Central Garden & Pet Company

Ladies and gentlemen, thank you for standing by. Welcome to Garden and Pets Fiscal 2025 First Quarter Earnings Call. My name is Julian, and I'll be your conference operator for today. At this time, all participants are in a listen-only mode. Following prepared remarks, we will hold a question and answer session, and instructions will be given at that time. If you require assistance at any point during the call, please press star zero on your touch phone keypad. As a reminder, this conference call is being recorded. I will now turn the call over to Frederic Edelman, Vice President, Investor Relations. Please proceed.

Good afternoon, everyone, and thank you for joining Central's first quarter fiscal 2025 earnings call. Joining me today are Nicola Hannes, Chief Executive Officer, Brad Smith, Chief Financial Officer, John Hansen, President of Pet Consumer Products, and J.D. Walker, President of Garden Consumer Products. In a moment, Nico will share today's key takeaways, followed by Brad, who will discuss these in more detail. After their prepared remarks, JD and John will join us for our Q&A session. Before we begin, 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 what those forward-looking statements express or imply 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 new information, future events, or other developments. Our press release and related materials, including a gap reconciliation for the non-gap measures discussed on this call, are available on ir.central.com. Lastly, unless otherwise specified, all growth comparisons discussed during this call are made against the same period in the prior year. If you have any further questions after the call or any point during the quarter, please feel free to reach out to me directly. And with that, let's begin. Nico?

Thank you, Frederic. And good afternoon, everyone. Thank you for taking the time to join us today. I'd like to begin by highlighting the three key takeaways from this call. First, a strong start to the fiscal year, thanks to excellent execution by Team Central. Second, steady progress in simplifying our business and driving efficiency through footprint rationalization, portfolio optimization, and cost structure improvements. And third, confidence in our outlook for the year. Now let me expand on these points. First quarter achievements. We delivered a solid performance in the first quarter, with growth in both earnings per share and net sales. This was driven by timing of shipments across pet and garden categories and channels, supported by favorable weather conditions for the garden business, and timing of promotional activities in our pet business. Most notably, margins improved due to disciplined cost management and easing inflationary pressures. We're particularly encouraged by the robust continued growth in e-commerce, which reflects our enhanced digital capabilities. These achievements are a testament to the dedication and hard work of Team Central. Their grit and unwavering commitment drive our success. And because of them, we're building an even stronger future. Second, cost and simplicity program. Our cost and simplicity program drives meaningful results. Initiatives implemented in prior periods are yielding tangible benefits. and we continue to roll out new projects. Highlights for the first quarter include distribution optimization. Our new distribution center in Covington, Georgia has now been operational for over 100 days. This facility replaced seven legacy facilities, significantly reducing our distribution footprint while increasing efficiency. Safety and productivity enhancements across all BU's We've implemented measures to improve safety, particularly within our merchandising teams. These efforts have boosted productivity and overall output. E-commerce expansion. We recently expanded our e-commerce operations to Easton, Pennsylvania. This new facility strengthens our ability to manage and fulfill our own direct-to-consumer business, as well as drop shipments for retail partners more effectively. These initiatives are part of our broader strategy to make Central leaner, more agile, and more efficient, positioning us for margin expansion while freeing up resources to support organic growth, strategic M&A, and our commitment to social responsibility and environmental stewardship. On that note, we're proud to share some of our business units and teams have collaborated to support several animal welfare organizations assisting communities impacted by the wildfires in the Los Angeles area. Our contributions include essential pet supplies such as dog beds, training pads, food and toys, along with a cash donation to LA County Animal Care and Control and Best Friends Animal Society. Third, our outlook for the fiscal year. We're confident in our strategy. Our team is and the deliberate actions we're taking to drive sustainable and profitable growth in fiscal 2025 and beyond. As such, we're reaffirming our fiscal 2025 guidance for non-GAAP EPS of $2.20 or higher, maintaining our focus on delivering long-term value. Looking ahead, we'll continue to exercise disciplined cost and cash management while strategically investing in critical capabilities, particularly in e-commerce, digital, and innovation. Our strategic M&A efforts remain focused on enhancing growth priorities, expanding capabilities, and strengthening our portfolio. That said, we recognize the complexity of the external environment, which includes macroeconomic and geopolitical uncertainties, such as potential tariffs. Additionally, we expect ongoing consumer pressure, a competitive marketplace driven by promotions and challenges in the brick and mortar retail sector. In the garden business, we anticipate continued volatility from extreme weather patterns as a potential new normal. With the 2025 garden season still ahead of us, we're cautious not to over-interpret first quarter results, especially given the significant benefit from the favorable timing of shipments. As retailers work through existing inventories, we anticipate a softer second quarter than last year. With that, I'll turn it over to Brad.

