Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's Fiscal 2024 Third Quarter Earnings Call. My name is Robert, and I will be your conference operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Friederike Edelmann, Vice President, Investor Relations. Please go ahead.

Good afternoon, everyone. Thank you for joining Central's third quarter fiscal 2024 earnings call. With me on the call today are Beth Springer, Interim Chief Executive Officer; Niko Lahanas, Chief Financial Officer; J.D. Walker, President, Garden Consumer Products; and John Hanson, President, Pet Consumer Products. In a moment, Beth will highlight our key messages, and Niko will provide more details about our results. After the prepared remarks, J.D. and John will join us for Q&A. Comments made during this call include forward-looking statements that are subject to risks and uncertainties. Our actual results may differ materially from what we shared today. We've described the range of risks in our SEC filings, including in our annual report on Form 10-K and undertake no obligation to publicly update these forward-looking statements. Our press release and related materials, including the GAAP reconciliation for the non-GAAP measures discussed on this call are available at ir.central.com. All growth comparisons made are against the same period in the prior year, unless indicated otherwise. If you have further questions after the call, please don't hesitate to reach out to me. And with that, I will now turn it over to Beth Springer. Beth?

Thank you, Friederike, and good afternoon, everyone. Let's begin with the three key messages we would like you to take away from this call. First, recognizing we had record earnings in the third quarter of 2023, we delivered solid third quarter 2024 earnings performance in a challenging environment. GAAP EPS was $1.19 and non-GAAP EPS was $1.32. Unfavorable weather negatively impacted our sales of live plants, and continuing softness in durable pet products more than offset our double-digit e-commerce growth across the pet and garden categories. Second, we further expanded gross margin. Our strategy to simplify our business and improve efficiency across our organization continues to bear fruit. Recent cost and simplicity milestones include our decision to exit the underperforming pottery business over the next fiscal year and the closing of a live plants distribution facility. And third, we are maintaining our outlook for the fiscal year. Given the recent significant decrease in market prices for grass seed, we now anticipate a write-down of approximately $15 million to $20 million in our grass seed inventory in the fourth quarter. While we see a path to delivering our outlook, it is worth noting that we also face continued volatile weather, uncertainty about retailer inventory, and the value-seeking consumer. Longer term, we believe the consumer trends in the pet and garden industries remain attractive, and our cost and simplicity program will continue to enable us to improve profitability and generate the fuel to make thoughtful investments in our Central to Home strategy. Finally, I want to thank all 6,700 members of Team Central for their hard work and dedication this quarter. And with that, let me hand it over to Niko, who will share with you more details. Niko?

