Central Garden & Pet Co

NASDAQ:CENT

Earnings Call Analysis

Central's Fiscal 2024: Challenges and Outlook for Growth

In fiscal 2024, Central faced a challenging environment, with net sales declining 3% to $3.2 billion. Non-GAAP EPS grew to $2.13, exceeding guidance, while gross margin expanded to 30%. The Pet segment saw a 10% sales drop, with organic net sales down 14%. However, e-commerce sales reached 29%. For fiscal 2025, the company anticipates non-GAAP EPS of at least $2.20, navigating a difficult landscape influenced by consumer spending, competitive pressures, and climate challenges. They plan capital expenditures of $60-$70 million for growth initiatives as they continue to streamline operations through a Cost and Simplicity program.

Key Financial Highlights

In fiscal year 2024, Central reported net sales of $3.2 billion, reflecting a decrease of 3% compared to the prior year. This decline was attributed largely to the previous year's benefits from an additional week of sales. Organic net sales fell 4%, even when excluding the impacts of TDBBS acquisition and the discontinuation of the independent garden channel distribution business. Notably, the company's non-GAAP gross profit increased slightly to $960 million, leading to a non-GAAP gross margin expansion of 110 basis points to 30%.

Challenges in Revenue Segments

The earnings call revealed significant struggles in both the Pet and Garden segments. Pet segment net sales fell 10% to $435 million, characterized by a 14% decrease in organic net sales. Factors contributing to this decline included weak consumer demand, especially for durable goods, which saw double-digit reductions. As for the Garden segment, net sales decreased 12% to $234 million due to challenges and competition. Despite these struggles, some positive trends were noted, including strong point-of-sale (POS) performance in consumables and grass seed products.

Cost and Simplification Initiatives

An ongoing 'Cost and Simplicity' initiative aimed at streamlining operations was highlighted. This includes consolidating operations and reducing costs, with 11 facilities closed in fiscal 2024. The program seeks to enhance efficiency while maintaining a focus on margin improvement and organic growth. Implementing improved transportation management systems has also been part of their strategy to lower expenses and enhance delivery reliability.

Outlook for Fiscal Year 2025

As Central looks forward to fiscal 2025, they have set a non-GAAP earnings per share (EPS) guidance of at least $2.20. Despite inflationary pressures, geopolitical uncertainties, and fluctuating consumer preferences, leadership remains optimistic. They project organic growth within consumables at low to mid-single digits while estimating a mid-single-digit decline in the durable category. The firm will focus on improving their e-commerce presence, as this segment witnessed growth, now accounting for 29% of total sales, up from 25% the previous year.

Financial Position and Capital Allocation

Central ended fiscal 2024 with approximately $754 million in cash equivalents, holding robust liquidity for potential mergers and acquisitions. The total debt stood stable at $1.2 billion with a gross leverage ratio of 3.1%. Capital expenditures for fiscal 2025 are expected to range from $60 million to $70 million, primarily for maintenance and productivity improvements across their segments.

Addressing Market Headwinds

The call addressed several headwinds impacting business operations, including challenging weather conditions affecting the garden sector and a tough competitive landscape driving a promotional environment. Adjustments in pricing strategy are anticipated due to increased pressures from consumer demand for value and discount offerings. This reflects a broader trend where pricing will be notably difficult, necessitating strong execution of their cost and simplicity program to uphold margins.

Management's Positive Outlook

Despite the challenges faced, Central's management expressed pride in the achievements made, demonstrating financial resilience through improved gross margins and record operating cash flow. They emphasized ongoing commitment to the 'Central to Home' strategy, focused on driving sustainable growth and enhancing shareholder value even in a fluctuating market.

Earnings Call Transcript 2024-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Central's Fourth Quarter Fiscal 2024 Earnings Call. My name is Julian, and I will be your conference operator for today. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the call over to Friederike Edelmann, Vice President, Investor Relations. Please go ahead.

[Friederike Edelmann, executive]

Thank you, Julian, and a warm welcome, everybody, to Central's Fourth Quarter and Fiscal Year 2024 Earnings Call. Speaking today are Nicholas Lahanas, Central's new Chief Executive Officer; Brad Smith, our new Chief Financial Officer; John Hanson, President, Pet Consumer Products; and J.D. Walker, President, Garden Consumer Products.

In just a moment, Niko will provide our key takeaways from the fiscal year share more a cost and simplicity program and our outlook. And Brad will then discuss the financial results for the year and for the quarter, our 2 segments and our outlook in more detail. John and J.D. will then join us for your questions.

Before they begin, I would like to remind you 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 we share today. We've described the range of risk factors in our annual report filed with the SEC. Central undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events or otherwise. Our press release and related materials are available at ir.central.com. And includes the GAAP reconciliation for the non-GAAP measures discussed on this call.

Lastly, all growth comparisons made during this call are against the same period in the prior year, unless otherwise stated. If you have more questions after the call, please don't hesitate to reach out to me.

And with that, I'm handing it over to Niko.