Brad? Thank you, Nico. Good afternoon, everyone. Building on Nico's key takeaways, I'll provide an overview of our first quarter results, including the results of our two segments and our outlook for the fiscal year. Let's start with our first quarter results. Net sales increased 3% to $656 million, driven primarily by timing of shipments, supported by favorable weather on the garden side and timing of promotional activity on the pet side. Consolidated gross profit for the quarter grew $196 million, up from $179 million a year ago, and gross margin improved by 160 basis points to 29.8%, driven by productivity gains and moderating inflation. SG&A expense of $168 million was 2% below the prior year, and SG&A as a percentage of sales decreased by 140 basis points to 25.5%, reflecting continued cost discipline across our businesses. Operating income was $28 million compared to $8 million in the prior year quarter, and operating margin improved by 300 basis points to 4.3 percent. Below the line, net interest expense was $8 million compared to $10 million in the prior year, driven by higher interest income as a result of larger cash balances. Other expense was $2 million compared to other income of $1 million a year ago. Net income was $14 million compared to $430,000, and earnings per share came in at 21 cents compared to a penny a year ago. Adjusted EBITDA for the quarter was $55 million compared to $37 million, and our tax rate for the quarter was 23.5%. Now I'll provide highlights from our two segments, starting with pet. Pet net sales increased 4% to $427 million, with growth primarily in dog and cat, more than offsetting lower sales in aquatics, driven by our decision to exit low-margin SKUs. Consumable sales grew mid-single digits, while durable sales saw a single-digits decline, an encouraging improvement compared to the double-digit declines of the past five quarters. Although consumable shipments were strong during the quarter, POS for consumables remained relatively flat. Overall, we held market share, with gains in e-commerce successfully offsetting declines in brick and mortar channels. E-commerce now accounts for 28% of pet sales, with net sales growing 6% over prior year. This growth was driven by the addition of new products, and further improvements in conversion rates, which contributed to share growth across multiple categories online. Operating income for PET was $51 million, up from $43 million in the prior year. Operating margin improved by 140 basis points to 12%, driven by productivity gains resulting from our cost and simplicity program and moderating inflation. As a result, pet segment adjusted EBITDA increased to 61 million compared to 54 million a year ago. Moving to garden. Garden net sales were $229 million, a 2% increase from a year ago. This growth was driven by strong performance in wild bird and controls in fertilizer, which more than compensated for lower sales in our distribution business. Overall, shipments for the quarter exceeded POS, reflecting large initial early season shipments for store sets during the month of December. Garden e-commerce sales, while less developed than pet, had another record quarter, growing double digits across pure play and omnichannel retailers, thanks to new items, optimized content, and centralized retail media efforts that boosted engagement and conversion rates across accounts and business units. Operating income for garden was $2 million compared to $9 million operating loss in the prior year quarter. Operating margin came in at 1.1% compared to a negative 3.9% a year ago, driven by moderating inflation and productivity gains. Finally, garden segment adjusted EBITDA was $14 million compared to $2 million in the prior year quarter. As Nico mentioned, Q1 is typically our smallest quarter. particularly for the garden segment where the 2025 season is still ahead of us. While we're pleased with the strong performance in the first quarter, it would be premature to draw conclusions for the full year. Let me now address the balance sheet and cash flows. Cash used by operations was $69 million for the quarter versus $70 million in the prior year quarter. Our ongoing focus on working capital management led to further inventory reductions this quarter compared to the prior year across both the pet and garden segments. CapEx for the quarter was $6 million, which was less than the prior year. Depreciation and amortization for the quarter was $22 million, also slightly below the prior year. During the quarter, we repurchased approximately 1.1 million shares, or $54 million of our stock. As of quarter end, $131 million remains available under the share repurchase programs, with additional shares authorized under the equity dilution plan. 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 compared to three times a year ago, below our target range of three to 3.5 times. We had no borrowings under our $750 million credit facility at the end of the first quarter. Cash and cash equivalents at the end of the first quarter were $618 million, compared to $341 million in the prior year, an increase of $277 million after our usual Q1 working capital build. Given our strong financial position, we remain actively focused on identifying high-growth, consumable companies with accretive margins. Our goal is to build scale and core categories, strategically enter adjacent categories, and enhance key capabilities to drive long-term growth and value creation. Turning to our fiscal 25 outlook. As Nico mentioned, our guidance remains unchanged from November. Given our first quarter performance benefited from favorable timing of shipments and promotional activities, we expect a softer second quarter compared to last year. However, we remain confident in achieving non-GAAP EPS of 220 or better for the fiscal year. This outlook underscores our confidence in the strength of our strategy and action plans and in the resilience of our team as we navigate near-term macroeconomic, geopolitical, and weather uncertainties. As we look at CapEx, we plan to invest approximately $60 to $70 million this fiscal year. These investments will be focused on productivity-enhancing initiatives and essential maintenance across both our segments. Our fiscal year outlook assumes the currently proposed tariffs, but excludes potential impacts from acquisitions defestitures, or restructuring activities, including initiatives under the Cost and Simplicity Program that may arise during fiscal 25. We would now like to open the line for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing star keys. One moment while you poll for questions. And our first question comes from Bill Chappell with Truist Securities. Please proceed with your question.

