $0.60 YOY; Q4 GAAP loss per share $0.16 vs $0.51 prior year; Q4 non-GAAP loss per share $0.09 vs $0.18 prior year
• Gross Margin: FY non-GAAP gross margin 32.1%, expanded 210 bps YOY; Q4 non-GAAP gross margin 29.1%, expanded 310 bps YOY (adjusted for prior-year grass seed inventory charge margin would be consistent)
• Operating Margin: FY non-GAAP operating margin 8.5% vs 7.0% prior year; Q4 non-GAAP operating margin -0.1% vs -1.7% prior year

Guidance:

• Fiscal 2026 non-GAAP EPS expected $2.70 or better.
• Q1 FY26 non-GAAP EPS expected approximately $0.10–$0.15 (seasonally small; includes shipment timing impacts).
• CapEx planned ~$50–$60M focused on maintenance and productivity initiatives.
• Estimated incremental gross tariff exposure roughly $20M over the next 12 months; expect to offset most via pricing, portfolio and supply‑chain actions.
• Outlook excludes potential impacts from acquisitions, divestitures or restructuring.

Business Commentary:

• Financial Performance and Margin Expansion:
• Central Garden & Pet reported recordearningsfor fiscal 2025, withnon-GAAP net earningsof$174 million, up22%, andrecord earnings per share of $2.55, up $0.93.

• The growth was driven by record gross margins, EBITDA, and strong execution across both segments.

• Portfolio Optimization and Cost Efficiency:

• The company reduced its exposure to low-margin durables in both Pet and Garden segments, which negatively affected top-line sales but improved profitability.

• This strategic move was part of Central's ongoing efforts to enhance its portfolio and position itself for sustainable growth.

• Operational Streamlining and Cost Savings:

• Central completed a multiyear supply chain network design project, which included 16 facility closures, enhancing productivity and cost efficiency.
• These initiatives included consolidating facilities and establishing e-commerce fulfillment capabilities, which contributed to margin expansion.

• Consumer Behavior and Market Dynamics:
• Consumables accounted for 84% of total Pet segment sales, with strong performance in Animal Health businesses and professional portfolio.

• The shift towards consumables and digital platforms showed resilience amid variable weather conditions and changing consumer behavior.

• Outlook for Fiscal 2026:

• Central expects fiscal 2026 non-GAAP earnings per share to be $2.70 or better, supported by margin expansion and operational performance.
• Challenges include tariffs, cost inflation, and a promotional retail environment, but Central is confident in its ability to offset these factors.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted 'record bottom line performance', 'record EBITDA and record earnings per share', guided FY'26 non‑GAAP EPS of $2.70 or better, cited gross margin expansion and $882M cash balance while acknowledging top‑line headwinds from tariffs and weather.

Q&A:

• Question from Bradley Thomas (KeyBanc Capital Markets): I wanted to ask about the operating margin at a high level... as we think about this upcoming fiscal year, can you talk about puts and takes and how they net out between Cost and Simplicity, tariffs, demand challenges, etc.?
  Response: We expect to continue expanding margins but at a more modest pace than prior years as low‑hanging fruit has been captured; product mix and ongoing Cost & Simplicity efforts will drive further improvement.

• Question from Bradley Thomas (KeyBanc Capital Markets): On the Garden segment — strong execution this quarter; how are you feeling about sell‑in for spring 2026 and the outlook for the garden category next year?
  Response: Cautiously optimistic: points of distribution excluding exited pottery are up ~8% YOY (manufactured products up double digits), but weather remains the key variable.

• Question from James Chartier (Monness, Crespi, Hardt): Corporate expense was up about $11M in Q4 after being down earlier — can you give color on that? And could you quantify the impact of tariffs on Q4, please?
  Response: Q4 corporate increase driven by timing variability, investments for FY'26 and reserve true‑ups (not structural); Q4 gross tariffs were roughly $7–8M.

• Question from James Chartier (Monness, Crespi, Hardt): Last quarter you discussed investing behind a new Pet product launch — what did that spend look like and how did the product perform?
  Response: Farnam Endure Gold Fly Spray launch has strong customer feedback and efficacy; it's seasonal, so meaningful takeaways expected next season (Mar–Jun).

• Question from Bob Labick (CJS Securities): On tariffs and pricing — have retailers accepted your pricing; when will you know consumer acceptance/elasticity? And how will investment levels/promotional activity change as you capture margin from Cost & Simplicity?
  Response: Negotiations with customers are over halfway done (mostly on Pet); expect to conclude by this quarter/early Q2 and pricing is being used judiciously; reinvestments will focus on digital, content and innovation with agile spend allocation to high‑return initiatives.