[Nicholas Lahanas, executive]

Good afternoon, and thank you all for joining us today. I'm truly honored to be here Central CEO, leading our talented team as we advance the company and enter an exciting phase of growth. Since becoming CEO, I've had the privilege of working closely with our leaders and our Board of Directors, and I'm more confident than ever in our path forward. We are operating from a foundation of strength with a focus on our Central to Home strategy which includes our cost of simplicity initiatives and our plans around customer and consumer experience, innovation and operational excellence.

Our goal is to build on this foundation and to drive long-term value for you, our investors. Having been with Central for over 18 years, I bring deep experience and understanding of our business. However, stepping into the CEO role offers me a fresh perspective, and I see clear opportunities to sharpen our focus, accelerate our key initiatives and identify areas for future growth. Going forward, I'm eager to share our vision and provide you with insights into our performance and discuss the steps we're taking to navigate the current environment while setting the stage for future success.

Before we go into the key messages, I want to thank Beth Springer, who did an exceptional job as our interim CEO and continue to serve as our Lead Independent Director. Let me start with the 3 key themes I'd like you to take away from this call. First, we had notable achievements in fiscal '24. Despite challenges, we delivered solid results in a tough environment. Next, we made meaningful progress on our cost and simplicity program. We're streamlining our operations and positioning ourselves for long-term success. And third, looking ahead to fiscal '25.

While we expect the consumer and competitive landscape to remain difficult, we're focused on executing our strategy and driving sustainable growth. Now let me delve into each of these themes in more detail. Turning first to our fiscal '24 achievements. We're incredibly proud of what team Central accomplished over the past 12 months. Despite facing a difficult environment, including soft demand across our pet businesses, particularly durable pet products and a tough garden season, we delivered the following: growth in non-GAAP EPS, continued gross margin expansion, strong profits in our Pet segment and another record year of operating cash flow. These achievements showcase the grit and perseverance of our 6,450 employees who rolled up their sleeves and work together to drive results and serve our customers.

Thank you to the entire Central team for your dedication and resilience. Second, progress on our Cost and Simplicity program. Our Cost and Simplicity program is a multiyear journey to simplify operations, enhance efficiency and better leverage the scale of our business across procurement, manufacturing, logistics portfolio optimization and administrative costs. Let me highlight some of the initiatives from the fourth quarter. Starting first with our consolidation of operations. We further integrated our Arden outdoor cushion, dog bed and K&H businesses, closing 2 leased facilities in Arizona and California and shifting production to our own facilities in North Carolina and Indiana has improved e-commerce capabilities reduced shipping costs and provided room for growth.

Second, scaling our natural dog treats production. To meet growing consumer demand, we expanded capacity and enhanced efficiency at our natural dog treats processing plant in Mexico, allowing us to capture a larger market share. Third, optimizing transportation. We completed the rollout of a corporate transportation management system and centralized load planning across most business units, reducing costs and improving delivery reliability.

And finally, streamlining our live plant operations. We consolidated our 2 live plants businesses under the Bell brand name, closed older, less profitable facilities and moved production to a modernized site in Kentucky for better planning and output. These initiatives are part of our broader effort to make Central more lean, more agile and efficient. They are designed to drive margin expansion and free up resources for organic growth and strategic M&A as well as to enhance our social responsibility and environmental stewardship. As such, we are embedding sustainability into our operations with measurable goals outlined in our latest impact report to ensure a resilient and secure supply chain, reduce our environmental impact and provide a safe working environment for our employees.

Recent efforts also include participation in and Home Depot's Foundation community events, reflecting our commitment to giving back to those in need. Now let's move to our third key message around our outlook for fiscal '25. Looking ahead, we remain steadfast in our commitment to the Central to Home strategy. Here's how we're preparing for the year ahead, staying disciplined on our cost and cash agenda, making targeted investments in critical capabilities, particularly in e-commerce, digital and innovation. Maintaining a focused approach to identifying and pursuing strategic M&A opportunities that align with our growth priorities, enhance our capabilities and strengthen our portfolio, and advancing a pipeline of new products across our pet and garden portfolios with launches planned for fiscal '25 and beyond.

That said, we anticipate having to navigate a challenging external environment marked by macroeconomic and geopolitical uncertainties. We foresee continued pressure on consumers who will prioritize value and be strongly influenced by discounts and promotional offers. An increasingly competitive and promotion-driven marketplace and significant headwinds in the brick-and-mortar retail sector presenting unique challenges.

Furthermore, extreme weather seems to have become the new normal. Adding an even greater volatility to an already seasonal garden business. That said, we remain confident in our strategy, our team and the decisive actions we are taking to drive profitable growth in fiscal 2025 and beyond. In line with this, we are guiding fiscal '25 to non-GAAP EPS to be $2.20 or higher. With that, let me briefly summarize my remarks before turning it over to Brad. I'm incredibly proud of what we accomplished in a challenging year. We delivered growth in non-GAAP EPS, demonstrating our financial resilience. We successfully expanded our gross margin despite softer category consumption and sales, and we achieved a record-breaking cash flow year, solidifying our fortress balance sheet. But what excites me most was that these achievements were driven by our exceptional people and their unwavering ability to execute even in a continually changing and tough environment.