Good afternoon. Hey, Bill. Hey, Nico, I don't really know. Am I supposed to say congratulations on the quarter, or was this all a pull forward and so everything's just exactly as you expect it?

I wouldn't say it was exactly how we expected. Otherwise, we would have guided you a little better. Yeah, we had some timing. I wouldn't call it pull forward. I think it was more of a timing of shipments. We had some businesses that just loaded in a little bit earlier than prior year. I would say, but it's a combination as well, right? We had some favorable mix, good weather, a little bit of timing, and some great executions. So all of it kind of came together. I think you'll see some of that come out of Q2, though, as we stated in the prepared remarks.

And I guess we're trying to understand is how much of that, I mean, is that majority upside? And also with that, you know, kind of a bigger question, I understand the timing of shipments on garden, and usually that's a bullish sign that the retailers are getting ready earlier for the season. But I don't remember seeing the timing of shipments on pet change that much, so maybe you could help us there.

Yeah, so we do have some seasonal pet businesses, one of which is our cushion business, Ardent, and that loaded in a little bit earlier as well. That's also obviously outdoor cushions, so very much a springtime type business, and we had some earlier orders. So a few of the pet businesses got pulled along as well. John, do you have anything to add?

Yeah, we had some promotional activity early Q2 that got pulled into Q1 that, honestly, we just hadn't planned for.

Yeah, I mean, this is Brad. I mean, the timing of when the customer needs shipments to go out to plan for those promotional activities can move around on fairly short notice as well. So we were expecting more of the shipments to hit in Q2 that actually ended up hitting sooner in Q1. But this was all normal year-over-year activity in terms of there were no big new promotions. It was fairly consistent with the prior year. And there was certainly, we just underscore, there was not a situation where we were intentionally trying to pull forward.

No, not at all. And, you know, even the seasonal businesses that pulled forward, honestly, we view that as a good thing because customers are excited about the season. They want to take the inventory early, which is a good thing.

Got it. And then somewhat surprisingly, you said in the release that you have accounted for some tariff activity in your guidance. Maybe you could give us a more color of what you've accounted and where you might expect to see issues.

