Central Garden & Pet Company 2026 Q3 Earnings Call

Please go ahead. 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. 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. 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.

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. 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.

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. 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.

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. 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. 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.

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. 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.

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. 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.

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. 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. 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.

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. 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.

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. 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. 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.

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? 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. 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.