Thank you, Beth. Good afternoon, everyone. I'll provide more details on our Q3 results, the progress on our cost and simplicity program, and our outlook for the year. Now let's start with our third quarter results. Net sales were $996 million, or 3% below prior year. Organic net sales also declined 3%. Non-GAAP gross profit of $326 million was essentially in line with the prior year. Non-GAAP gross margin improved to 32.7%, driven by cost and simplicity projects, including the benefit from last year's consolidation of our cushion business with dog beds and moderating inflation. Non-GAAP SG&A expense of $199 million was 5% above the prior year and non-GAAP SG&A as a percentage of net sales increased by 140 basis points to 19.9%, mainly due to the TDBBS acquisition and increased expense in corporate, primarily due to higher legal costs. Non-GAAP operating income was $127 million and non-GAAP operating margin contracted by 60 basis points to 12.8%. Net interest expense was $10 million compared to $13 million in the prior year quarter, driven by higher interest income from higher cash balances and higher interest rates. Non-GAAP net income was $88 million compared to $94 million a year ago. We delivered GAAP EPS of $1.19 compared to $1.25 and non-GAAP EPS of $1.32 compared to $1.40. Note that the prior year EPS was adjusted for the February 2024 stock dividend. Adjusted EBITDA was $156 million compared to $166 million. Our effective tax rate was 24%, compared to 24.4% in the prior year quarter due to a larger tax benefit related to stock compensation in the current year quarter. Let me add some details on our two segments, beginning with Pet. Pet segment sales increased 1% to $508 million, driven by the recent TDBBS acquisition, our professional business, dog and cat, and equine. Organic net sales, excluding TDBBS, decreased 2%, primarily due to continuing declines in durable pet products across our categories, in line with softer new pet adoptions and ongoing macroeconomic pressures impacting consumer discretionary spending. Importantly, our POS outperformed shipments. Branded pet products once again outperformed our private label products, demonstrating the strength of our brands, and we expanded market share in flea-and-tick small animal, aquatics, and wild bird. Let me highlight just a few of our recent product and marketing innovations. Our aquatics line, Aqueon, introduced the France first app, BlueIQ for smart and easy aquarium care. Using our Coralife smart LED lights, saltwater and freshwater fish keepers can now control their aquarium lights with the Wi-Fi and Bluetooth-enabled app and will be notified when a light is on too long or it's time for a filter replacement. Our outdoor patio cushion brand, ARDEN, launched its first favorites collection together with Country Music Singer-Songwriter Alexandra Kay, the fade-resistant textiles are eco-friendly, featuring ARDEN's new earth fiber material, a blend of bamboo, viscose, and polyester. And our Equine brand, Farnam, went live with its innovative, everything for the ride campaign, featuring the country music trio, The Castellows, resulting in over 28 million impressions, achieving engagement rates well above benchmarks and driving strong conversion rates. Our e-commerce business outpaced the market, growing high single digits and representing approximately 28% of our pet sales. Leveraging our online capabilities, we improved conversion rates, driving share growth online in several key pet categories. Pet segment operating income improved 39% to $83 million and operating margin expanded by 450 basis points to 16.4%, driven by gross margin expansion. Pet segment adjusted EBITDA was $94 million compared to $84 million a year ago. We expect consumable pet products to continue to grow but sustained pressure on durables through this fiscal year. We anticipate household penetration and buy rates will be fairly stable. Longer term, we expect that consumer trends, including premiumization and humanization, pet health and wellness, and growing share of e-commerce, and a shift to younger generations will support pet industry growth. Switching now to Garden. Garden segment sales were $488 million or 6% below the prior year. Organic net sales declined 4%. Recall that the independent garden channel distribution business we sold last fiscal year represented approximately 5% of our garden sales; this year, the cold and wet weather in April and May, followed by record heat in June, negatively impacted sales across almost all garden categories, particularly the sell-through of our live plants, more than offsetting sales growth in grass seed. Non-GAAP Garden segment operating income was $74 million compared to $88 million a year ago. Non-GAAP Garden segment operating margin declined to 15.1% due to lower sales in live plants, one of our key businesses. Garden segment adjusted EBITDA was $85 million compared to $99 million in the prior year. Household penetration and buy rate have remained essentially in line with the prior year and well above 2019 levels, demonstrating consumers are staying engaged in the garden category. While boomers historically comprise 50% of the category spend, that is beginning to shift to younger cohorts, supporting