(CENT) Central Garden & Pet Upgraded to Outperform

Buoyed by impressive third-quarter 2012 results and strategies undertaken to reposition itself in an economy that is witnessing an uneven recovery, we have adopted a bullish stance on Central Garden & Pet Company (CENT). We upgrade our recommendation to Outperform from Neutral with a target price of $11.00.

Central Garden & Pet Company is a leading producer and marketer of premium and value-oriented products focused on the lawn and garden as well as pet supplies markets in the U.S.

Fabulous Quarter

The company’s diversified portfolio of brands has helped Central Garden & Pet establish a healthy commercial relationship with giant retailers such as Wal-Mart Stores Inc. (WMT), The Home Depot Inc. (HD) and Lowe’s Companies Inc. (LOW). This provides a significant upside potential for the company, evident from the company’s third-quarter 2012 results.

Central Garden & Pet Company’s quarterly earnings of 47 cents a share came in line with the Zacks Consensus Estimate, and surged 51.6% from 31 cents earned in the prior-year quarter on the back of increased marketing efforts, brand-building initiatives, and product innovation that helped drive consumer demand.

The company’s top line registered an increase of 10% to $533.8 million, reflecting sales increase across Garden and Pet segments. Moreover, the reported net sales surpassed the Zacks Consensus Estimate of $506 million. Pet segment sales jumped 19% year over year to $271.3 million, whereas Garden segment sales climbed 2% to $262.5 million.

Strategies to Step Up

For 2012, the company’s primary focus is on streamlining its cost structure and increasing operating efficiencies in order to improve its margins and concentrate on revenue growth through promotions. The company’s long-term target is to attain growth of at least 10% in the top line, and achieve operating margins in the range of 10% to 15%. The company also targets a $30 million yearly savings in cost as it exits 2012.

The company intends to transform into an integrated, multi-brand company from a portfolio of stand-alone businesses, by restructuring and reorganizing operating units and consolidating manufacturing facilities and logistics centers.

Central Garden & Pet has lowered the count of sales and logistics warehouses to 27 in fiscal 2011 from 34 in fiscal 2008.  The company has closed 1 manufacturing facility and 5 warehouses, and hinted at closing 2 more facilities in the fourth quarter.

The company also intends to manage its inventory level efficiently in order to systematically manage working capital. Another significant area of savings is the SKU rationalization, and the company aims to lower its total SKU count by at least 30% to 35% by the end of 2014. Since, the beginning of the year, the company has lowered its SKU count by 13%.

Closing Comment

The above analysis supports our unbiased view, and advocates our bullish stance on the Central Garden & Pet, which is well defined through our Zacks #2 Rank that translates into a short-term “Buy” rating.

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