And with that, I'd like to introduce to you Brad Smith, Central's new CFO. For those of you who haven't met Brad yet, he joined Central in 2017 as Chief Financial Officer of our Pet segment. Prior to Central Brad worked 12 years at what is now Ahold Delhaize.

Brad, the floor is yours.

[Brad Smith, executive]

Thank you, Niko, and hello, everyone. It's great to be here with you all today. Building on Niko's remarks, let me start with our fiscal '24 results. Net sales were $3.2 billion, a decrease of 3% compared to the prior year. As a reminder, fiscal '23 benefited from an extra week in the fourth quarter. Organic net sales declined 4%, excluding the impact of the TDBBS acquisition and the sale of our independent garden channel distribution business. Non-GAAP gross profit for the year was $960 million compared to $957 million and non-GAAP gross margin expanded by 110 basis points to 30% and driven by productivity efforts throughout the year and moderating inflation.

Non-GAAP SG&A of $737 million was 1% above the prior year and non-GAAP SG&A as a percentage of sales increased 100 basis points to 23%, reflecting the addition of TDBBS, partially offset by cost discipline across our business in response to lower volumes. Non-GAAP adjustments were $45 million in fiscal '24. Of that total, $28 million related to Cost and Simplicity initiatives.

Within Garden, this included closure and consolidation of 1 manufacturing facility 6 distribution facilities and 1 research facility, all of which will be completed by the end of this calendar year as well as the wind down of our pottery business, which will be completed by the end of calendar '25. Within Pet, this included closure and consolidation of 2 Arden and K&H manufacturing facilities, which were announced in the fourth quarter and will be completed in the second half of fiscal '25.

In addition to the Cost and Simplicity charges, the fourth quarter also includes the impairment of intangible assets related to K&H due to changing market conditions and increased international competition. Lastly, we recognized $4 million in net charges related to the impairment of equity investments in 2 private businesses, partially offset by gain on the settlement of litigation. The $45 million overall charge was mostly noncash, with $16 million included in COGS, cost of goods, $21 million in SG&A and $8 million in other expense. Non-GAAP operating income for the year was $223 million compared to $227 million a year ago, and non-GAAP operating margin expanded to 7% from 6.9%.

Below the line, interest expense -- net interest expense was $38 million compared to $50 million driven by higher interest income. Non-GAAP other income was $2.4 million compared to $1.5 million. Non-GAAP net income was $142 million compared to $138 million and non-GAAP EPS came in at $2.13 above our guidance and above prior year. GAAP EPS was $1.62. Adjusted EBITDA for the year was $334 million compared to $343 million. Our tax rate for the year increased by 80 basis points to 23.2%, primarily due to an increase in the blended state income tax rate.

Now turning to the consolidated financial statements for the fourth quarter. Fourth quarter net sales were $669 million, down 11% versus the prior year. The decline was primarily due to lapping the extra week last year. Organic net sales decreased 13%, excluding the acquisition of TDBBS and the sale of the Garden distribution business. Non-GAAP gross profit for the quarter was $174 million compared to $199 million and non-GAAP gross margin contracted 60 basis points to 26%, primarily driven by impairment of grass seed inventory in our Garden segment, in line with what we signaled in our Q3 call. This charge more than offset benefits we had from moderating inflation and productivity efforts.

Non-GAAP SG&A for the quarter was $186 million, a 1% decrease and as a percentage of net sales was 27.7% compared to 25%. These variances reflect lower volumes and timing of spend related to productivity and commercial initiatives, Non-GAAP adjustments for the quarter were $29 million, reflecting $10 million related to cost and simplicity initiatives, $13 million related to intangible impairments and $4 million related to the equity investment write-down and partially offsetting legal settlement gain. The $29 million overall charge was mostly noncash, with $5 million included in cost of goods, $16 million in SG&A and $8 million in other expense. Non-GAAP operating loss for the quarter was $11 million compared to operating income of $12 million, non-GAAP operating margin contracted to negative 1.7%. Net interest expense was $6 million compared to $8 million, non-GAAP loss for the quarter was $12 million compared to non-GAAP income of $5 million last year.

And non-GAAP loss per share was $0.18 compared to a non-GAAP earnings per share of $0.08 last year, adjusted for the stock dividend earlier this year. GAAP loss per share was $0.51. Adjusted EBITDA for the quarter was $17 million compared to $42 million. Now I'll provide some insights into the fourth quarter of our 2 segments, starting with Pet. Pet net sales decreased 10% to $435 million. Organic net sales decreased 14%, excluding the impact of TDBBS. The decrease was primarily due to lapping an extra week. While durables continue to be soft from a shipment and POS standpoint, consumables POS remain positive and outpaced shipments for the quarter.

