Central Garden & Pet : Annual Report

We are Central to home

2022

Annual Report

O U R M I S S I O N

Lead the future of the

Garden and Pet industries...

one blade of grass and

one wagging tai at a time

L E A D I N G P O S I T I O N S

Lawn & Garden			Pet Supplies
#2Consumables		#2
	(ex. Dog & Cat Food, Cat Litter)

G R E A T B R A N D S

S O L I D F I N A N C I A L R E S U LT S I N A C H A L L E N G I N G E N V I R O N M E N T

Net

Sales

$3.3

+1%

Gross

Margin

29.7%

+30 bps

Operating

Income

$260

+2%

EPS

$2.80

+2%

DEAR SHAREHOLDERS,

Our success at Central Garden & Pet is the result of every employee's commitment to win together. We also benefit from an amazing ecosystem of stakeholders including our consumers, customers, suppliers and shareholders. I thank all of you for your continued confidence in Central; this is a responsibility and privilege that I am honored to carry.

FISCAL 2022 PERFORMANCE

Thanks to the hard work and dedication of Team Central, we delivered a year of solid financial results in a very challenging operating environment. Headwinds included poor weather during the peak garden season, high inflation across key commodities, freight and labor, evolving consumer behavior, and unfavorable retailer inventory dynamics. Despite these headwinds, we grew net sales, gross margin, operating income, and earnings per share versus prior year, and we exceeded the revised guidance we provided in June.

Our business momentum in the Pet segment slowed due to a number of factors, including the deceleration of pet adoptions, high inflation impacting consumer behavior, a shift of consumer purchases from durable to consumable products, and retailers reducing inventory. As a result of these headwinds, along with SKU rationalization and the purposeful exit of select, low-profit private label product lines, Pet net sales declined by 1%. Excluding the SKU rationalization and private label impact, Pet net sales would have grown versus prior year. From a competitive perspective, we are pleased with our market share performance, with share gains in Small Animal, Equine and Dog Treats.

Our Garden business faced poor weather during the peak season along with increasing economic uncertainty, which resulted in consumer foot traffic declines and excess inventory concerns at our retailers, affecting our product sell-in in the second half of the year. Total Garden net sales increased 4% versus prior year driven by our 2021 acquisitions. While we saw a 7% decline in organic net sales due to the headwinds, our consumption outperformed net sales, indicating that consumers are still engaged in the category and continue to rely on our brands. And we grew share in two key categories: Wild Bird and Grass Seed.

PROGRESS ON OUR CENTRAL TO HOME STRATEGY

In the last 12 months, we continued to make meaningful progress on our Central to Home strategy, which is focused on building capabilities across five strategic pillars to fortify our competitive advantage over the long term.

Consumer

Thanks to the addition of great talent and the efforts of our team, we have significantly advanced our consumer agenda and growth capabilities, including building distinctive brands, creating disruptive innovation, and driving digital marketing excellence. For example, we saw promising early marketing campaign results driving accelerated growth and share gains across several brands both in Pet and in Garden.

Customer

Our efforts to strengthen talent, capabilities and investment in the critical high growth eCommerce channel are manifesting in market share gains and strong sales growth. Our Pet eCommerce business grew 10% and now represents 22% of total Pet, thanks to improved eCommerce fill rates and a double-digit increase in digital marketing ROIs. And our Garden eCommerce business grew 9% and now accounts for mid-single digits of total Garden. We grew market share on a large pureplay e-tailer across our portfolio and return on ad spend improved by double digits on both omnichannel and pureplay customers.

Central

We're proud to have launched our inaugural Impact Report. The report is framed around our sustainability strategy and showcases a range of initiatives and their positive impact across our business units. We outlined three key priorities: protecting our planet, cultivating our communities, and empowering our employees, and our goals in 10 key areas ranging from waste, water and biodiversity to philanthropy and employee volunteering to diversity & inclusion and

learning & development. One of the great examples of our team's passionate work to advance sustainability is our Nylabone dog & cat business, which commissioned rooftop solar panels, mitigating hundreds of thousands of pounds of greenhouse gases. And in our outdoor cushions business, we converted millions of pounds of ocean-bound plastics into our Oceantex branded fabrics.

