Q2 2025 Central Garden & Pet Co Earnings Call
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Ziko: Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet Fiscal 2025 2nd quarter earnings call. My name is Ziko and I will be your conference operator for today.
Ziko: At this time, all participants are in listenony mode Following the prepared remarks, we will hold a question and answer session and instructions will be given at that time.
Ziko: If you require operator assistance at any point during the call, please press star followed by zero on a touch-tone phone.
As a reminder, this conference call is being recorded. [inaudible]
Speaker Change: I will now turn the call over to Frederick Edelmann, Vice-President, Investor Relations, please proceed.
Friederike Edelmann: Good afternoon, everyone, and thank you for joining Central Second Quarter Fiscal 2025's Erning School. Joining me today are Nico Lahanas, Chief Executive Officer, Brad Smith, Chief Financial Officer, John Hanson, President, Pet Consumer Products, and JD Walker, President of Garden Consumer Products.
Nicholas Lahanas: Nico will start by sharing today's key takeaways, followed by Brad who will provide a more in-depth discussion of our results. After their prepared remarks, JD and John will join us for the Q&A session.
Nicholas Lahanas: Before we begin, I would like to remind everyone that all forward-looking statements made during this call are subject to risk and uncertainties that could cause our actual results to different materially from what those forward-looking statements express or imply today.
Nicholas Lahanas: A detailed description of Central's respectors can be found in our annual reports filed with the SEC.
Nicholas Lahanas: Please note that Central undertakes no obligation to publicly update forward-looking statements to reflect new information, future events or other developments.
Nicholas Lahanas: Lastly, on this otherwise specified, all comparisons discussed during this call are made against the same period in the prior year.
Nicholas Lahanas: If you have any additional questions after the call or at any time during the quarter, please don't hesitate to contact me directly With that, let's get started, Nico Let's get started, let's get started, let's get started,
Thank you, Friederike and good afternoon everyone.
Nicholas Lahanas: I'd like to begin by outlining the three takeaways from today's call.
Nicholas Lahanas: First, a solid second quarter driven by outstanding execution from Team Central.
Nicholas Lahanas: Second, further advancements in streamlining our business and enhancing efficiency through footprint consolidation, portfolio refinement, and cost structure improvements setting us up for future growth.
Nicholas Lahanas: and third, confidence in our outlook for the year, even as we navigate a more challenging environment in the second half of the fiscal year.
Now, let me expand on these points.
First, our second quarter achievements.
Nicholas Lahanas: As previously indicated during our first quarter earnings call, the earlier timing of pre-season orders and promotional events shifted sales forward into the first quarter, leading to softer sales during second quarter.
Nicholas Lahanas: Compounding this unseasonably cold and wet weather in March delayed the start of the garden selling season, further impacting sales.
Nicholas Lahanas: In addition, the loss of two product lines in our third-party garden distribution business placed additional pressure on our top line. [inaudible]
Nicholas Lahanas: Nevertheless, our teams focus on execution, drove growth in both gap and non-GAAP earnings per share, meaningful margin improvement, and record non-GAAP operating income within our pet segment.
Nicholas Lahanas: A particular highlight of the second quarter was the performance of a wild bird business which benefited from the extended cold weather and achieved record sales. Were extremely pleased with the consistent growth these teams have delivered over time.
Nicholas Lahanas: Moreover, our e-commerce sales performance remains strong, reflecting the continued success of our enhanced digital capabilities.
Nicholas Lahanas: We're proud to report that our brand held the number one online sales position in both the Wild Bird and Graff seed categories.
Nicholas Lahanas: These achievements are a testament to the dedication, resilience, and hard work of our over 6,000 employees who continue to drive our success and position us to build an even stronger future.
Nicholas Lahanas: Second, Cost and Simplicity Program. Our Cost and Simplicity Program continues to deliver significant results.
Nicholas Lahanas: Completed initiatives are producing tangible benefits and we are introducing new projects. Highlights to the second quarter include...
E. Commerce Expansion
Nicholas Lahanas: We recently upgraded our distribution center in Eastern Pennsylvania by adding direct to consumer or DTC capabilities.
Nicholas Lahanas: The facility is already delivering strong results, having shipped more than 10,000 packages directly to consumers.