Overall, we held market share with gains in e-commerce offsetting slight declines in brick-and-mortar. E-commerce as a percentage of total pet sales reached a record high of 29%, up 4 points over prior year as we continue to improve conversion rates, and drive share growth online. Sales of our branded pet products outperformed our private label sales. Our brands continue to demonstrate resilience with share gains in rawhide, both organic and with the addition of TDBBS. And in dog treats and bird. This more than offset private label declines linked primarily to durable products where demand is soft, and where we have been purposefully rationalizing and in some cases, exiting low-profit SKUs. Non-GAAP operating income for Pet was $35 million versus $48 million a year ago, due to lower volume and timing of spend related to our productivity and commercial initiatives. Non-GAAP operating margin was 8% versus 9.9% a year ago.

Pet segment adjusted EBITDA was $45 million compared to $58 million a year ago. Moving to Garden. In the fourth quarter, Garden net sales were $234 million, down 12% versus a year ago. Organic net sales decreased 11%, excluding the sale of the distribution business, similar to Pet, the decline was primarily due to lapping the extra week. Importantly, after a challenging third quarter, we saw positive POS trends return in the fourth quarter, and split traffic improved in home centers returning to a level above prior year.

Moreover, we saw particularly good performance in grass seed, which posted strong share gains across all retailers and channels. Garden e-commerce sales, which is lesser developed in Pet continue to see double-digit growth as investments we made in new and improved content displays and videos in addition to new items drove higher engagement and conversion rates. Non-GAAP operating loss for Garden was $25 million versus a $5 million loss due to the impairment of grass seed inventory. Non-GAAP operating margin was negative 10.6% compared to negative 2%, Garden segment adjusted EBITDA was a negative $14 million compared to a positive $6 million in the prior year. Let me now address the balance sheet and cash flows. Thanks to our focus on turning inventories into cash. We had a record cash flow year.

Cash provided by operations was at an all-time high of $395 million in fiscal '24, versus $382 million in the prior year. Compared to last year, our inventory at year-end, even with the acquisition of TDBBS was down 10%. CapEx for the year was $43 million, about 20% less than what we invested in the prior year. Depreciation and amortization was $91 million compared to $88 million. During the fourth quarter of fiscal '24, we bought back approximately 270,000 shares for roughly $9 million. Subsequent to fiscal year-end, we purchased approximately 1.7 million additional shares for roughly $52 million through November 21.

Total debt was $1.2 billion, in line with the prior year. We ended the quarter with a gross leverage ratio of 3.1%, also in line with the prior year and within our target range of 3 to 3.5x. We had no borrowings under our $750 million credit facility at the end of the year. Cash and equivalents, including short-term investments, were $754 million at year-end compared to $489 million in the prior year. Coupled with our credit facility, this provides us with ample liquidity for M&A. And given our financial strength, we continue to be on the lookout for high-growth consumables companies with accretive margins to build scale in core categories, inter-adjacent categories and add key capabilities.

Now turning to our fiscal '25 outlook. As Niko mentioned, we are guiding fiscal '25 non-GAAP EPS to be $2.20 or better. This carefully balances the confidence we have in our strategy and our people against the headwinds we see in front of us this year around macroeconomic and geopolitical uncertainties, consumer and customer pressures and volatile weather conditions. As we look to CapEx, we're planning to invest approximately $60 million to $70 million, most of which is either needed for maintenance or productivity initiatives across both our segments. We expect Q1 non-GAAP loss per share to be a loss of $0.05 or better for the quarter. I want to remind you that Q1 is typically one of our smallest quarters and not indicative of the full year. It is even more the case this year, given we have 2 less shipping days at quarter end compared to last year. As always, our outlook for Q1 and the fiscal year excludes any impact from acquisitions, divestitures or restructuring activities that may occur during fiscal '25. This includes projects under the Cost and Simplicity program.

And with that, we'd like to open the line for all your questions.

[Operator]

[Operator Instructions] And our first question comes from Bill Chappell, Truist Securities.

[William Chappell, analyst]

Niko, Brad, congratulations, Niko long, long overdue. But glad that you're in the seat. I guess 2 questions. One, a year ago, we talked about Pet was going to have a tough year. And just -- it was kind of the hangover for from the pandemic? And you thought it would kind of ease as we get to the back half and things would normalize as we moved into '25. So what's of the state today? Are we feeling like hangover is going to last a little bit longer? Do we feel like we've bottomed out and Pet, in particular, is going to start to grow again organically as a category or as multiple categories?

[John Hanson, executive]

Bill, this is John. What we told you for '24 largely came true, consumables outperformed durables, but durables continue to have a double-digit decline. Even in Q4, the category was down double digits. I think teens right low double digits. And we actually were down a little bit more than that because we have been continuing to skew at low-margin unprofitable SKUs. If you look at Q4, our consumable business was up on POS, right? We think that is more indicative of how we view the business going forward. But the category still is getting pulled down by durables. The other thing, and we mentioned this in the last quarter a bit. On the durable side, consumers are buying product directly out of Asia.

And there's e-commerce businesses like a Temu, as an example, that get around the de minimis tariff. And we're -- we don't have visibility into what that data looks like. But it's something we're staying on top of and we're managing appropriately going forward. But as we look at the category, next year, we see consumables growing low to mid-single digits, and we see our durable business in the durable category, continuing to decline roughly mid-single digits, I'd call it. Does that help?