Cost

Given the continued inflationary environment and challenging economic outlook, we're focused even more on our cost reduction agenda to build margins and fuel growth. Since the beginning of the pandemic, we've simplified our portfolio by eliminating thousands of SKUs, shifted some of our wild bird and garden controls production from co- manufacturers to our own plants and invested in automation to drive improved efficiency in many of our businesses including dog & cat treats and toys, aquatics, grass seed and bird feed.

Culture

We believe our employees are part of our organization because they are passionate about the Pet and Garden industries, and they can learn and grow every day as they build a rewarding career at Central. Every member of Team Central and every job is important to our success and helping us to achieve our purpose. Over the course of the past year, we formalized our mentorship program, advanced our diversity & inclusion agenda, enhanced our training & development programs and improved engagement among senior leaders.

LOOKING AHEAD TO FISCAL 2023

Pet and Garden are resilient industries, even in recessionary times, and we remain confident in the fundamental trends that support their growth for years to come.

Given the uncertain economic environment, we are controlling what we can control. We are looking at simplifying our manufacturing network, rationalizing our overall footprint, leveraging our scale, and converting inventories into cash. In addition, we are deliberately pausing hiring and the filling of open salaried positions and are reducing travel expenses. While we focus even more on controlling cost and generating cash in the short term, we continue to invest in our Central to Home strategy, our framework to drive long-term profitable growth.

Our Company remains strong, well-capitalized and well-positioned to grow both organically and through acquisitions in the years ahead. 2023 will be challenging, and yet I'm convinced our team can navigate the short term while building for the long term.

Sincerely,

Tim Cofer

Chief Executive Officer

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________________________________________________

FORM 10-K

• ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 24, 2022

OR

• TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from ________ to ________
  Commission File Number 1-33268

Central Garden & Pet Company

	(Exact name of registrant as specified in its charter)
Delaware		68-0275553
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)
1340 Treat Boulevard, Suite 600, Walnut Creek, California 94597
	(Address of principal executive offices) (Zip Code)
	Telephone Number: [phone]
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock	CENT	The Nasdaq Stock Market LLC
Class A Common Stock	CENTA	The Nasdaq Stock Market LLC
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.	Yes	☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.	Yes	☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer ☐
Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

At March 26, 2022, the aggregate market value of the registrant's Common Stock, Class A Common Stock and Class B Stock held by non-affiliates of the registrant was approximately $438.2 million, $1.7 billion and $86 thousand, respectively.

At November 11, 2022, the number of shares outstanding of the registrant's Common Stock was 11,266,889 and the number of shares outstanding of Class A Common Stock was 41,252,435. In addition, on such date, the registrant had outstanding 1,602,374 shares of its Class B Stock, which are convertible into Common Stock on a share-for-share basis.

DOCUMENTS INCORPORATED BY REFERENCE

Definitive Proxy Statement for the Company's 2023 Annual Meeting of Stockholders - Part III of this Form 10-K

Central Garden & Pet Company

Index to Annual Report on Form 10-K

For the fiscal year ended September 24, 2022

		Page
		PART I
Item 1.	Business	1
Item 1A.	Risk Factors	12
Item 1B.	Unresolved Staff Comments	21
Item 2.	Properties	21
Item 3.	Legal Proceedings	22
Item 4.	Mine Safety Disclosures	22

PART II

Item 5.

Item 6.

Item 7.

Item 7A.

Item 8.

Item 9.

Item 9A.

Item 9B.

Item 9C.

Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity	23
Securities
Selected Financial Data	25
Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Quantitative and Qualitative Disclosure About Market Risk	41
Financial Statements and Supplementary Data	42
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	42
Controls and Procedures	42
Other Information	42
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections	42

PART III

Item 10. Directors, Executive Officers and Corporate Governance	42
Item 11.	Executive Compensation	42
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	42
Item 13. Certain Relationships and Related Transactions, and Director Independence	43
Item 14.	Principal Accountant Fees and Services	43
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	43
Item 16.	Form 10-K Summary	48

i

FORWARD-LOOKING STATEMENTS

This Form 10-K includes "forward-looking statements." Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, projected cost savings, capital expenditures, financing needs, plans or intentions relating to acquisitions, our competitive strengths and weaknesses, our business strategy and the trends we anticipate in the industries and markets in which we operate and other information that is not historical information. When used in this Form 10-K, the words "estimates," "expects," "anticipates," "projects," "plans," "intends," "believes" and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we cannot assure you that our expectations, beliefs and projections will be realized.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-K. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Form 10-K are set forth in this Form 10-K, including the factors described in the section entitled "Item 1A - Risk Factors." If any of these risks or uncertainties materializes, or if any of our underlying assumptions are incorrect, our actual results may differ significantly from the results that we express in or imply by any of our forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances, except as required by law. Presently known risk factors include, but are not limited to, the following factors:

• high inflation, a potential recession and other adverse macro-economic conditions;
• fluctuations in market prices for seeds and grains and other raw materials;
• our inability to pass through cost increases in a timely manner;
• fluctuations in energy prices, fuel and related petrochemical costs;
• declines in consumer spending and increased inventory risk during economic downturns;
• our ability to successfully manage the continuing impact of COVID-19 on our business, including but not limited to, the impact on our workforce, operations, fill rates, supply chain, demand for our products and services, and our financial results and condition;
• the potential for future reductions in demand for product categories that benefited from the COVID-19 pandemic, including the potential for reduced orders as retailers work through excess inventory;
• adverse weather conditions;
• the success of our Central to Home strategy;
• risks associated with our acquisition strategy, including our ability to successfully integrate acquisitions and the impact of purchase accounting on our financial results;
• supply chain delays and disruptions resulting in lost sales, reduced fill rates and service levels and delays in expanding capacity and automating processes;
• seasonality and fluctuations in our operating results and cash flow;
• supply shortages in pet birds, small animals and fish;
• dependence on a small number of customers for a significant portion of our business;
• consolidation trends in the retail industry;
• risks associated with new product introductions, including the risk that our new products will not produce sufficient sales to recoup our investment;
• competition in our industries;
• continuing implementation of an enterprise resource planning information technology system;
• potential environmental liabilities;
• risk associated with international sourcing;
• impacts of tariffs or a trade war;
• access to and cost of additional capital;
• potential goodwill or intangible asset impairment;

ii

• our dependence upon our key executives;
• our ability to recruit and retain new members of our management team to support our growing businesses and to hire and retain employees;
• our inability to protect our trademarks and other proprietary rights;
• litigation and product liability claims;
• regulatory issues;
• the impact of product recalls;
• potential costs and risks associated with actual or potential cyber attacks;
• potential dilution from issuance of authorized shares;
• the voting power associated with our Class B stock; and
• the impact of new accounting regulations and the possibility our effective tax rate will increase as a result of future changes in the corporate tax rate or other tax law changes.

MARKET, RANKING AND OTHER DATA

The data included in this Form 10-K regarding markets and ranking, including the size of certain markets and our position and the position of our competitors and products within these markets, are based on both independent industry publications, including The Freedonia Group Lawn Care Consumer Insights, October 2022; 2021 National Gardening Survey; Packaged Facts Home and Garden Pesticides, December 2020; The Freedonia Group Outdoor Living Products, May 2021; Packaged Facts Lawn and Garden Consumables, December 2020; Packaged Facts U.S. Pet Market Outlook, 2022-2023, March 2022; Packaged Facts Pet Market Sizing Spreadsheet, August 2022; Packaged Facts Pet Stores and Pet Specialty Retailing, August 2022; Packaged Facts Durable Dog and Cat Pet Care Products, May 2022; American Pet Products Association (APPA) National Pet Owners Survey 2021-22; IBIS World Industry Report 45391 Pet Stores in the U.S., April 2019; U.S. Census Bureau; and our estimates based on management's knowledge and experience in the markets in which we operate. Our estimates have been based on information provided by customers, suppliers, trade and business organizations and other contacts in the markets in which we operate. While we are not aware of any misstatements regarding our market and ranking data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading "Risk factors" in this Form 10-K. This information may prove to be inaccurate because of the method by which we obtained some of the data for our estimates or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in a survey of market size. As a result, you should be aware that market, ranking and other similar data included herein, and estimates and beliefs based on that data, may not be reliable. We cannot guarantee the accuracy or completeness of such information contained herein.