Yeah. So, I mean, we've been obviously like everyone watching very closely where things are heading with tariffs. Obviously this week has been quite a wild ride to say the least, but You know, we've sized up the potential impact of the 10% tariff on China, as well as 25% on Canada and Mexico. And we were able to get comfortable that, given our exposure and the timing of when that would hit, some of the mitigation strategies we've got in place, that we'd be able to tackle those, absorb those, and still, based on everything we see in front of us, stay within our guidelines.

Great.

Thanks so much.

Thank you.

Thank you. And our next question comes from Brad Thomas with KeyBank Capital Markets. Please proceed with your question.

Hi. Thanks for taking my question. Nico, I was hoping to follow up just on that topic of some of the policy changes and was wondering if you could talk about your opinion on the de minimis exemption and it potentially being closed or substantially reduced and just how much impact you think that may be having on your pet category right now, for example.

Yeah, I'll kick it off and I'll let John fill in. He knows a hell of a lot more than I do about it. But we're very pleased that, you know, Washington finally decided to address the issue. We'll have to see how it plays out. I think it's going to probably affect the durable category the most. going forward. But I think we still have to see how that plays out. I think if you dig a little bit deeper, we'd still love to see live animal and pet adoptions really take off and see that household penetration rate increase. And I think with that, you'll see the durables pick up. But certainly, it should level the playing field.

Yeah. Just to build on that a little bit, we've seen durable declines. In Q1, I think there were low double digits, sequentially, you know, improvement versus prior quarters, so think around that 12% range for the category. You know, it's really difficult for us to say, hey, how much of that is, you know, soft pet ownership or soft pet acquisition, you know, versus what is coming out of Asia, you know, via e-com and low-priced goods. We know it's having an impact, no doubt about it, because you can just go on the webpage and you can look and see what they're offering and the prices they're offering. So we think it's a really good thing going forward, and we're just going to have to wait and see how that impacts the back half.

I appreciate it. And if I could follow up on the live goods category, I know that better weather is a really big opportunity for you all. Fingers crossed here for the spring. But just as you think about retail doors that you're in and placements, any color that you could share on just what the underlying business would look like on kind of a like-for-like basis if weather doesn't change? Are you up or down, you know, as we think about live goods? Actually think about that.

Great question, Brad. This is JD. I'll take that. So first of all, you know, regarding live goods, obviously they had a material impact on our performance last year. The live goods business turned in a very solid quarter in Q1. I'm proud of the business unit. I think they delivered on their financial commitments, and it reflects a lot of the good work that they've done in getting the business to a better business model and overall better business performance. So they've right-sized SG&A, rationalized the product offering, and that includes exiting some unprofitable geographies or unprofitable SKUs, They've optimized facilities, at least started that process, so getting the footprint right. Obviously, you know, that's Q1, and this business or the season is still in front of us. It's mainly a Q3 season. But we really like the operating cadence and the rhythm that they're in right now. And if weather cooperates, if Mother Nature does her role here, I think that this business turns in a much better business performance year over year. So we feel much better about it.

That's great. And maybe if I could squeeze the last one in just on the new distribution facility that you have. Can you help us think about the capacity of the facility and perhaps how it might fit into acquisitions and growth going forward here?

Yeah, I mean, it's a large, what I would call more state-of-the-art facility than what we had before. And we've taken roughly seven other facilities and folded them in there. It's got high ceilings, more doors than we've ever had before, and some room to grow. Largely right now, you can think of this as a garden project where we've put mainly garden products in there, but we had our entire pet segment come and tour the facility. I think we're very close to seeing us begin to distribute product, both pet and garden products, out of one facility. We continue to really shrink the footprint of the business in total, not just garden or pet, but really thinking through mixing centers and what that looks like across the country and consolidating, becoming more efficient. And I think it just allows us to be more agile, particularly on the garden side where we're dealing with more just-in-time. This allows us to stage shipments better and just be a more agile, fast-moving org. going forward. So we're pretty excited about it.

Very helpful. Thanks, Nico.

Yep.

Thank you. And our next question comes from Jim Charico with Maness, Crespi, and Hart. Please proceed with your question.

Hi, thanks for taking my questions. On the tariffs, can you just remind us what percentage of your product is sourced from China, Mexico, and Canada?

