Central Garden & Pet eyes recovery with innovation, consumables push and M&A

Recovering sales growth and intensifying cost cuts are the core strategies of Central Garden & Pet to improve performance, according to CFO Brad Smith. 

After reporting a 4% drop in net sales in Q3, attributed to weak demand, the Californian company is doubling down on innovation, cost efficiency and M&A opportunities.

“Sales growth is going to be a top priority next year. It’s obviously a very difficult environment. So we’re going to be focusing on building the same kind of muscle in innovation that we’ve built in our cost and simplicity initiative, as well as growing through M&A,” Smith notes during Canaccord Genuity’s 45th Annual Growth Conference.

The durables challenge

Durable goods contributed to the pet segment’s net sales decline for 2 consecutive quarters, driven primarily by the drop in outdoor cushions, pet beds and aquatic products, as well as the company’s decision to exit lower-margin stock-keeping units (SKUs). 

Smith linked the trajectory to the decline in pet ownership post-pandemic, which, except for cats, has fallen below pre-pandemic levels. 

“The category demand in durables is generally solid when new pet adoption or replenishment is at a normal level. It has declined longer than we expected,” Smith says. “I think we’re getting really close to the bottom of this.” 

To address this challenge, the pet supplier sees a sustained demand for cat durables and a potential increase in demand for small dogs, although the latter needs more observation. 

At the same time, Central has stepped back in the category by reducing its portfolio and exposure in China, a process Smith says will follow through 2026.

On the other hand, Central plans to “invest heavily” in high-margin consumables businesses as part of an effort to strengthen its product mix.

Cost reductions to rescue profit

The decrease in sales was offset by a series of cost reduction initiatives under the umbrella of the Cost and Simplicity Program implemented by the company in 2023. 

The program targets various areas, including procurement, manufacturing, logistics, portfolio management and administrative spending, with a focus on streamlining operations.

According to the CFO, the results are shown in profitability. Central saw a surge in adjusted EBITDA in Q3: it recorded $55 million (€47.3M), rising from $37 million (€31.8M) a year earlier. 

As part of efforts, Smith says the company has a “pipeline of further cost reduction projects” and expects to see results “in a few years.” As an example, earlier this year, the company closed its pet operations in the UK. 

M&As

Mergers and acquisitions will play an important role in the company’s strategy due to the fragmentation of the pet and garden market, which is still composed of small players, Smith notes. 

“There’s still a lot of opportunity to further consolidate our businesses and get additional scale benefits. So that will continue to be part of our long-term algorithm.” 

Central will focus on high-growth and high-margin consumable businesses, and is particularly keen on bolt-on acquisitions. 

In terms of segments, the company sees potential in its cat business, pet supplements, and adjacencies (such as pest control chemicals and products).