Nicholas Lahanas: With enhanced capacity, the Center strengthens our ability to efficiently manage and fulfill both our own DTC business, as well as drop shipments for our retail partners.
Fueling our growing e-commerce momentum. [inaudible]
Nicholas Lahanas: Designed with higher ceilings and more doors to move product quickly, the upgraded center not only improves operational flow but also significantly enhances employee safety the top priority for us
Nicholas Lahanas: Building on this success, we are excited to be on track to consolidate two older distribution centers in Ontario, California and Salt Lake City, Utah, into a new DTC-enabled facility in Salt Lake City later this fiscal year.
Nicholas Lahanas: This move should further strengthen our logistics network, drive significant cost savings and position us for future growth.
Nicholas Lahanas: Optimizing our logistics for growth, we are pleased to announce the opening of our new 300,000 square foot dog and cat distribution center in New Jersey.
Nicholas Lahanas: This facility centralizes all warehousing, shipping, and receiving operations for the business unit, including direct to consumer picking, packing, and shipping.
Nicholas Lahanas: This expansion is a major step forward in boosting productivity and operational efficiency.
Nicholas Lahanas: while positioning us for continued growth in one of our fastest growing categories.
Wright sizing our footprint.
Nicholas Lahanas: In our pet segment, we began winding down our UK operations in our transitioning to a direct export model servicing the UK in certain European markets directly from the United States.
Nicholas Lahanas: These initiatives are integral to our broader strategy to streamline central, enhancing agility and efficiency. They position us for margin expansion while freeing up resources to drive organic growth, pursue strategic M&A, and uphold our commitment to social responsibility and environmental stewardship.
Nicholas Lahanas: Third, confidence in our outlook for the fiscal year. We delivered the strong first half with earnings well above the prior year period.
Nicholas Lahanas: Looking ahead to the remainder of the fiscal year, recent tariff actions and related geopolitical tensions have significantly increased macroeconomic uncertainty and weighed on consumer confidence.
Nicholas Lahanas: Assuming current chairfrites remain in effect, we anticipate heightened inflationary pressures in the second half, particularly within the pet segment. [inaudible]
As a result, we expect the following [inaudible]
Increased consumer caution and a heightened focus on value [inaudible]
Nicholas Lahanas: A More Promotional Retail Environment, and Further Pressure on the Pet Specialty Brick & Mortar Channel.
Nicholas Lahanas: Given the increasing unpredictability of weather patterns evident in this year's delayed start, we factor this variability into our forward looking expectations. Thank you for your time.
Nicholas Lahanas: Importantly, when conditions are favorable, consumer engagement and longing garden remain strong, and with the bulk of the season still ahead, we remain cautiously optimistic on the remainder of the garden season.
Nicholas Lahanas: After carefully considering the uncertainty ahead in our plans to manage the second half, we are reaffirming our fiscal 2025 guidance for non-GAAP EPS of $2.20 or higher, underscoring our commitment to delivering long-term value to shareholders.
Nicholas Lahanas: Looking ahead, we will continue to prioritize discipline, cost and cash management, while investing strategically in organic growth, particularly in e-commerce, digital technology and innovation.
Nicholas Lahanas: Our M&A strategy remains focused on accelerating growth initiatives, expanding capabilities, and strengthening our portfolio for the future.
With that, I'll turn it over to Brad. Brad? Brad?
Brad Smith: Thank you, Nico. Expanding Nico's key takeaways, I'll share an overview of our second quarter results, including the performance of our two segments and our outlook for the fiscal year.
Now, let's start with our second quarter performance.
Brad Smith: Ned Salesway, 134 million, a decrease of 7%, Gross Profit of 273 million was down 2%, while Gross margin expanded by 180 basis points to 32.8%.
Brad Smith: The margin improvement is being driven primarily by the successful execution of our cost and simplicity program
Brad Smith: SGNA expense of 180 million was 3% below the prior year, reflecting continued cost discipline across our businesses. However, given the lower sales, SGNA has a percentage of net sales expanded by 100 basis points to 21.6%.
Thank you very much.
Brad Smith: non-GAAP operating income of 99 million was in line with the prior year while non-GAAP operating margin expanded by 80 basis points to 11.8 percent.