future growth. However, foot traffic in our largest home center customers was below prior year and the pre-COVID baseline. Our targeted investments in consumer insights, branding, and digital capabilities supported our growth, particularly online. We increased return on ad spend and drove conversion, resulting in share gains and double-digit e-commerce growth across categories and retailers, and e-commerce sales now represent 7% of total Garden sales. Turning now to the balance sheet and cash flows. Our balance sheet remains strong, and our team stayed focused on decreasing inventories, particularly on the garden side, with total inventories now $81 million lower despite the added inventory from TDBBS. Cash and cash equivalents at the end of the third quarter were $570 million, compared to $333 million a year ago. Net cash provided by operations was $286 million for the quarter compared to $325 million. This quarter, we invested $14 million in CapEx, mostly in the maintenance and productivity initiatives in our dog and cat business, small animal, grass, and wild bird. Total debt of $1.2 billion was in line with the prior year. Our gross leverage ratio was 3x at the end of the quarter, compared to 3.1x a year ago. We had no borrowings under our credit facility at the end of the third quarter. Depreciation and amortization for the quarter was $23 million compared to $22 million. We continue to make progress on our journey to reduce cost and simplify our business. The savings generated from strategic projects across procurement, manufacturing, logistics, portfolio optimization, and administrative costs are allowing us to create the capacity to invest and offset sustained cost increases. As part of our ongoing network optimization, we closed the manufacturing facility in California and moved the remaining production of our organic fertilizer called Alaska Fish to our garden manufacturing facility in Missouri. Our next-gen plant science center operates research farms and facilities across the country with a focus on developing new and innovative grass seed and controls products. We recently announced the opening of a new research location in Texas, which will reduce our reliance on third-party testing as well as consolidate our current grass seed breeding farms in Oregon. In line with rightsizing our logistics footprint and simplifying our work processes and fulfillment strategy, we closed the live goods distribution center. The consolidation of four Garden distribution locations across Georgia, Alabama, and Virginia into a new fulfillment center is well underway, and we recently started shipping out of the new Georgia-based facility. We expect the new center to improve in-season on-time service and support future growth in the Southeast region. Optimizing our portfolio and shifting to higher-margin businesses, we started winding down our underperforming pottery business, including taking out the remaining inventory, which was held in seven locations across the country. As a result of our cost and simplicity projects, we incurred $11 million of one-time costs in the quarter, largely related to the pottery exit, including $8.6 million in cost of goods sold and $2.5 million in SG&A, the majority of which was non-cash. Our 6,700 members of Team Central have rallied behind our multi-year cost and simplicity program, and we will continue to provide quarterly updates on our progress. The pipeline of projects to leverage our scale and deploy our capabilities across our two segments remains strong. As in the past, we believe there will be plenty of opportunities to reduce costs ahead of us. And last but not least, turning to our fiscal '24 outlook, we are maintaining our outlook for the fiscal year of non-GAAP EPS of $2 or better despite several challenges. Due to a recent significant decrease in market prices for grass seed, based on our current analysis, we anticipate a write-down of approximately $15 million to $20 million in our grass seed inventory in the fourth quarter. While we are confident in our ability to meet our fiscal goals, we must acknowledge the ongoing risks and uncertainties, including continued volatile weather, uncertainty around retailer inventory levels, and a consumer base that is increasingly focused on value. Additionally, we assume moderating inflation, softer consumption in a number of categories, lower foot traffic in key home center customers, and an environment of macro and geopolitical volatility. Looking ahead, we continue to believe in the competitive strength of Central, our Central to Home strategy, and the positive long-term consumer trends, enabling growth in our two industries. Thanks to our financial position, coupled with the amount available on our credit facility, we remain on the lookout for growth and margin-accretive acquisition targets in pet and garden that can add scale to our businesses, enable us to enter adjacent categories, or add capabilities, for example, in digital and e-commerce. As always, our outlook excludes the impact of any restructuring activities undertaken during the fourth quarter, including any projects under the cost and simplicity program. And with that, let me turn it back to Beth for a final comment. Beth?

