Central Garden & Pet (CENT)- BTN Red Flag Note

Concerning signs in the company’s first-quarter results

In the past, our work for institutional clients has focused on larger cap names as the bulk of their portfolios are invested in large, liquid companies. Over the last year, however, we have expanded our data analytics and screening capabilities, allowing us to spend more time looking at mid-cap and small-cap stocks.

Regulatory constraints on research budgets and declining brokerage profitability have significantly reduced Wall Street’s coverage of these smaller names, arguably creating more opportunities to find market inefficiencies. As a result, we expect to uncover compelling ideas in this space while continuing our deep dives into large-cap earnings.

Central Garden & Pet (CENT) is a good example of a recent small-cap that triggered earnings quality red flags in its most recent quarter. The company topped earnings estimates in Q1’25 by 23 cps. Despite the big upside, the company merely maintained the previous guidance of “$2.20 or better” for FY 2025. Management acknowledged that the quarter benefited from “favorable timing of shipments and promotional payments,” suggesting a one-time boost rather than a sustainable earnings trend. The press release also stated that the company picked up 500 bps of margin in the quarter in the garden unit due to lower inflation. This will likely repeat going forward which makes the lack of an upgrade to the EPS outlook more suspect.

Let’s get behind CENT’s Q1’25 numbers for a closer look at the quality of the reported earnings.

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