Brad Smith: non-GAAP adjustments for the quarter are related to the strategic wind-down of our UK operations, a cost and simplicity initiative we launched in the second quarter.
Brad Smith: Moving to a direct export only model to service the UK and certain European markets is expected to reduce cost and operational complexity and improve our overall profitability
Brad Smith: As a result of this initiative, we incurred an initial non-cash charge of $5.3 million, including $4.4 million in cost of goods and $900,000 in SGNA.
Brad Smith: Below the line, net interest expense was 9 million compared to 11 million in the prior year, driven by a higher interest income as a result of larger cash balances. [inaudible]
Brad Smith: Other income was $744,000 compared to other expense of $171,000 a year ago .
Brad Smith: non-GAAP Net income total 68 million, an increase of 3%. We delivered non-GAAP EPS of 104, an increase of 5 cents. Gap earnings per share also rose by 5 cents coming in at 98 cents.
Brad Smith: These results underscore the strengths of our operations and the positive momentum we are maintaining across the business.
Brad Smith: Adjusted Yvada of 120,000,000 was 1,000,000 below the prior year quarter. Our tax rate for the quarter was 23.5%.
Brad Smith: Now I'll provide highlights from our two segments starting with pet. [inaudible]
Headnet sales total $454 million, a decrease of 6% [inaudible]
Brad Smith: primarily driven by the earlier timing of customer orders and promotional events.
which shifted sales into the first quarter. [inaudible]
Brad Smith: The decline also reflects our strategic decision to exit lower margin skews and durables, which we accelerated toward the end of last fiscal year in response to softer demand and increased pricing pressure.
Brad Smith: Consumer sales were relatively flat compared to the prior year while durable sales were down double digits with points of sale or POS and indicator for consumer and demand slightly outpacing both categories. Great.
Brad Smith: Overall, we held market share with strong share performance in several key categories, including dog chews, Raheid and Equine.
Brad Smith: E-commerce sales represented 27% of pet sales up versus the prior year, fueled by the introduction of new products, optimized retail media efforts, and enhanced conversion rates.
Brad Smith: non-GAAP operating income for pet reach 66 million, up 5% and a record second quarter for the segment.
Brad Smith: non-GAAP operating margin expanded by 150 basis points to 14.5% driven by productivity gains resulting from our cost and simplicity program. Lastly, pet segment adjusted EVA.Total 75 million up to 2 million.
Now, moving to Garden.
Brad Smith: Gardennet sales total $390 million, a 10% decrease primarily due to the earlier timing of customer orders which shifted sales into the first quarter. [inaudible]
Brad Smith: A delayed start to the spring season that impacted sales across garden categories and the loss of two product lines in our third-party distribution business. These declines were partially offset by the record sales we saw in our Wild Bird business across channels.
Brad Smith: Overall, POS trends were down low single digits, reflecting the delay in the garden selling season for our traditional garden categories, offsetting the strong consumer demand in our wild bird business.
Brad Smith: Overall, share performance was strong in the second quarter, which share gains across key categories, including Wildbird, Grassseed, Chemicals and Fertilizer,
Brad Smith: Garden e-commerce sales delivered another strong quarter of double-digit growth led by outstanding performance in wild bird and grass seed across pure play and omnichannel retailers.
Brad Smith: This momentum was fueled by the introduction of new product offerings, enhanced content, and centralized retail media initiatives which drove higher engagement and improved conversion rates across accounts and business units.
Brad Smith: Gap Operating Income for Garden The $59 million was up to $2 million. Gap Operating Margin was 15.5% and increase of 109 e-bases points driven by productivity gains.
Brad Smith: Finally, Garden Segment, adjusted Yvada with $69 million compared to $73 million.
Let me now address the balance sheet and cash flows. [inaudible]
Brad Smith: Cash used by operations was $47 million for the quarter, versus $25 million a year ago. Our ongoing focus on working capital management led to further inventory reductions of $90 million in the second quarter across both segments of our business.
Brad Smith: CapEx for the quarter was $11 million, 14% below the prior year, reflecting disciplined investments, primarily in productivity and enhancing initiatives, and essential maintenance projects.