Yeah. Yeah. We've got about, I think, 4% of it that is coming from China. Canada and Mexico are, in combination, about 2%, roughly. And then we've got another 8%, roughly, of our inputs that are coming from other countries.

So it's total, like, 15% of cost to goods. 14, 15. 14, 15 that's coming from abroad. Got it. Thank you.

And then can you just give us a little more color on kind of what a softer 2Q means? You know, sales down, EPS down year over year, and then if EPS is down, like, you know, given the margin performance in first quarter, you know, why would we think that the operating margin would be down year over year in second quarter?

Well, the margin may not be down. What I would just say is – First of all, I want to get away from guiding every quarter, because as we've said in the past, we're going to be wrong a lot. So I would just say directionally, it's not going to be what last Q2 was. If you remember, last Q2 was pretty strong, and we'll probably be below last year's Q2 EPS. With the timing of the shipments, I think We'll look at the top line could be down low single digits into the quarter. But beyond that, product mix is going to play a big role. We have every intention of expanding margin and really having a great quarter in Q2. And then weather is going to play a role there as well. So that's sort of when the garden season starts to really kick off. And then we want to see what POS does early on in Q2.

Great. Thank you.

Yep.

Thank you. And our next question comes from Bob Lubick with CJS Securities. Please proceed with your question.

Good afternoon. Thanks for taking our question. I wanted to stick with the pet durable side. You've talked about it a little bit. Maybe we can just dig down a little further. The hard goods sales, obviously there was an impact from the pandemic and pet ownership, and you've talked about some potential competition. What's the line of sight for recovery? Is there innovation that you can introduce that can drive sales? How do you see this getting back flat to growth over time, or is that not a near-term expectation?

Well, certainly I'd kick it off by saying we believe in these categories long-term. You know, we believe, you know, low to mid single-digit growth in these categories. And if you think about COVID, it was a huge pull forward in live animals, right? And we're still working through that. There's no doubt about it. And we see that, you know, in all the pet ownership and new pet acquisition numbers that we get. You know, there's categories like small animal, which include, you know, rabbits and guinea pigs that we're still seeing declines. So we got to work through that. Durables often go with the live animal, because when you buy the live animal, you buy an enclosure, you buy feeding, watering, you know, filtration, if you're in aquatics. So we got to work through it. I don't have a crystal ball to say, hey, when that's going to recover. But I do see durables sequentially, the declines are improving. And then we had this wild card thrown at us with e-commerce direct imports coming in from Asia. And those goods were cheap, really, really cheap. And they got around that de minimis tariff. And that's been closed. So I do think that is going to have an impact as we go forward. And then certainly as live animals pick back up, which it will, history says it will, and I believe it will, and we all believe it will, You know, you're going to see durables recover as well.

And we are innovating with durables where it makes sense. So if you think of sort of the razor, razor blade type of concept with our fish tanks, we've got the, you know, the Blue IQ app that goes along with that. We've got some proprietary filtration that, you know, you have the cartridges, which is the consumable, but they only fit our filtration system. So we're doing some good innovation there. We're not just walking away from durables because they are important. And again, you know, we try to be smart about how we go into the categories with respect to the durables and try to take, you know, really the viewpoint of more of a razor, razor blade type mentality there where we can.

Okay, great. Appreciate that. And speaking of the crystal ball, you obviously have a very strong balance sheet. And so I was just curious if you could give us, you know, you'd like to make, as you said, accretive acquisitions, margin growth, et cetera. What's the M&A environment like out there now, given all of the macroeconomic events and everything else? I'm not going to ask you if you're going to do something this year, but how has the environment changed? How is your pipeline? How do things look from an M&A perspective?

Yeah, I mean, we were in discussions with a few deals. We currently still sort of are, but it's been more – kind of anticipatory right now. I think everyone's waiting for the deal flow really to kick off and get going. There's been a lot of discussions with bankers. I think the activity level's up. We just haven't seen a ton of deals come across our desk as of yet, but I certainly think that there's a lot of anticipation in the market. I think sellers are starting to take a hard look. We're hearing you know, from banks and others that pipelines are being formed. We just haven't seen it yet, but it feels like it's starting to come together, and hopefully we'll have more to share as the year progresses.