[William Chappell, analyst]

That helps. Can you remind us the percentage of sales is durables versus consumable?

[John Hanson, executive]

Yes. For the category, it's roughly 75%, 25%. For us, we're over 80% consumable.

[William Chappell, analyst]

Got it. Second question, just as we look into '25, are you assuming or are you planning on price increases for both Pet and Garden?

[Nicholas Lahanas, executive]

Bill, pricing next year will be very, very tough. In our plan, we're actually net negative on price because it's going to be very much -- everyone knows that the commodities have moderated. So pricing will be very difficult to come by. That's going to be one of the headwinds going into the year. It makes our Cost and Simplicity program that much more important so that we can maintain margin as opposed to just taking it on the chin on the top line. So pricing will be really hard to come by, I think, in both segments given what's going on out there in terms of the commodities as well as the consumer being very value-driven right now as well.

[Operator]

Our next question comes from Brad Thomas, KeyBanc Capital Markets.

[Bradley Thomas, analyst]

Niko and Brad, congratulations. I wanted to start off asking about the Garden segment and J.D. I was hoping you could give us an update on how some of the conversations are going as you think about the spring sell-in and the amount of shelf space that you're going to have particularly -- and particularly how you're thinking about the live goods opportunity after such a poor spring that we had last year for the industry?

[J. Walker, executive]

Brad, thanks for the question. I think we feel cautiously optimistic when we look forward to the spring. We are now in negotiations with our customers for a lot of the promotional support. We already know our listings for next year. And I'd say from a branded standpoint, we're in very good shape heading into the year. The customers are signaling that they will load the stores early. As Niko mentioned, in the script, we have a couple of shipping days less at the end of the quarter.

So at the end of Q1, we shipped an awful lot of the initial shipments for store sets at the beginning of the season. So if it doesn't ship at the end of December, it will trickle into January. But they are signaling that they're going to take an aggressive approach to loading the stores and getting ready for the season. With regard to live goods, I'd say we're also cautiously optimistic. I think we've taken some key steps here to, one, take cost out of our own internal network.

And secondly, take some steps to limit the downside risk to that category for us. Now we had an awful Q3 in live goods last year, and it was mainly weather driven. So weather can still have a negative impact on us next year. It's hard to imagine the weather would be worse than it was this past year when it rains 6 of the 8 weekends that were key to our season. And we came out of that in Q3 and went into the hottest summer on record. So having said that, we're seeing some very encouraging signs with regard to consumption in the live goods category. Going into our Q4 and into Q1 of our fiscal year '25. So I'd say the word here is cautiously optimistic for both the live goods and across the entire Garden segment.

[Bradley Thomas, analyst]

That's really helpful, J.D. And Niko, maybe if I could ask you a question just around both tariffs and acquisition, maybe I bucket is, as you think about the current administration that's coming in here and some of their policies. I guess from one on the tariff front, can you remind us your exposure to China? And if there's anything unusual about the playbook that you would run with tariffs and then just, again, as we think about this administration and the backdrop, does that change at all, do you think the opportunity for acquisitions on the horizon?

[Nicholas Lahanas, executive]

Sure. So tariffs for one of sort of the keys that we looked at as we put together our plans for '25. And we're looking at potentially 60% coming in from China and then 20% coming in from other regions. So it will have an impact if all of those things happen, hard to tell right now, whether it's a lot of saber rattling or what's going to play out an update on our exposure to tariffs, specifically China. I know in the past, we've talked about 8% of our cost of goods. With the decrease, so the silver lining with the decrease in durables that we're below 5% now coming in from China. So much less exposure. And again, if there was a silver lining, that's pretty much it.

As far as part 2 of your question, I think it's a really important one because if you look at where we are and how we're strategically positioned for the future, we really operate in 2 great categories, but with the elections behind us, we're really entering a new phase, one that could bring reduced regulatory pressures, increased M&A activity and heightened deal opportunities in '25.

So how are we preparing to leverage these favorable conditions, we're really -- we're ready not only to navigate these changes but also poised to capitalize on them, given our exceptional liquidity position on our balance sheet. So it's the best insurance policy that I can think of, we can think of ensuring that we stay ahead in an evolving landscape.

[Operator]

And our next question comes from Jim Chartier, Monness, Crespi, Hardt.

[James Chartier, analyst]

Congratulations to Niko and Brad as well. It sounds like the Pet business is going to be up a little bit next year. Just kind of help us understand kind of the overall sales guidance for the company in the Garden business in particular?

[Nicholas Lahanas, executive]

Yes. We typically don't guide on the top line. But overall, I would say that we're pretty cautious going into the year. it's not going to be a year of exceptional growth. I think that any growth we get, we're really going to have to fight for. And so I think that's going to be -- it's going to be a real challenge. And -- the other thing I would add too is we also walked away from some business on the Pet side. So there's some low-margin durable business that really didn't meet our margin standards, if you will, for the company as we're very, very margin focused right now. So we ended up walking away from some low-margin business, which creates a little bit of a hole that we have to dig our way out of, but we think that we've got a good shot at that.