Brad Smith: Depreciation & Advertisation of $21 million was 9% below the prior year quarter.
Brad Smith: During the quarter, we repurchased approximately 1.2 million shares or 41 million of our stock. We purchased an additional 1.2 million shares or $39 million of our stock through the end of April .
Brad Smith: As of the end of April , approximately $63 million remain available under the share repurchase program.
Brad Smith: Cash and Cash Equivalence at the end of the second quarter were 517 million, and increase of 215 million [inaudible]
Brad Smith: Total debt of 1.2 billion was in line with the prior year. We ended the quarter with a gross leverage ratio of 2.9 times in line with the prior year quarter and below our target range of 3 to 3.5.
Brad Smith: Factoring in our strong cash position, our net leverage ratio was around 1.7 times. We continue to have no borrowings under our 750 million credit facility. We continue to have no borrowings under our 750 million credit facility.
Brad Smith: With our strong financial position, our M&A strategy continues to prioritize identifying high growth of consumable companies with a creative margins.
Brad Smith: Our objective is to scale core categories, strategically expand into adjacent markets, and strengthen key capabilities to drive sustained growth and long-term value creation.
Brad Smith: Turning to our fiscal 25 outlook, as Nico highlighted, we are reaffirming our guidance for non-GAAP EPS of 220 or higher for the full fiscal year.
Brad Smith: This outlook takes into consideration anticipated shifting consumer behavior amid macroeconomic and geopolitical uncertainty, challenges within the brick and mortar retail landscape and the weather variability anticipated for the remainder of the year.
Brad Smith: It underscores the confidence we have in our strategy, our action plans and our team's ability to manage through these challenges.
Brad Smith: Regarding CAPEX, we expect to invest approximately 60 million during fiscal 25. These investments will be directed towards initiatives that enhance productivity and support essential maintenance across both segments of our business, positioning us well for future growth. Thank you very much.
Brad Smith: Please note that our fiscal $25 does not incorporate potential impacts from further changes in tariff rates.
Brad Smith: Or from acquisitions, divestitures, or a structure in activities that may occur during the fiscal year, including actions related under our ongoing cost and simplicity program.
We would now like to open that line for questions.
Thank you.
Brad Smith: Ladies and gentlemen, we will now be conducting a question and answer session.
Brad Smith: If you would like to ask a question, please press star and one on your telephone keypad.
Brad Smith: The confirmation tone will indicate your line is in the question cue.
Brad Smith: You may press star and too, if you would like to remove your question from the queue
Brad Smith: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys
Brad Smith: Ladies and gentlemen, we will bid for a moment while we poll for questions.
Speaker Change: Our first question comes from Bill Chappell with two securities, please go ahead.
Thanks, Good afternoon.
Speaker Change: Hey, can you talk a little bit more just about the pet trends and in particular kind of the dervils versus consumables, what you're seeing kind of how the quarter ended up and just kind of the outlook as we move through this summer.
John Hanson: Bill, listen, John , yeah, you know, I can jump into that, you know, so...
John Hanson: For Q2, our net sales were down 6% and as we mentioned.
You know, we had customer pull forwards due to seasonality.
John Hanson: seasonal events and promotional events in Q1 and that combined with some proactive skewer rationalization we took, really drove that down 6% if you look at our business on a half.
John Hanson: We were down 1% and we feel like we, you know, from the date we've got, we held a share.
John Hanson: Right, and then a couple other key data points I think are important. One is consumables for the half for up, you know...
John Hanson: Low to mid-single digits, 3% range, and ECOM was up, you know, corresponding kind of, kind of low to mid-single digits .
John Hanson: So, you know, our focus has been on driving e-com growth, driving consumables.
You know, it's margin accretive.
John Hanson: and the durable category continues to be challenged. You know, if you look at it in total
John Hanson: You know, it was down double digits somewhere in that 10-11% range. We were down a couple points worse due to our ski rationalization efforts.
John Hanson: and if I think about that durable business, we have a live animal business that was starting to show some positive trends.
John Hanson: Honestly, in its stabilizing, you know, we're feeling really good about the direction of it as we, you know, think about the back half, the wild card right now is tariffs.