TRADEMARKS, SERVICE MARKS AND TRADE NAMES

We own or have rights to use trademarks, service marks and trade names in connection with the operation of our business. In addition, our names, logos and website names and addresses are or include our service marks or trademarks. Other trademarks, service marks and trade names appearing in this Form 10-K are the property of their respective owners. Some of the trademarks, service marks and trade names referred to in this Form 10-K may be listed without the ® or ™ symbols, but the absence of such symbols does not indicate whether or not they are registered. We will assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names.

iii

PART I

Item 1. Business

Our Company

Central Garden & Pet Company ("Central") is a market leader in the garden and pet industries in the United States. For over 40 years, Central has proudly nurtured happy and healthy homes by bringing innovative and trusted solutions to consumers and customers. We manage our operations through two reportable segments: Pet and Garden.

Our Pet segment includes dog and cat supplies such as dog treats and chews, toys, pet beds and grooming products, waste management and training pads, pet containment; supplies for aquatics, small animals, reptiles and pet birds including toys, cages and habitats, bedding, food and supplements; products for equine and livestock, animal and household health and insect control products; live fish and small animals as well as outdoor cushions. These products are sold under brands such as Aqueon®, Cadet®, Comfort Zone®, Farnam®, Four Paws®, K&H Pet Products® ("K&H"), Kaytee®, Nylabone® and Zilla®.

Our Garden segment includes lawn and garden consumables such as grass seed, vegetable, flower and herb packet seed; wild bird feed, bird houses and other birding accessories; weed, grass, and other herbicides, insecticide and pesticide products; fertilizers and live plants. These products are sold under brands such as Amdro®, Ferry-Morse®, Pennington® and Sevin®.

The following charts indicate each class of similar products that represented approximately 10% or more of our consolidated net sales and the percentage of net sales represented by each segment in fiscal 2022.

Net Sales by Category

Net Sales by Segment

Wild bird 13%

Other garden	Garden 44%
products 26%

Dog & cat products 16%

	Other pet	Pet 56%
Other
products 23%
manufacturer's
products 22%

Strategy

Our Central to Home strategy reinforces our unique purpose to nurture happy and healthy homes and our ambition to lead the future of the pet and garden industries. Our objective is to grow net sales, operating income and cash flows by developing new products, increasing market share, acquiring businesses and working in partnership with our customers to grow the categories in which we participate. We run our business with a long-term perspective, and we believe the successful delivery of our strategy will enable us to create long-term value for all our stakeholders. To achieve our objective, we plan to capitalize on our competitive strengths and favorable industry trends by executing on five key strategic pillars to drive long-term growth:

Consumer: Build and Grow Brands that Consumers Love

To grow, we are seeking to develop more differentiated new products and reinvest some of our annual cost savings in brand building and demand creation to help us drive sustainable organic growth and build market share. We continuously strive to get a deeper understanding of our consumers, including what products and features they desire and how they make their purchasing decisions. We are investing in consumer insights, data analytics and research and development to achieve our innovation goals with a strong pipeline of new products. We recognize that consumers are increasingly researching, as well as buying products online. Therefore, we are advancing our digital capabilities. One key area is in marketing communication where we are working to better reach consumers at key points in their path to purchase with advanced capabilities in precision marketing, search engine optimization and social listening, to name a few. We are seeing promising early marketing campaign results driving accelerated growth and share gains across several brands, including our Pennington "Smart from The Start" and Kaytee "All for the Small" campaigns.