Thank you, Niko. I would like to provide an update on CEO succession. As you know, our Board of Directors has been working to identify our next Chief Executive Officer. We have shared on prior calls that we've been pleased with our progress, and we are now in the final stages of our work. We expect to make an announcement soon, which could be as early as the end of our current fiscal year and certainly before our Q4 earnings release. We'd now like to open the line for questions.

Thank you. Our first question comes from Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.

Yes, hi. Good afternoon, a couple of questions, if I could. First, I wanted to start off with the Garden segment, and I know we're coming off of the most important quarter in the year for the segment and so going forward, a little less important seasonally. But I guess just as we reflect on the last few months, I was hoping you could talk a little bit more about the underlying trends versus the impact of weather versus the impact of pricing? And just how you're thinking about the overall health of the category as we look out to next year?

Hi, Brad. It's J.D. Thanks for your question. I'll handle that. First off, this was a challenging quarter, which Niko mentioned earlier. As we entered the quarter, we felt optimistic since most of the season was still ahead of us. We had a solid first half of the year, with our live goods business up 17% during that time. As you know, this business heavily relies on Q3 for consumption, and this is also true across our other businesses. However, our live goods segment was significantly affected in Q3 by unfavorable weather. Niko summarized it well; we faced wet and cold conditions in April and early May, followed by extreme heat in June. Specifically for live goods, we saw a 17% increase in the first half, but in Q3, it dropped by 6%, which is a crucial time for consumption. The month of May, which is peak season for this segment, saw a decline of 13%, and we couldn't recover from that. If products aren't sold during that time, the scrap rates increase. If we look at the business excluding live goods, the underlying metrics were quite healthy, with consumption remaining strong and financials looking solid. Year-over-year comparisons may not look favorable, but that's largely due to one business segment, which is affected by unpredictable weather patterns. Drawing long-term conclusions from this can be challenging. We are focused on improving the fundamentals and remain optimistic about the future. There are many positive aspects to consider. Niko mentioned our cost and simplicity initiatives, and we're making significant progress there. We are optimizing several facilities, improving our operations, and gaining market share in areas like grass and outdoor insecticides, while e-commerce is also seeing strong growth. Household penetration is stabilizing, and younger consumers are entering our categories. So to address your question, we feel good about the overall business dynamics despite one underperforming segment in the quarter that impacted our entire lawn and garden business.

That's very helpful, J.D. Thanks so much. Niko, I was hoping you could talk a little bit about the margin opportunity looking forward as we reflect on this current year with one quarter left; Central has done a very good job of supporting margins in a difficult environment. Could you talk a little bit more about what opportunity you have ahead of you? And maybe in broad strokes, what the puts and takes maybe as you look out to fiscal 2025, again, knowing that you haven't given formal guidance yet, but just so we think about things in broad strokes?

Yes. Sure, Brad. It's going to be more of the same really. We have our cost and simplicity initiatives ahead of us. We've got a nice pipeline of initiatives that we plan on executing well into '25 and beyond. There's also portfolio optimization that you're going to see. This last quarter, we announced the wind down of the pottery business. That business was underperforming both from a top line as well as a margin standpoint. So we're going to be pretty ruthless in terms of looking at the portfolio as well as cost-out projects that we can continue to do. I would say too that just to pile on to what J.D. said, the live goods business was just devastating to Garden and even the company. And you look at margins would have expanded both garden and total company had that business just somewhat underperformed. It, in fact, contracted by 1,200 basis points, which is really tough to overcome. But getting back to your question, yes, we have every intention of continuing this journey on taking cost out, becoming more simple, focusing on higher margin businesses. So I think it's just going to be more of the same. We'll obviously give a lot more color in late November when we lay out our guide and our plans for '25, we're kind of in the middle of putting those together. But I would say more of the same. It's a big push for the company.

And Niko, I'd say that we're still in the early innings of the cost and simplicity initiative, right? And we still have a lot of runway still in front of us.

We really do. We really do. And getting back to that example out in Covington, the warehouse we did there. We took out four warehouses, consolidated them into that. Plus we had some ancillary other sort of surge warehouses that we're able to close down. And then when you do a big project like that, it has a domino effect where it opens up space in other areas too that we can leverage. So a lot more to come there. And I think it's one of the benefits of growing through acquisition where you have a little bit of a longer runway in terms of really integrating and optimizing businesses.

That's great to hear. Thanks so much.

Our next question comes from Bill Chappell with Truist Securities. Please proceed with your question.

Thanks. Good afternoon.

Hi, Bill.

I would like to follow up on the Garden segment and seek clarification regarding the grass seed situation. I believe there has been a write-off, and specifically, I noted Scott mentioned on their call that they gained 700 basis points of market share in lawns, but they plan to implement significant discounts due to an oversupply of grass seed in the fourth quarter. I’m trying to reconcile this with your earlier statement that everything was fine except for live goods. It seems that according to your largest competitor, your grass seed business is struggling significantly. Any clarification on this would be appreciated.

Trounced is a strong term, Bill. I would say they mentioned not to focus too much on the competition. They acknowledged strength in some of their lawn categories, but I didn't hear them highlight any specific strength in grass seed. We believe—and know—that we gained market share in grass seed, which has performed well for us. However, let me explain some market dynamics that have played out over the last few years. We've experienced significant fluctuations in supply and demand. From 2021 to 2024, there was a drought at the beginning of that period that impacted harvests, resulting in low supply heading into the pandemic. During the pandemic, demand for grass seed soared, leading to rapid cost inflation. Our varieties such as turf-type tall Fescue, K31, Bermuda, and Perennial Ryegrass saw remarkable price increases, with some doubling compared to historical levels, which was quite unusual. The increased costs prompted farmers to plant more grass seed acreage. However, in the post-pandemic period, we have observed that higher retail prices have caused consumers to reconsider their purchases, leading to a decline in demand and units, which has worsened the situation. As we see this year's harvest arriving, we are coming off record prices from last year, but the current harvest looks solid. The supply chain is stretched, not just in our facilities but across all manufacturers and retailers, both domestically and internationally. We are observing high inventory levels, which have resulted in a significant drop in prices. This price decrease is relatively new, emerging in the last month or so, and that's what we're responding to.