[John Hanson, executive]

And just on that a little bit, on the durable side, I said our expectation that it will be declining as a category kind of mid-single digits. We're going to lose share in durables next year. We'll be down more because of the SKU rationalization.

[Nicholas Lahanas, executive]

Well, and the other thing, too, is what's really the big catalyst on the pet side is household penetration. And so we saw a bit of a pullback after we saw this incredible growth rate during the pandemic where everyone is buying a puppy. And we've seen a bit of a pullback in terms of the penetration. The good news is we've got a much younger cohort in the category in terms of millennials and Gen Zs, but the older generation whose pets are passing are not re-upping. And so they're engaging in more travel and experiential things as opposed to going back and buying another dog. So until that starts to turn around, we're sort of stuck in the category being a bit -- and I'm talking mainly dog here. Cat has actually done better. We're a bit stuck because as everybody knows, it's the durables that follow the the live animal sales. And in our world, we view the live animal sales at durables as well. And that's really dock, which sort of drives the bus here. Cat has done better. We feel that's -- one of the reasons for that is the return to office and cats tend to be a little bit more independent and folks have continued to purchase cats. So that area has done better.

[James Chartier, analyst]

Okay. And then I think last quarter, you said the grass seed write-down would be, I don't know, $15 million to $20 million. Just where exactly did that come in?

[Nicholas Lahanas, executive]

Came in that range. Unfortunately, we were pretty accurate.

[James Chartier, analyst]

And where is the $20 million or?

[Nicholas Lahanas, executive]

No, it was on the high end of the range. It was $19 million.

[James Chartier, analyst]

Okay. And then you mentioned tough to take pricing next year. What does your cost outlook look like for next year before the benefit of your cost simplicity initiative?

[Nicholas Lahanas, executive]

I mean our cost outlook is good. We've done a great job over the years taking cost out. We're going to continue to do that. We're becoming better at manufacturing. The real question will be what does the promotional environment look like in the marketplace? Are we going to have to promote more discount more. Those things still have to play out. But I will tell you that we're doing everything we can on our end to become a more efficient, better organization.

[Operator]

And our next question comes from Bob Labick, CJS Securities.

[Bob Labick, analyst]

We'd like to offer our congratulations to Niko and Brad as well. I guess we talked a little bit about revenue headwinds so far. You've said pricing, walking from some lower-margin business, the consumer, et cetera. I was hoping you could kind of give us a sense of any other revenue headwinds going here? And then certainly, any tailwinds you see that we should be thinking about for fiscal '25?

[Nicholas Lahanas, executive]

Yes. I mean, we also had -- we lost a little bit of business on the Garden side in our vendor partner area. It's not going to be the highest margin business but it does create a little bit of a gap on the top line. I would say tailwinds sort of what I outlined. We are taking a very consumer-centric approach delivering exceptional value to customers and consumers through tailored promotions. We're going to innovate and also up our game digitally. So those are areas that we think we can grow. And then underpinning all of that is our continued efforts around cost and simplicity, optimizing the supply chain, inventory management, these are all going to help us mitigate impact on tariffs and weather-related disruptions.

So just becoming a better, more efficient organization. And again, investing in e-commerce because we think that can offset some of the challenges that we're seeing in brick-and-mortar right now. and then really adapting to changing consumer behavior. So really becoming a more agile organization.

[Bob Labick, analyst]

Okay. Great. And then as it relates to Cost and Simplicity, how would you characterize how much you've accomplished to date and what remains as opportunities ahead in terms of -- I don't know how much you'll quantify this, the impact you could have on fiscal '25, the benefits and then future benefits over the next several years?

[Nicholas Lahanas, executive]

Yes. Again, we're staying away from quantifying it, giving a big cost envelope and then giving a timetable to hit those numbers because invariably, we'd be wrong about all of that. What I would tell you is we've made a tremendous amount of progress. We closed 11 facilities in '24, and we're really consolidating facilities and taking cost out we're consolidating businesses. If you look at what we did on the pet side with pet bedding, our cushion business and K&H. So, you're seeing us form these platforms around efficiency and really aligning for scale. We have a ways to go. We're going to be doing more of it in '25 and into the future. And I think also when you look at a company like ours where we really grow through acquisition and we have a big M&A agenda that the work is never really done. So you're continuously looking to integrate, take costs out, become more efficient and the bigger and better our platforms are, the more synergies we can bring to the table when we do acquisitions.

So we feel like it really sets us up and makes us an even better acquirer going forward once we engage in M&A.

[Operator]

Our next question comes from Brian McNamara, Canaccord Genuity.

[Brian McNamara, analyst]

Of course, our congratulations to Niko and Brad on the promotions. A couple of months ago, a CFO at one of your Pet specialty retail customers offered an expectation that the Pet industry should return to mid-single-digit growth in the "not-too-distant future." I'm curious what your take is there and what's kind of required to get the category growing again. Are pets just too expensive in the current macro environment?