1

Customer: Win with Winning Customers and Channels

We are building on our strong customer relationships by developing and executing winning category growth strategies. We produce both branded and private label products for our customers as well as distribute third-party brands that give our retail partners a breadth of selection from premium to value products. Recent trends have shown that eCommerce channels, including pure-play, omnichannel and direct-to-consumer, are the preferred solutions for today's convenience-oriented consumers. To address the changing consumer landscape, we are building out our digital and eCommerce capabilities while also ensuring we have the right policies, products and programs to allow all channels to compete effectively. Concurrently, we are optimizing our supply chain for high-demand eCommerce items to ensure customer and consumer availability requirements are met at optimal cost. Finally, we are also investing in sales planning, net revenue management and price pack architecture.

Central: Fortify the Central Portfolio

We are managing each business differentially, based on clearly articulated strategies that define the role of each business within our portfolio. We have assessed the profitability and growth potential of each of our businesses. All businesses have clear roles in the portfolio and a strategy that is consistent with that role. Some of our businesses are managed to optimize top-line growth, whereas others are more focused on reducing costs and maximizing operating income.

We are building out our portfolio in attractive, broadly defined pet and garden markets. We are supplementing our organic growth with acquisitions and joint ventures. Our M&A priorities are to build scale in our core pet and garden categories, enter priority adjacencies and enhance key capabilities, for example in digital and eCommerce. We generally seek growth and margin accretive, brand-focused companies with talented management teams. We are also committed to divesting businesses where we cannot find a path to profitability and have done so in the past, for example the disposal of our dog and cat food business in 2020.

Central Ventures, our venture fund which we established in 2020, further supports our M&A strategy. Our objective is to partner with leading entrepreneurs and innovators in the garden and pet industries and leverage our experience and capabilities to accelerate growth. The fund is primarily focused on three emerging growth areas across the pet and garden industries: sustainability, health and wellness, and digitally connected products and services.

Grounded in our purpose to nurture happy and healthy homes, we are working towards a more sustainable future for all. We believe we have not only the opportunity but also the responsibility to make a difference and drive positive change. Our Central Impact Strategy - focused on protecting our planet, cultivating our communities and empowering our employees - is our commitment and approach to sustainability.

Cost: Reduce Cost to Improve Margins and Fuel Growth

Optimizing our supply chain footprint is a priority as we seek to become more efficient and cost-effective. Having the right facilities in the right locations is critical to lowering costs and enabling our businesses to meet the demands of our existing and new customers. We have already consolidated some of our dog and cat treat and toy businesses and numerous garden manufacturing facilities. We recently combined our outdoor cushion business with our pet bedding business given the synergies in sourcing, manufacturing and innovation. In addition, while we value being a business-unit led company, we believe we have significant opportunities to improve our performance by driving processes and programs that allow us to align for scale and share best practices across our business units. For example, we've simplified our portfolio by eliminating thousands of SKUs, shifted some of our wild bird and garden controls production from co-manufacturers to our own plants and invested in automation in many of our businesses.

Culture: Strengthen Our Entrepreneurial Business-Unit Led Growth Culture

Our values, created by leaders across the Company, are the cornerstone of our culture, and they are at the root of every decision we make - we call them "The Central Way." We believe having a strong set of values provides a foundation for employees and strengthens how we all work together. They comprise six simple values: "We do the right thing." "We strive to be the best." "We are entrepreneurial." "We win together." "We grow every day." and "We are passionate."

We believe our employees work at Central because they love the pet and garden categories and that creates a passionate and effective team. We strive to make Central a great place to work that embraces diversity and inclusion. In fiscal 2020, we implemented a diversity and inclusion council and introduced our diversity and inclusion strategy, which reflects our dedication to making meaningful progress in the areas where we can have the most impact including recruiting, employee education, mentorship and leadership development. Over the course of the past year, we formalized our mentorship program, designed for mid- to senior-level leaders, with a focus on women and people of color who have a desire to build their career and leadership skills. The intent is to develop strong and diverse talent in our future leaders, while fostering cross-level relationships.

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