Okay, great. Thanks.

Thank you. And our next question comes from Brian McNamara, Canaccord Genuity. Please proceed with your question.

Hey, good afternoon, guys. I guess this one's for Nico. If I'm an investor looking at the stock, you guys have had a lot of stuff go wrong or, I guess, out of your control over the last few years. You've had weather, you've had pet ownership, you've had the durables issue. What would you say to investors kind of kicking the tires on the stock for the first time? It sounds like things are starting to get a little bit better here, but I want to put words in your mouth.

Yeah, I mean, I would say that that's exactly right. We have had a few rough weather years. We had the big pull forward, as John mentioned, via COVID on some of the pet categories. I would say if you look at the business, the teams here have done an incredible job of executing, both through the pandemic and post-pandemic. So if you look at our margin profile compared to a lot of the other consumer companies out there, We've done a really good job, and I think our balance sheet reflects that. If you look at our cash position, that's really a sign of great execution around working cap, profitability, things like that. I would say right now we're in a bit of a cycle, but to your point, and if you look at the numbers, it feels like we're starting to come out of that. We feel very good about the business. We love our categories. And I would say we have a very strong management team that's incredibly focused on the future. So really love the organic business and then a strong balance sheet to go after some accretive M&A. To me, that's pretty exciting. Great. Thank you.

Thank you. And our next question comes from Andrea Teixeira with J.P. Morgan. Please proceed with your question.

Thank you. Good afternoon. I hope you're all well. I have a question and two clarifications, please. One is on the cost and simplicity program. I understand you don't provide outlook on that program, but your margin expansion was notable in the quarter. Obviously, you had some operating leverage with the shipments being earlier. But what was the magnitude, would you say, of the savings in Q1? And how much more are you anticipating savings for the remainder of the fiscal year? And the two follow-ups, one is that what is actually doing better than expected that offset the impact of the tariffs? Or are you planning to take pricing against the impact and leading to a neutral model line? And second, on the upside for the Q1 quarter, we just say that there was about, I think if my math is correct, it was about $20 million that was a beat against our estimates and consensus. that should probably come out from Q2. Just as a cadence, it's important to model. Thank you very much for all of those.

Yeah, I would say you're right on the cost and simplicity. A big part of our margin expansion was due to us continuing to take cost out. We're going to continue down that road, and Andrea, we're not going to guide on the year and how much we're going to take out because Again, just like us guiding the quarter, we're going to be wrong. And so we're going to instead tell folks about it, and you're going to see it in the margins as we go forward. And we're going to continue to really optimize the footprint and the business. In terms of tariffs, I would say that, you know, pricing is going to be very difficult to go into retailers and try to take price. I think that's going to be a real challenge. So really the onus is going to be on us to, you know, either work with the suppliers out there to see about some cost cutting. We have our own efforts here where we're taking cost out in our cost and simplicity program. So we have a way to expand margin that way. But I think taking price, you know, we guided, I think back in November, we said we were going to be net negative on the year in pricing by about 14 million. And I think we were net negative in this quarter. So, really, it's being made up on volume and cost savings and just really good execution. And I think that's going to have to continue forward. I really don't see us going in with a ton of prices here.

And I would just echo that. You know, I think working with our suppliers to minimize is a high priority for us. You know, we've looked and continue to look at country of origin. you know, for our suppliers. But, you know, as Nico said, pricing is going to be very difficult to take.

And on the upside for the quarter, just like thinking $20 million is a good number, as Bill was starting on the call asking, like, you know, it's not a pull forward, but obviously it has been the calendar. I understand, like, Easter is is there is actually going to fall in your third quarter from what I, um, a lot of companies are starting to talk about it because of the calendar shift. Uh, not sure if, uh, that, you know, for the seeds for the gardening side will make any impact because folks will be more, I'm assuming there's more consumption occasions if they are not on a holiday. I mean, is that anything that impacts maybe, maybe the gardening is going to be okay. Um, they're going to continue the same pace.