• Question from Brian McNamara (Canaccord Genuity): High‑level thoughts on 2026 top line — what could drive better or worse trends outside of weather?
  Response: Top line expected to be challenging in 2026 due to tariffs, low consumer confidence and income bifurcation; management will not guide top line but is focused on margin and execution.

• Question from Brian McNamara (Canaccord Genuity): Durables are ~16% of pet sales — how did durables perform in Q4; still a double‑digit decline?
  Response: Yes — durables (16% of pet sales) declined double digits in Q4, largely driven by proactive discontinuation of low/no‑margin SKUs.

• Question from Brian McNamara (Canaccord Genuity): What's the company's view on pet ownership trends and what data do you use?
  Response: Pet ownership trends are stabilizing and roughly stable to up slightly (low single digits); management monitors multiple data sources including live animal business and POS trends.

• Question from Brian McNamara (Canaccord Genuity): On capital allocation — you repurchased $18M this quarter and hold a record cash balance; will you sit on cash for M&A or consider larger buybacks/dividends?
  Response: Bias toward keeping dry powder for M&A (targeting margin‑accretive pet consumables) while opportunistically repurchasing stock; repurchased ~$18M this quarter and >$150M over the prior year.

• Question from Andrea Teixeira (JPMorgan): What pricing is embedded in FY'26 guidance and what should we think about margins going forward?
  Response: Embedded pricing is modest (~1%) primarily to offset tariffs/commodity exposure; management expects to expand margins in FY'26 but more modestly than the prior year.

• Question from William Reuter (Bank of America): On Lawn & Garden — excluding pottery exit you're seeing distribution gains; with ~1% price and equal weather why not more bullish?
  Response: Excluding pottery exit distribution up high single digits and manufactured items up double digits; management is bullish but remains cautious because weather is unpredictable and a continuing vendor exit is a headwind.

• Question from William Reuter (Bank of America): Regarding buybacks vs M&A — will you sit on cash until M&A environment improves or consider dividend/repurchase programs?
  Response: Preference is to retain cash for M&A to drive top‑line and portfolio expansion, though the company will remain opportunistic on buybacks when valuation presents a dip opportunity.

• Question from Carla Casella (JPMorgan): You mentioned shipments shifting from Q1 into Q2 — did you quantify how much will move?
  Response: No quantification provided; the amount is evolving and hard to pinpoint due to order timing and limited shipping days between Christmas and quarter end.

• Question from Carla Casella (JPMorgan): Are you seeing strength or weakness across channels (home centers, specialty pet, mass, online)?
  Response: Broad shift to online across both segments (Garden e‑commerce growing rapidly, surpassing 10% of Garden sales); omnichannel retailers are winning; pet specialty foot traffic remains challenged but live goods stabilization is hopeful.

Contradiction Point 1

Tariff Impact and Pricing Strategy

It involves differing perspectives on the impact of tariffs and the company's pricing strategy in response to these tariffs, which directly impacts financial expectations and operations.

What was the impact of tariffs on Q4? - James Andrew Chartier (Monness, Crespi, Hardt)

20251125-2025 Q4: Gross tariffs were roughly $7 million to $8 million in the fourth quarter. - Nicholas Lahanas(CEO)

What remaining tariffs are pending? - James Andrew Chartier (Monness, Crespi, Hardt)

2025Q3: We're more than halfway through tariff negotiations... We're pricing to offset costs, not to build margin. - Brad Smith(CFO), John Hanson(President, Pet Consumer Products)

Contradiction Point 2

Pet Ownership Trends

It involves differing opinions on the stability of pet ownership trends, which are critical for forecasting demand and market growth.

What is your current view on pet ownership trends? - Brian McNamara (Canaccord Genuity)

20251125-2025 Q4: We think pet ownership is stabilizing with some variability. - John Hanson(President of Pet Consumer Products)

How do you expect 2026 to unfold considering tariffs and consumer behavior? - Brian McNamara (Canaccord Genuity)

2025Q4: Pet ownership overall, I think, is stabilizing. - John Hanson(President of Pet Consumer Products)

Contradiction Point 3

Garden Segment Outlook and Weather Dependency

It involves differing expectations for the Garden segment's performance and the role of weather as a key driver, which impacts revenue projections and strategic planning.

What is the outlook for the Garden segment and the 2026 garden season? - Brad Thomas (KeyBanc Capital Markets)

20251125-2025 Q4: We're cautiously optimistic... Weather is the key variable, but we're confident in our execution and distribution gains. - J. Walker(President, Garden Consumer Products)

What steps are needed for Garden to achieve consistent modest growth? - Madison Callinan (Canaccord Genuity)

2025Q3: We expect another year of declines in Garden... Weather represents a greater risk for us in Garden than in Pet. - John D. Walker(President of Garden Consumer Products)