John Hanson: You know, we're going to have to work through tariffs, a lot of durables come from a variety of countries and we're going to have to work through that and we're right in the middle of working through it. [inaudible]
I would tell you that. Thanks.
John Hanson: This is Brad, I would just add on the Durables front that we were down, I guess mid-teens, roughly year to date in Durables in Durables.
John Hanson: about half of that was driven by our actions to skew rat our business so it was significant. If you pull that out, the actual residual remaining softness is kind of high single digits.
Springer.
Speaker Change: Just following up on that, because I think most of your chair of exposure is on the pet segment, I mean...
Hmm.
Speaker Change: Baby's more color out of what you're doing now. I mean, are you just pausing?
Speaker Change: Waters and so we kind of see where the pricing is, are you, did you stock file a fair amount or inventory beforehand, you know, and in any way to kind of quantify what you're going to do on pricing to offset it or it's just really too early. Thank you.
Speaker Change: So, let me answer it this way. So, if we look at our total import costs that are subject to tariff, it's about 13% of our cost of goods.
Speaker Change: And I would say the big piece of that is China, which is about 20% of our charitable imports, but about 80% of our exposure.
Speaker Change: Like you said, this is mostly in pet but we do have some in garden We are actively working on plans around vendor concessions [inaudible]
Speaker Change: Country of Origin changes, ski redesign, ski rationalization as well as some pricing at the end of the day, we are going to have to take some...
Speaker Change: So we're working on all of that now. Many plans, many plan changes will not impact our P&O until...
Speaker Change: Q4 or Q1 of next year. It's going to take some time to move sourcing and to implement pricing. We do have some pre-tariff inventory levels that are also helping us to reduce our 25 exposure well.
Speaker Change: But, you know, Bill, the wild card is we know Tiros adds up today and they could change, right? You know, so we're working on, we're working the best we can with the current knowledge we have. [inaudible]
Speaker Change: Yeah, I would say overall, just to sum it up, I think that the businesses have done an excellent job of preparing for this through a number of actions one being, you know, buying a little bit forward in terms of inventories.
Speaker Change: and then the other piece is just remaining really flexible with the supply chain, you know, across the world really and so we feel like we have a really good line of sight for the rest of the fiscal. Let's go.
Speaker Change: I think 26, we're going to have to really take a hard look at that, which is what we're doing right now, but we feel pretty good about the near term in terms of the tariffs in our exposure there. [inaudible]
Got it. Thanks for the call.
Yep.
Thank you.
Unknown Moderator: Next question comes from Brad Thomas with Keybank Capital Markets. Please go ahead.
Brad Thomas: afternoon. Thanks for taking my question. I will first ask about the garden segment.
Brad Thomas: and we all are well aware that the weather has been unfavorable again so far, but I hope you can comment just a little bit more about what you're seeing out there in the spring-selling season, what you're hearing from retailers and seeing at POS how you feel like inventory levels are. Thank you very much.
Brad Thomas: and then any comments on the live goods specifically would be great.
Speaker Change: Sure, thanks, Brad. This is JD. I'll take that. I'd say, well, you nailed it. At the start, they're talking about a delayed season that's been widely reported by other competitors and retailers as well.
Brad Thomas: Delayed Season, but one of the glimmers of hope that we saw in February and March was when the weather was decent, the consumers were very engaged
Brad Thomas: So, not the start that we wanted for the year. Top line, some headwinds as we noted in the script.
Brad Thomas: However, we managed our way to a solid growth margin and operating margin and results, so we feel good about that [inaudible]
Nicholas Lahanas: and I'd say that since the end of Q2, going into Q3 is the weather is improved, consumption is improved. So that gives us an optimistic outlook. I think Nico said cautiously optimistic in his script and I agree with that.
Nicholas Lahanas: I do think that our team has done all the hard work in advance of the season to take advantage if the opportunity is there and I do believe the opportunity will be there.
Nicholas Lahanas: Retailers of State Engaged. They're very promotional as it's been reported right now, so they're trying to drop footsteps into the stores and win the weather's.
Nicholas Lahanas: Favorable, as I mentioned, we're seeing that kind of consumption so we think we're in a great position to succeed this year.
You mentioned live goods and I think that...