Yeah, I think weather will be a bigger component to Q2 and Q3 than where Easter falls. I think you're right. It will probably affect garden more than anything and probably live goods. But I would say, getting back to your question on the top line, I think conservatively, you could take that out of Q2, even though we really don't want to get into the habit of guiding the quarters. And then last but not least, you know, the weather will play a role in Q2 and also our POS, the performance as the quarter goes. So things could change as that quarter progresses.

Yeah, Nico, just building on that.

It is favorable to us when we have an earlier quarter So, you know, last year Easter was at the end of Q2 in late March. That's more preferable than the third week of April like it is this year. But having said that, Nico's right. Weather far outweighs the impact of having a later Easter. We are getting into peak season in that time, though. Late April, early May will be peak season for us.

Mm-hmm. And then that's super helpful. And then just as obviously the disaster of like the fires, is there anything we should be cognizant of? Of course, like, you know, the human impact and obviously the past impact. I appreciate that you donated a fair amount as you put it in the prepared remarks. But anything we should be aware of in terms of the impacts here? Yeah.

Yeah, we can't really think of anything other than a lot of unfortunate, you know, people were displaced. But, you know, we're doing everything we can to try to help folks down in Southern California.

Okay, fair enough. Thank you very much. I'll press on.

And our next question comes from William Reuter with Bank of America. Please proceed.

Hi, guys. Good afternoon. This is Rob Rigby on for Bill. So first question from us, you know, appreciate the commentary around M&A. But moving forward, you know, given the large cash balance that you do have, I guess, absent M&A, what are you expecting any uses of cash to be? Should we expect a similar level or similar cadence of share purchases moving forward?

So the way we look at the share or purchase, well, first of all, I would say we still want to invest in the business, so that's always going to happen. We have a big balance, and when you have a balance that size, really the first place you're going to look is M&A. Secondly is really internally around CapEx as well as demand creation, brand building, marketing, things like that. Third is we always look at... Stock buybacks, a lot of that has to do with where our own stock is trading. So you saw us buy back pretty aggressively back in October where the stock had dropped and we went in to support it because at the time we viewed that as really a great value and an excellent way for us to return money and value to shareholders. So I think those are really going to be our three areas. They continue to be those three. And I I truly believe that M&A will pick up. Again, you know, right now it's a little bit, you know, there's a lot of anticipation, but I think that we're going to see it pick up.

Great. That's super helpful. And then just a second from us, I guess maybe, you know, appreciate some of the color around timing of shipments, but maybe if you could touch on sentiment and maybe optimism that you might be seeing, I guess, first around, you know, the garden segment, favorable weather, you know, going into peak season, and then as well, you know, any commentary around the sentiment from your pet retailers. Thank you.

So this is JD. I'll go first and talk a little bit about, you know, outlook for the season. You know, I'd say that You know, we're out of the gates well. You know, a great start to the year. We're pleased with the financial performance of the garden segment, but we have to keep it in perspective. As we've said many times, we still have the season and 85% of our year still in front of us. I am pleased that our team is executing at a really high level. So, you know, our fall inventory build, gaining support from the retailers for the upcoming season, display and promotional support, execution at retail, all of those things are happening and that we're executing with excellence. So I feel very good about that. And I feel like we're ready for the season. The retailers are also highly engaged, very excited about the season. They drive an awful lot of their spring foot traffic through the lawn and garden department. So they're very much engaged. And I'd say that our relationships with those retailers are have never been better. So kudos to our sales teams for that. I expect it to be a very competitive marketplace in the upcoming spring, but that's no surprise, and I think we're ready for that with that promotional and display support that I spoke to. So I think in general, we feel very good about the controllable causal factors. Those things are within our control. We feel great about it, and we're ready. And I think that if, you know, I said this earlier, but if Mother Nature does her part, And we have decent weather. It doesn't have to be stellar. It was a challenge last year. So I think just normal weather this year, whatever that looks like, will be an improvement year over year and should lead to better results for the garden segment. So we're cautiously optimistic.