[Nicholas Lahanas, executive]

Oh, God, that's a lot, I think I would go back to what I stated earlier, which is it really starts with the live animal. And until we get folks out there buying more live animals, we're going to see sort of the pet category kind of flatlined. I think you're seeing a lot of other things that work here. There's a lot of premiumization going on, particularly in food and treats. But to get to real unit growth, we need to improve the household penetration of the Pets themselves. So in our view, that's really the rate limiting factor. In some categories, we're below pre-pandemic levels right now.

[Brian McNamara, analyst]

That's helpful. And maybe 1 for J.D. Obviously, our last 3 years of weather haven't clearly helped the Garden business. Can you remind us what is ideal weather for your important Garden product lines as you and your public competitors have very exposures. And are there any efforts being made to kind of diversify or mitigate this weather risk?

[J. Walker, executive]

Yes, great question. I think if you look at our portfolio, we actually do have 1 business that is a little bit counter seasonal to the typical lawn and garden business, and that is our wild bird feed business. So winter months, winter storms, things like that, we tend to see a spike in our business, and it's a nice offset to the rest of our traditional lawn and Garden portfolio. But ideally, we'd like to see, unlike the harsh summers that we've seen in the last couple of years and late-breaking spring. We'd like to see warm temperatures, moderate temperatures with precipitation. Ideally, I tell people, ideally, it would be great if it would rain on Wednesdays and every weekend was sunny and beautiful. So that would be ideal for weather. We just haven't seen that in a few years.

[Operator]

Our next question comes from Shovana Chowdhury, JPMorgan.

[Shovana Chowdhury, analyst]

Congrats to both Niko and Brad, I wanted to ask 2 questions, if I may. You spoke about how e-commerce has been growing for both the segments, and it has more or less offset or partially after some of the pressures you may be seeing in brick and mortar. And so you said you may be upping your game digitally next year to help with the top line growth. Can you give -- can you like elaborate more on what are some of the steps you're taking and also, if I may, I'd like to ask about consumers who are attracted to more promotions, understandably, given the current metro environment and called out the cheap Asian e-commerce such as Temu. Can you give us more color on this and the level of promotions you're seeing versus prepandemic levels? And also a sense of how your market share is impacted as a result?

[Nicholas Lahanas, executive]

Sure, I'll start with the e-comm question. We we've made a lot of really great progress in e-com. We've hired some tremendously talented people. If you look at -- we have to have an orientation that looks at the business from an omnichannel standpoint. And a lot of customers, they want that. That's what they're doing. So it's really kind of a symbiotic relationship between online and off-line. It's going to all oversimplify it, but it really just starts with content is the first step and really having an A+ content for your A SKUs and getting that out there. And then the other part is really inventory management, making sure that the product is available to ship. So it may sound a little bit oversimplistic, but it really starts with blocking and tackling.

Then there's other things we can do in terms of search engine optimization, improving conversion rates, we have an extensive program where we go out. We test things if they fail, we fail fast and then take a different angle in terms of trying to drive the customer to the site and really increase that conversion rate and the return on on those ad spends. And we constantly monitor that. And I think there's been a lot of progress there. The other part too is having your own fulfillment capabilities, and that's something that we are distributing across the company.

Back in '21, we bought DMO. They had an incredible fulfillment capability, where we're taking their software and their business process and really distributing it across the country. So that we're in a position where we have that flexibility to either ship to an e-comm, e-tailer or do a 3P situation where we are fulfilling it ourselves in the most efficient way possible. So it's it's digital from a marketing standpoint, it's also very much having logistical capabilities as well.

[John Hanson, executive]

Yes. And the only thing I'd add on the Pet side, Niko mentioned, we built a ton of capability here and that's people, that systems, that's processes it's the DMO capability that Niko mentioned. This year, 29% of our business was e-comm, that's up 4 points, we've grown share year-on-year, I think, for 3 or 4 years in e-comm. So we've got a good playbook and we want to continue to enhance that playbook. Some of it is having the right pack sizes as well to hit the key price points that we need. But the fulfillment piece is going to be really important as we go forward, and that's going to be help as an enabler to continue that growth and continue to lean into that channel.

[Shovana Chowdhury, analyst]

And the other question was on the promotional level you're seeing versus pre-pandemic levels and what you do and how has your market share being impacted if it has?

[Nicholas Lahanas, executive]

Well, I mean, it's J.D., you want to take it?

[J. Walker, executive]

Well, I was just going to speak for Garden. The planning of the promotional calendar is not -- they're only a few months out, so they are not beyond early spring at this point in time. We're anticipating a much more promotional marketplace this coming year, but we don't know a lot of the details yet. So we are in the bidding process to land some of those promotions, and we'll bid aggressively, but we expect it to be a very competitive marketplace.

[Nicholas Lahanas, executive]

Yes. I just think overall growth, again, I said it earlier, is going to be harder to come by because of the deflationary environment that we're in. And so it's going to become very, very competitive, we think, in '25 from a promotional standpoint.

[Operator]

Our next question comes from William Reuter, Bank of America. Correction. That is Carla Casella, JPMorgan.

[Carla Casella, analyst]

Can you hear me?