Nicholas Lahanas: Live Goods Again, it's a weather story more than anything else but there's been a lot of hard work in advance of the season. We've done some ski rationalization has been mentioned here a couple of times. We've done some ski rationalization and actually pulled out of some markets that were unprofitable for us and focusing on areas where we have a right to win. [inaudible]
Nicholas Lahanas: and most of that season is still in front of us. In fact, this coming weekend, Mother's Day weekend is typically the peak for that season, so we feel like we're ramping into it really well.
Nicholas Lahanas: and I think that that business year over year is going to perform much better than prior year. All in all, optimistic about the year. I think the team is in a great operating rhythm and ready to succeed.
Speaker Change: Yeah, I would just add, I think, you know, big call out to the live goods team, they did a tremendous job.
in this year of really rationalizing their skews.
being more data-driven, just an incredible job of...
Speaker Change: of really, you know, streamlining that business and setting it up for success. The other thing I would call out too is, you know, a nice offset and really testament to our portfolio is our wild bird business, which is really in the middle of having a record year. [inaudible]
Speaker Change: So the weather there has been really helpful in terms of wild birds and we're really pleased with the results there. Yeah the weather that's a drag for our legacy garden businesses it was actually a tailwind for our wild bird business particularly in February and January February March when we saw one winter storm after another that was a [inaudible]
Speaker Change: It was nice to have something in the portfolio that offsets that typical lawn and garden cycle and that wild bird business has been incredibly strong.
Speaker Change: That's very helpful, JD and Nico, thank you. And if I can follow up just around Terrace.
Nico, as you plan the business. [inaudible]
for the next six months and you start to...
Speaker Change: You know, hopefully get a better line of sight into where some of the tariffs are going to settle out out.
Speaker Change: Can you help us just think about, number one, how significant the changes you may need to make in supply or how significant the changes in pricing may need to be for you? And to what extent do you feel like you need to look at incremental cost actions within the company?
Speaker Change: Yeah, I think you hit on all of it. You know, like I said, we have a good line of sight for the next few months in terms of
Speaker Change: Q4s where we could see some bumpiness relative to tariffs, that's where we'll have to contemplate some pricing. We're just going to continue to really look at the supply chain. [inaudible]
Speaker Change: and really look under every rock in terms of where we can get better in terms of procuring product.
Speaker Change: and then as we outlined on the prepared remarks, we're continuing down with our costs and simplicity program.
Speaker Change: So really taking cost out and really becoming a more efficient, stronger organization overall. So that's going to continue.
Speaker Change: Really glad we started that a few years ago because it's got some really nice momentum.
Speaker Change: and as everyone can hear on the calls every quarter, we update folks on what we're doing.
Speaker Change: and some really nice work being done there by the whole organization around just consolidating facilities, streamlining the organization, just becoming more efficient, taking cost out. And I think you see it in the margins, right, because
Speaker Change: You know, revenues down, and yet margins continue to expand, and I think that's a real sign of just really nice efficiency across the board.
Very helpful. Thanks, Nico. Yep
Speaker Change: Thank you. Our next question comes from Jim Chartier, with Mona Squarespace-PR. Please go ahead.
Jim Chartier: Hi, thanks for taking my questions. You've mentioned the past, you know, Chinese...
Online Import, Bill.
Jim Chartier: Probably hurting your pet business. With the diminutive, powerful exclusion taken away now, you know, what are your thoughts there? I know it's early but have you seen any price increases online yet? And how do you step playing out going forward? [inaudible]
John Hanson: Yeah, you know, we've definitely met, this is John , Jim, we've definitely mentioned that in the past and, you know, it's hard to get data on. We just know that those sites have had a tremendous amount of traffic.
John Hanson: and they're selling, you know, very inexpensive pet supplies. You know, anecdotally I've read some articles that say, you know, the costs have gone dramatically on those sites with the, you know,
John Hanson: Diminimist Interception being eliminated. But I think it's, you know, time will tell, right? You know, I do know that, you know, I've read some articles too in the Wall Street Journal that said...
John Hanson: You know, FEMA West, an example, you know, has really stopped doing direct import directly to the consumer into the US.