And we have to take a look at the net realizable value of that inventory, and that's really the driving force behind the write-down.

And I have another question on pet, but just to clarify, like does the grass seed go bad? Or you're just choosing to burn it up to take some supply out of the market?

Our grass seed can go bad over time if it sits too long, the germination rate will drop on grass seed. That's not so much of the case here. What we're doing here is marking to market, right? The market has dropped. So therefore, we have to lower the cost of our inventory.

Got it. I understand. And then on pet, just kind of trying to understand both from the consumable and durable side, like how the category performed versus your expectations this year? And whether you see kind of the light at the end of the tunnel in terms of as we move into '25 kind of returning to a growth category as it's been historically?

Bill, I can comment on that. This is John. I would say durable has been a bit softer than what we had planned as we entered the year. Now keep in mind that 80% of our business is consumables and 20% is durables. And we're growing consumables, I think, mid-single digits, and durables continue to decline, I think, low double digits. So Niko talked about softening pet ownership, macroeconomic environment. We're also seeing low-priced imports coming in via the e-comm channel. We can't really measure that in terms of we don't have good syndicated data, but we know it's having an impact, right? And we're staying really close to it. Long term, we see these categories growing low to mid-single digits, for sure. But short term, this durable headwind, we just got to stay close to it and work our way through it as we've been.

Yes. And I think that's right what John said is spot on. And we're seeing, again, on top of the category somewhat softening because you're seeing adoption rates that are down and also the penetration down, particularly in dog; cat has remained a little more stable. We have seen some low-cost competitors coming in from Asia and really taking some share, both via Amazon, but also some of the other online Asian competitors. And so we have to figure out what that's doing to the category, is the category actually up and just losing share to some of the Asian competitors or is the category still down. But some work to do there. I think what you're going to see in the future is obviously a portfolio that's more skewed towards consumables. And I think that's where we need to be.

Yes. And just to add on that, our e-com business, as Niko said, is very healthy. We gained share. It's 28% of our pet business now. We're going to continue to lean into that channel. That is the fastest-growing channel. And pet specialty remains a bit soft. We're managing through that as well.

Great. Thanks for the color.

Our next question comes from Jim Chartier with Monness, Crespi and Hardt. Please proceed with your question.

Hi. Thanks for taking my question. Excluding the write-down in fourth quarter, can you just talk about some of the other margin dynamics maybe that we should consider?

Certainly. To begin with, on a non-GAAP basis year-to-date through Q3, we were at $2 last year and reached $2.31 this year. We are really pleased with the business and believe we have achieved three solid quarters. We are facing challenges with grass seed that we need to address, particularly regarding the net realizable value of that inventory. It's important for us to handle this properly. Additionally, as J.D. noted, we encountered a very difficult year in live goods, which has impacted us. However, reflecting on Q3, our Garden sales increased by double digits, particularly our grass seed sales. Overall, we had a strong quarter in grass. Furthermore, our margins continue to expand, driven primarily by our cost and simplicity program and moderating inflation, both of which are positively impacting our margin growth.

Okay. And then you talked about some new innovations coming to market and then some marketing. I guess how do you feel about kind of the innovation pipeline coming into next year? And how are you thinking about advertising spend? And what are you doing to kind of drive the business?