[Nicholas Lahanas, executive]

Yes, barely.

[Carla Casella, analyst]

All right. I'm having problem with my connection. Can you hear me?

[Nicholas Lahanas, executive]

That's better.

[Carla Casella, analyst]

Okay. Sorry about that. A couple of questions here. One, you talked about the M&A environment taking -- changing for 2025 and totally agree with you there. Can you give us some guidepost of how high you'd be comfortable taking leverage or kind of where your comfort zone on is in terms of leverage if you find the right transaction or transactions?

[Nicholas Lahanas, executive]

Yes. We'd be willing to go over 4x leverage. We need to have a direct line of sight to get it back to our 3, 3.5, but we'd be willing to lean into something over 4.

[Carla Casella, analyst]

Okay. Great. And then on the tariff front, looking back at '18, '19, what were the best mitigant or the -- how could you mitigate the tariffs? And does this change as you look at the potential this go around?

[Nicholas Lahanas, executive]

I think it does to some extent because I don't believe the tariffs were -- let's just talk to China for a second. I don't think they were 60% last time. They were a little bit lower -- there are several ways you can look at it. We looked at in-sourcing. We'll look at sourcing from different countries that either have no tariff or a much lower tariff and then if we can't move the product, then we work with those vendors on taking cost out and just getting it to a point where you can be competitive. Those are really kind of the 3 options. Those are the things we did last time and I think we'll be doing it again if we're putting that position. Fortunately, our exposure is lower, though. So that plays a pretty big role for us.

[Carla Casella, analyst]

Great. And then just one more on the cost simplification program. How much are you outsource versus in-source today? And where are you in that process? How many -- what inning are you in, in terms of further opportunities there?

[Nicholas Lahanas, executive]

Good question. I would probably put a maybe midway kind of fourth, fifth inning right now. We made a lot of progress this last year. I think '25 is going to be another pretty big year for us as well. But really, things are progressing quite nicely. Like I said, we took out 11 facilities in '24. And with minimal to no business disruption. So I'll just take a quick opportunity to call out the teams that have done that work. I just amazing that there was no business disruption there really performing with excellence. So we're getting quite good at it.

[Operator]

And our next question comes from William Reuter, Bank of America.

[William Reuter, analyst]

So you clearly have a ton of cash on the balance sheet you mentioned that your outlook is still that the Pet industry is going to be down. I think you said mid-single digits this year. Are valuations in for acquisitions coming down commensurate for the outlook, which is more subdued than I think most industry participants expected 12 or 18 months ago?

[Nicholas Lahanas, executive]

On the Pet side, we haven't seen much. We've seen a lot of durable businesses out there, but not a whole lot of consumables. I know the expectation is still pretty high on the Pet side in terms of multiples. But all my great ranking relationships assure me that there's going to be immense deal flow in '25. So we'll have lots to choose from. So I'm being a little cheeky, but the election being over I think that there is a lot of optimism going into '25 that deal flow will pick up in the midst of a more favorable regulatory environment and really just a lot of pent-up demand. If you look at the level of transactions, IPOs, you name it, has been fairly anemic the last year or 2. So we believe that there's a lot of pent-up demand, both from a supply and demand standpoint.

So we're looking forward seeing more deals. And frankly, I can't think of being better positioned than we are right now to take advantage of that.

[William Reuter, analyst]

Okay. And then just one follow-up. In terms of M&A targets, you mentioned consumables and you mentioned Pet, would you consider targets that are either on the durable side and Pet? Or would you consider additional M&A in the Garden side of the business? That's it.

[Nicholas Lahanas, executive]

Depends on the deal. I think the durable side is, believe it or not, a little harder for us to wrap our heads around right now given what's going on. But if an attractive deal came across in Garden that we think had legs, we would look at it. I think it's going to be very deal specific and where we see value. So I'll never say no. But I think the durable is a longer put, the durable piece.

[Brad Smith, executive]

This is Brad. One thing I would add is strategically, I think we want to avoid any further exposure to seasonality in our business. So that's a key driver as well in what we look at.

[Operator]

And our last question comes from Hale Holden, Barclays.

[Mary Neale, analyst]

This is Mary Ann Neale on for Hale. Just on the back of Carla and Bill's questions. Could you speak a little bit to what inning you might be in your M&A pipeline in terms of pursuing a transaction, please?

[Nicholas Lahanas, executive]

Yes. We -- M&A is really an uncertain business. So we're a little reluctant to to give color in terms of what inning we're in. What I can tell you is things have picked up a little bit. We're in a few processes right now. but that's pretty much all I can share because there's no guarantee we win those or what the outcome is there. There's a lot of uncertainty in those as everybody knows. So -- just know that things have picked up a little bit, and we are out there looking at stuff.

[Operator]

And with there are no further questions at this time. I would like to turn the floor back to Friederike Edelmann for closing remarks.

[Friederike Edelmann, executive]

Thank you for attending our earnings call today and have a wonderful Thanksgiving. If you have further questions, please reach out to me and other wise. Enjoy the rest of the day.

[Operator]

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.