John Hanson: You know, so, you know, I think it can be a tailwind for sure underurbles. We're just gonna have to see what it looks like. Yeah, we haven't seen it really play out yet. Yep.
John Hanson: Great, and then you met you in a late-breaking spring season. Have you seen, you know, garden and shipments pick up here in April and May today?
John Hanson: Hi, Jim, it's JD, we have, we've seen consumption improvement as well as shipments improvement, so it's playing out exactly the way we had hoped at the end of Q2 and we're ramping into season very nicely and and
John Hanson: Again, a lot of seasons still in front of us, our peak weeks are still remaining in front of us but so far so good so yes we have seen improvement.
Speaker Change: Sorry, and sorry if I missed it, but did you mention what the POS was for the Guardian segment in the quarter or the first half?
Speaker Change: I'm not sure if we was mentioned in prepare remarks or not but it was low single digits decrease.
Speaker Change: POS. And again, we mentioned that there's a couple of large vendor partner or third party lines that we lost this past year. If you factor those out, our POS was flat for the quarter, year over year.
Great, thank you. Mm-hmm.
Speaker Change: Thank you. Our next question comes from Bob Labick with C.J.S. Securities. Please go ahead.
Speaker Change: Yeah, hi, it's Pete Lucas for Bob. You talked a little bit about what you're seeing from the consumer. Are you seeing the trade down to private label? Retail is starting to push that more in anticipation of a sluggish consumer? Yeah, sure.
We have seen some trade down.
It's best represented in our well-burred business, where we actually have good, better, best.
Speaker Change: of the whole gamut in terms of the value chain there. And we have seen some trade down in Wildbird in particular to the more value type of products. So we are seeing that.
Speaker Change: Hard for us to all that JD talk more about private label but hard for us to call because we've just kind of midstream and taking over private label business.
Speaker Change: Yes, that's right, Pete. This year we picked up a couple of meaningful pieces of private label business at two large big box stores. And that business is doing extremely well, but we don't have a prior year comp to compare it against.
Speaker Change: I would say that the conversion rate seems like the, first of all, rate execution and stores by our merchandising team is leading to great conversion for both of those brands and brands.
Speaker Change: So we are seeing some trade down, I believe it is, you know, it's coming to fruition. I'd say both that and also a much deeper promotion than we've seen in the past few years. So I see the consumers being more seeking value more than we've seen over the last couple of years. Thank you very much.
Speaker Change: And I guess just a follow-up, if it does tend to, and I'm not saying it will, and I know you didn't, but if private level were to increase at all, how do you stand from a capacity point of view there? And how do you we think about margin profile? Well,
Speaker Change: Well, from a capacity standpoint, in terms of, or do we have the capacity to execute the programs? Yes, we absolutely do.
Speaker Change: and we feel great about this year and even next year is that those brands continue to grow. We have the capacity to fulfill customer commitments, not a problem there. In terms of margin, those are margin of creative opportunities for us. [inaudible]
Speaker Change: Yeah, and the way to think about private label is typically what we see is a lower gross margin.
Speaker Change: But the operating margin assuming we're a low cost-produced or more efficient can be very comparable to the branded products.
Speaker Change: because you don't have the marketing expense a lot of times the customers pick it up. So...
Speaker Change: You know, your SGNA tends to be much lower with private label, and as long as you're incredibly efficient as an operator, you can print some really nice margins there. And it's something we've done for a lot of years, so it's nothing new to us in terms of doing private label.
Speaker Change: We've been at it, you know, as long as I've been here and even before, so it's sort of in our DNA. And across many categories, right? I mean, while birth food, we do private labor, we do it in grassy, we do it in fertilizer, we do it in controls products, so almost every category in which we compete, we have some profit label up front.
Very helpful. Thanks. I'll jump back into the queue. Thank you.
Unknown Moderator: Thank you. A next question comes from Brian McNamara with Cana Court Genuity, please go ahead.
Good afternoon, thanks for taking the questions. I'm curious. Thank you.
Unknown Moderator: To start out here, how tires are impacting the M&A environment, both in terms of deal flow, and then I'm assuming the uncertainty isn't helping, but I'm curious what the impact would be on the current bid S spread relative to what you've seen over the last, you know, prior three to six months. Thanks.