And on the pet side, I'd say something pretty similar. We're off to a really good start. We feel good where we're at. You know, we've got strong relationships with our customers. You know, we've done a really nice job, our sales force working with our business units, to identify, you know, gaps and opportunities with our customers to drive more distribution. And I think we're going to see some nice distribution gains in the back half. So we feel, you know, really good where we're at to be able to – you know, have a really good year. You know, I think, you know, the challenge with the pet side is, hey, does this new pet acquisition, you know, pick up, and when does it pick up? And if it does, you know, we get super excited where we're headed.

I'll just add on the pet side, I mean, just exceptional execution on e-comm. and it continues to be a key growth area.

You know, in e-com, we have invested. We build capability around content, retail media. Our data and analytics are much stronger than they were before. You know, we built additional fulfillment capabilities to give us more flexibility about how we get our product direct to the consumer. You know, so we're doing all the right things and feel really good where we're at.

Great. Thank you guys very much.

And our next question comes from Carla Casea with JP Morgan. Please proceed.

Hi. Most of my questions have been answered, but I'm just wondering if you could give us a little more color on the pet side about whether you're seeing any more stability in that pet specialty channel or if you're still seeing that channel mix shift towards mass and... other?

Yeah, this is John. You know, it's a challenge channel right now, honestly, and a lot of that's driven by new pet acquisition. A lot of the consumers, when they're looking for new pets, you know, both to understand and get advice from retailers as well as make the purchase, they go into pet specialty. So, traffic related to that new pet acquisition has been a bit soft. We stay really close. We've got great relationships, you know, with the customers in that channel. And, you know, but in the near term, it is challenged.

Okay, great. Thank you.

And our next question comes from Hale Holden with Barclays. Please proceed.

Hi, good afternoon. I just had two real quick ones. On the sequential improvement in pet durables, how does that look like on a two-year basis? Are we really seeing start to flatten out towards a stabilized trend line that you can grow from, or is it just same rate of decline against easier year-over-year comps?

It's less of a decline on a sequential basis, but it's still a year-on-year decline. And, you know, again, you know, talking about the pet ownership, but also this de minimis tariff exception. You know, it's a bit hard to quantify how much of that is related to inexpensive products coming out of Asia. You know, you can go on to some of these websites and look at, you know, like a pet bed, and it's very inexpensive coming out of Asia. You know, that is going to... you know, I don't know if it's going to stop, but it certainly is going to be more challenging for that to happen. And I do believe that is going to have a, you know, a positive impact on our business. It's just hard to say how much right now. Yeah.

Okay. And then the second question I had is, I know you guys have covered this a little bit on the call, but just Really simplistically, why was the pull forward in Garden this quarter? Some of the things I heard was maybe the weather was better in December. Maybe your customers were loading up a little bit earlier than normal, but I'm sure you got some pretty direct feedback from your larger customers on what drove it.

Sure, Hale. This is JD. I'd say that for the most part during the quarter, consumption and shipments tracked very closely to one another, but historically, right at the end of December, we always have a number of shipments that go to our larger customers to set the stores for the upcoming spring season. So they move from Christmas in their stores right into lawn and garden. And that usually starts setting the first week in January. The initial shipments are scheduled to go late December. Now, most of our customers pick up at our DC's distribution centers. So it's difficult to predict exactly when those trucks are going to show up. They may show up a day or two before Christmas. A lot of them show up between Christmas and New Year's, so it's difficult for us to predict. We got more shipments out than we anticipated. We had the orders, their trucks showed up, and we were able to get those out in two less shipping days than what we had the prior year. So all of those variables came into play. It made us, you know, cautious in what we were predicting for the end of December. We actually got a lot more shipments out than we were anticipating. Kudos to our supply chain team. But that's what drove a lot of the shipments. Now, it's strictly timing. So it's whether that ship's the last week of December or the first week of January. It's for the same purpose, and it's not consumption-driven. It's to set the stores for the coming spring season. So the early shipments in December most likely will normalize and come out of Q2 shipments. So not a net gain, just a timing difference, that's all. Does that make sense?

It makes total sense. I'm going to still give Nico credit for the meat this quarter, though. So thank you, guys. Thank you.

Absolutely.

This was our last question. Thank you, everyone, for joining us today. We're available to answer any additional questions you might have after this call. Thank you.

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