I mean, I'll give some overarching comments, and I'll kick it over to J.D. and John. I think you can never have enough innovation and great ideas. So that's an area where we feel like we can really improve and there is an effort to improve on that to bring new fresh ideas to the market. It's great for the consumer and great for the retailer. We're pretty pleased with where we are, but we feel like we can do a lot better. And I think on top of that, not only do we want those to come organically, but they're going to come through M&A as well by bringing new DNA into the company, new thought partners, fresh ideas. So those are the areas that we really want to go after. And then we want to go after areas where we have a right to win. So as we mentioned earlier, we really want to be in consumables on the pet side. On the garden side, we want to also be in consumables; we're divesting pottery. So I think we can get better. We've got a long ways to go, but I think we've made some really nice progress. And I'll kick it over to John and J.D. to give any details.

Yes. Just to jump in on pet, Niko hit the nail on the head, right? Our focus really is pet consumables. We continue to build our capability and innovation and insights. I think you can never have enough, but our pipeline certainly hasn't improved, and we feel good about it as we head into fiscal '25. On the marketing side, we've really pivoted to digital. And the investment behind that, the capability that we've built behind that is really improved. And I think you see it showing up in our market shares on e-comm, and we'll continue to do that.

Yes. And then similar story on the garden side as well, Jim. We feel good about the innovation pipeline. It's building nicely. We've made nice progress over the last couple of years. We still have a ways to go. We're in the process right now of landing our 2025 listings with our customers, finalizing line review results from the past several months, and we feel good about where we are. I think we'll see nice growth in our branded portfolio for next year. I don't want to show too many of my cards right now, but I do think that we'll see SKU store combinations, total distribution points grow for next year. So we're encouraged by that. And I think that speaks to a building innovation pipeline. Similar to John, our marketing tactics will be focused more on lower funnel type conversion tactics. And I think that that's appropriate to this type of a business environment where the consumer is seeking value.

Great. Thank you.

Our next question is from Bob Labick with CJS Securities. Please proceed with your question.

This is Will on for Bob. Maybe you can add some color to the components necessary for a return to revenue for Garden going forward?

Will, can you give me a little more color on that question?

Can you discuss the components needed for a return to revenue for Garden in the future? I understand you're addressing the innovation pipeline, and perhaps you can elaborate on that.

I think it largely reflects what I just mentioned. Some of it involves new distribution, which we are currently working on and finalizing line review results. I expect to see significant improvements in distribution. Naturally, in a seasonal business, weather plays a crucial role, but it's hard to plan around. Therefore, we focus on the controllable factors such as distribution, our investment in lower funnel marketing activities, and execution at retail. We are confident about all of these elements. Additionally, we need favorable weather conditions. If we receive that next year, I believe this business will return to a strong revenue profile.

We actually came out with some new packaging this year in our controls business that was extremely successful, both online and in brick-and-mortar. And then the other thing I would add to J.D.'s point as far as controls go, the weather actually has cooperated; it's hot and wet, which brings all the bugs out. And so we've had a very nice control year so far. And largely, in many ways, driven by the packaging as well as very good weather for bugs.

All right, great. Thank you.

Our next question comes from Brian McNamara with Canaccord Genuity. Please proceed with your question.

Hi. Good afternoon. Thank you for addressing our questions. Most of them have been answered, but I would like some additional clarity on the pet durables. Last quarter, you mentioned they were still in double digits but had improved sequentially. You indicated that they were down in the low double digits this time. I assume that's further improvement. It just feels like this has been a prolonged situation.

Yes. It has been a long, you're right. I would agree with that. As Niko said, softening pet ownership, the macroeconomic headwinds, and products coming in from imports coming in from Asia via e-comm. That last one has really gotten on our radar over this last quarter, and we're trying to really quantify the impact relative to the category in our business. The category still remains soft. I wouldn't call it an improvement from quarter-to-quarter. I'd probably call it kind of a stabilization from quarter-to-quarter. And we're just going to stay really close to it, manage it appropriately. But yes, it's been a long burn here for sure.

And there's also more commoditization going on with durables. They become brands less important for the most part, and there's a lot of commoditization going on and a little bit of a race to the bottom. So it's not something that we're eager to participate in, which, again, is why we're going to probably focus on more consumables, where we can build brand and really connect with our customers and consumers.

Yes. To expand on that, we have an 80-20 ratio of consumable to durable products, and Niko is correct that many durable categories are primarily private label. These categories have been or are becoming somewhat commoditized.