Unknown Moderator: Yeah, you're right. It's not helping at all. I was just listening to a show the other day and I think the M&A activity is the lowest it's been the last few months since 2009. So I think it's having an impact everywhere.
Unknown Moderator: Yeah, I think they're still, they're still a little bit of a disconnect between Beth Springer's
Speaker Change: particularly assets that are private equity-owned and particularly assets that...
Speaker Change: That were bought during the pandemic at higher multiples. So I think there's still an expectation of getting liquid at that higher multiple which the world certainly has changed and you've got to...
Speaker Change: Be realistic about it, and we will be willing to accept the lower multiples. So I think there is some tension there, although I would say overall the deal flow is pretty anemic.
Speaker Change: Yeah, the only thing I'd add, this is Brad, is that, you know, that doesn't keep us from continuing to look very... we spend a lot of time these days looking at potential deals in order to be able to transact when the opportunity arises, so it's still a top priority for us.
and John Lennon. Thank you.
Speaker Change: Great, and then secondly, really impressive margin performance in Q2 on weaker sales. I'm wondering what they would look like with some operating leverage on higher sales down the road. Is it fair to say your margins are structurally higher today given your efforts in the cost and simplicity program? Yeah.
Speaker Change: Yeah, I think they are. I think also we're intentionally affecting mix.
Speaker Change: I think that organically with durable is going down, that's a positive to mix and a positive to margin. I think that's a positive to margin.
Speaker Change: But we're also rationalizing as part of our cost of simplicity program, rationalizing out skews that are lower margin but we're
Speaker Change: We're just becoming more efficient, more streamlined, the businesses are running better. [inaudible]
Speaker Change: I think everybody's on board with it and has a real focus around cost and simplicity so a lot of credit goes out to the BU's on great work over a number of years now and we still have a ways to go.
Thanks a lot, I'll pass it on.
Thank you.
Unknown Moderator: A next question, from Shovana Chowdhury, with JP Morgan, please go ahead.
Shawana Choudhury: Hi, thanks for taking our questions very quickly from the previous answer. Can you give us a sense of how much work has been done or how much more skewer rationalization remains to be done and essentially how much longer and to what baggage you can expect growth margin to be expanding in the future?
Yeah, we don't, as a rule, we don't...
Shawana Choudhury: The prognosticate on gross margins sort of what our goal is, our goal is to expand margin every year.
Shawana Choudhury: We do that through a number of initiatives, through innovation, cost and simplicity, skew rat, all of those things. I would say overall the program has many more years to go.
Shawana Choudhury: We have a few years under our belt now but we've got a ways to go.
Shawana Choudhury: And the other thing I would add is because we are so acquisitive, we're never going to really be done. This is going to be an ongoing process where we continue to integrate.
Shawana Choudhury: Rationalize & Optimize the Businesses that we acquire. I think it's just going to make it stronger over the long haul and the better our platform becomes. [inaudible]
Shawana Choudhury: Right now, the more synergies we'll be able to address when we make further acquisitions. And so,
It's going to be an ongoing process.
Shawana Choudhury: and again we're going to be consistent in that we'll give updates every quarter in terms of what's been done and as opposed to give a long range goal that we probably be wrong on.
Thank you if I may slot another one in.
Speaker Change: You mentioned the trade down, the more a more value seeking consumer and the trade down to private label, but it was just in Wildbird. But a lot of HPC companies that already reported.
Speaker Change: Additionally, Garden is more discretionary, if you will. So, like, any early signs or indication that consumers may perhaps be pulling back a little bit?
J.D. Walker: This is JD, I think it's too early in our season to tell if the consumer is pulling back. I did state earlier that they're definitely seeking value, so they are driven by promotions.
J.D. Walker: Does that mean they're buying fewer bags or fewer bottles? We haven't seen that yet at all.
J.D. Walker: and I do think that there's some trade down to private label.
J.D. Walker: Again, seeking value here, but I have no evidence that says that they're pulling back whatsoever. I think that that's a normal trend in an uncertain economic environment. [inaudible]
Thank you, I'll pass it on.
Speaker Change: Thank you. This was the last question. With that, I would like to thank everyone for joining our call today and we're available to answer any additional questions you may have.
Thank you.