All right. Great. We've heard many consumer companies discuss a weakening consumer landscape, with several indicating that July has been particularly weak. I’m interested in hearing what your observations are regarding this. Additionally, how does this relate to the challenges we are witnessing in pet ownership from a cyclical perspective? While we still see trends like humanization supporting the market, it seems that some traditional structural trends are diminishing. How should we approach the potential for a weakening macro environment?

Yes. I mean I would say that we are seeing value-seeking behavior by the consumer. We see that in our business. The good news is, in many of our categories, we have good, better, best. So we will see the consumer just buying good as opposed to the more premium product that we have in the category. So we are somewhat covered off there, which is great. On the pet side, our largest customer is Costco, which I would submit is a real big value play. People go there for value. That's why the pack sizes are bigger. We do very well there. And so I think in many ways, we sort of hit the sweet spot of that value-seeking behavior, but we also need to get better and recognize that, that's an ongoing trend. I would say, overall, what we're seeing on the pet side is really the boomers are kind of a wildcard. You're seeing some of their pets as they pass away; they're not re-upping with new pets. And I think that's been probably the biggest area of weakness. On the positive side, we're seeing Gen Z and millennials really get into the category as well as on the garden side; we're seeing a younger cohort come into these hobbies and categories. So that bodes well for the future. I think we were going through a little bit of a rough patch, and it should sort itself out soon, and we can get more back into a more normalized sort of growth type of trajectory.

Great. Thanks.

Our next question is from Shovana Chowdhury with JPMorgan. Please proceed with your question.

Hi. Thank you for taking my question. I have a couple of inquiries. With approximately $570 million in cash on your balance sheet, can you provide more insights into the market regarding mergers and acquisitions? Additionally, I believe you mentioned exploring M&A opportunities in digital and e-commerce. Could you elaborate on that?

Sure. We are very proud of our cash balance, which positions us as a strong buyer. We can move quickly to close deals because of our cash resources. Currently, we are focused on the garden and pet categories, with a preference for pet considering our four garden acquisitions in 2021 and the importance of pet consumables. The current environment for mergers and acquisitions is somewhat slower. Many businesses acquired by sponsors have been hesitant to sell due to previously high purchase multiples, which have since decreased. Consequently, they are adopting a wait-and-see approach. As a result, there are fewer deals available compared to two or three years ago. Our primary use of cash will be for M&A, with secondary investments in the business, particularly in digital capabilities. We are also interested in digital and e-commerce acquisitions because it is the fastest-growing channel in both the pet and garden sectors, and we recognize the need to enhance our performance in these areas for future success.

I have a quick question. You mentioned that in the pets category, the point of sale outperformed shipments. Does this indicate any pressure on retailer inventory, or is the inventory in a good state as we exit the quarter? Can you provide more details?

Yes, this is John. I can address that. Our pet retail inventory has been well-positioned throughout the year. However, it is important to note that there is an industry-wide focus on tightening inventory. Therefore, we might see some customers being more successful and implementing new programs related to this. We also intend to tighten our inventory. Overall, I believe our inventory situation is strong. There are quarterly fluctuations that we are observing, which could be what we're seeing currently. Nonetheless, we are pleased that point of sale is outperforming shipments.

On the pet side, we don't have a lot of overhang in the market right now at retail. We feel really good about our inventories.

On the garden side, we ended the quarter with inventories up in the mid-single digits. However, this is an overall view. When looking at it by category, I mentioned earlier that our grass inventory, along with that of most companies, is on the high side, leading to some variability. Despite this, overall, we are in a solid position. With the fall season still ahead of us, we should be able to reduce some of that inventory and be well-prepared for the next year's season.

One last question, if I may. Given that, if I'm not mistaken, this is the third year in a row that you have had bad luck with weather, and of course, it's uncontrollable. So given that the Garden segment, fiscal third quarter is the biggest business for live plants. Are you thinking of any other businesses or anything else you might be looking into, to somehow offset, let's say, the live business in future fiscal years should there be another bad luck with weather?

Yes. We are always looking at that. In fact, that's why when I spoke a little bit earlier about M&A, we were probably a little more biased on the pet side, because that has much less seasonality to it and can help offset some of the lumpiness that we see on the garden side. So that's the reason for pivoting a little bit more over to pet.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.