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Central Garden & Pet Co (NASDAQ:CENT)
Q4 2019 Earnings Call
Nov 26, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Central Garden & Pet Fourth Quarter and Fiscal Year 2019 Financial Results Conference Call. My name is Devin 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 Steven Zenker, Vice President of Investor Relations, FP&A and Communications. Please go ahead.

Steven Zenker -- Vice President Finance-Investor Relations, FP&A, and Corporate Communications

Thank you, Devin. Good afternoon everyone, thank you for joining us. With me on the call today are Tim Cofer, Central's New Chief Executive Officer; Niko Lahanas, our Chief Financial Officer; Howard Machek, our SVP Finance and Chief Accounting Officer; J.D Walker, our President, Garden Branded Business and John Hanson, our President Pet Consumer Products.

Our press release providing results for our fourth quarter ended September 28, 2019 is available on our website at www.central.com. Also on the website is the GAAP to non-GAAP reconciliation for any non-GAAP measures discussed on this call. Before I turn the call over to Tim, I would like to remind you that statements made during this conference call which are not historical facts, including EPS and other guidance for 2020, expectations for new capital investments and product introductions, future acquisitions and improved revenue and profitability are forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those implied by forward-looking statements.

These risks and others are described in Central's Securities and Exchange Commission filings, including our Annual Report on Form 10-K filed today. Central undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events or otherwise.

Now I will turn the call over to our new CEO, Tim Cofer. Tim?

Tim Cofer -- Chief Executive Officer

Thanks, Steve and good afternoon. It's a pleasure to be here with all of you today on my first earnings call as the new CEO of Central Garden & Pet. Given that I'm only a few weeks into my tenure here at Central, I'm going to defer to our CFO, Niko Lahanas to review the results for the quarter and the year. But before turning it over to Niko, I'd like to say a few words about why I came to Central in my initial observation's about the opportunities on how we can unlock our company's potential. I've spent the first 6 weeks immersing myself in all things Central, our business, our brands, our customers and our employees. I've embraced an aggressive onboarding agenda traveling coast-to-coast conducting in depth business reviews, touring many of our facilities, meeting key customers and listening to a great deal of feedback from my Central colleagues.

As a result of these engagements, I developed a keen appreciation and respect for what Central has built. And an even greater enthusiasm for our potential moving forward. In my 30 years of consumer products experience, I've had the privilege to lead many different businesses here in the United States and across the globe. In my most recent role as Chief Growth Officer of Mondelez International, I led all consumer and customer facing functions, including corporate and M&A strategy, insights and analytics, marketing, sales, e-commerce, research and development, quality and innovation.

In partnership with the Chairman and CEO of Mondelez. I led the development and execution of the company's growth strategy, which resulted in accelerated top line growth, with continued margin expansion. My other general management experience includes P&L President roles at Oscar Mayer Foods, Kraft Pizza company, Kraft Foods Europe and Mondelez Asia-Pacific, Middle East, Africa. Although, these previous efforts were not in the Garden or Pet industries, I already see many commonalities with Central's customers and consumers.

As I joined Central, I'm impressed by its many strengths. Central is a leader in both Garden & Pet industries, with a robust portfolio of strong brands, private label offerings and distribution businesses. 2020 marks 40 years since our Chairman, Bill Brown founded Central and it's clear to me that our growth through acquisition model has created value for our shareholders and meaningful scale advantages for our company.

Today, Central has a broad route to market, unique distribution capabilities, a strong reputation for quality products and superior customer service and an efficient supply chain. And I can see that since coming here, I've been very impressed with our entrepreneurial culture, our talented employees and our empowered business unit structure. All of these strength gives Central a good foundation for the future. Looking ahead I'm already seeing ways we can improve the business and better capitalize on our opportunities. I've only been here for 6 weeks, but here's my early read. First, we need to better balance consumer and customer. We need to strengthen our consumer muscle through marketing, branding and innovation.

Next, while we've made good progress over the last several years in gaining a presence online, it's clear that we need to invest even more aggressively in expanding our digital agenda and strengthening our e-commerce capabilities. Third, in addition to organic growth, M&A remains a compelling opportunity to expand our scale and strength in both core and adjacent categories.

Given Central strong balance sheet, we're in a good position to evaluate and pursue value accretive and cash generative acquisitions in businesses that are additive to our overall platform. And finally, I believe we can improve the consistency of our executional excellence at Central by enhancing discipline, monitoring the right KPIs and ensuring our incentives are driving the right behavior.

In partnership with our Board and our leadership team, I plan to flesh out my initial perspectives informed by further conversations with all of Central's stakeholders over the next several months. What I can say is that I anticipate 2020 will involve significant investment in growth drivers and capital expenditures in order to take Central to the next level and position our platform to grow sustainably in the years ahead.

Sometime in the Spring, I will share with you an update on our long-term strategy and the implications for 2020 and beyond. In closing, I want to reiterate my excitement about joining Central and my confidence in the value of the platform and our ability to unlock its full potential. I am and all of us at Central are committed to working to drive real value for our shareholders.

With that, I'll now turn it over to Niko, who will give you a more detailed view on our 2019 results.

Nicholas Lahanas -- Chief Financial Officer

Thank you, Tim and good afternoon everyone. Our press release for our fourth quarter and fiscal year financial results was issued earlier today. For fiscal year 2019, sales increased 7.6% due in large part to acquisition. Bell Nursery and General Pet were part of our first and second quarter results and while their inclusion added sales, it did reduce margins and overall profitability. In fiscal 2019, we purchased Arden in our second fiscal quarter and it aided both sales and profit. Finally, we closed on C&S in our third fiscal quarter and that was a small sales and profit contributor for the year.

Our overall organic growth of 1.5% was attributable to our Garden segment, which grew 4% organically, despite unfavorable weather for the control category,

Organic growth for the Pet segment was relatively flat, held back meaningfully by our Animal Health businesses, which were impacted by very unfavorable weather for our fly control, cattle feed additive in grain protection products. In addition, continuing weakness in our consumer behavior management products due to performance issues and increased competition was also a drag on Pet's results. Our total company gross margin of 29.5% for the year declined 100 basis points, half of that decline is attributable to acquisitions that were in this year's results, but not in last year's results.

The largest impact was from the inclusion of two quarters of Bell Nursery this year that were not in last year's results. Those quarters for Bell had sizable losses as the business earns all of it's profit in one quarter, our third fiscal quarter. Lower results in our Animal Health businesses and an unfavorable mix of product sales also contributed to the gross margin decline. Our Animal Health businesses tend to have higher margins and so when they underperformed, they had a disproportionately large impact on the bottom line.

Operating income for the year declined 9.1% or $15.2 million and our operating margin declined 120 basis points, meaningfully impacted by the lower gross margin and higher logistics costs. Lower marketing expenses as a percent of sales offset some of the decline as we chose to scale back spending in unfavorable weather environment. EBITDA for the year excluding the two last quarters for Bell in fiscal 2019 results that were not in the prior year's results declined 2% to $210.2 million. This year also contain certain non-operating factors that weighed on EPS, which came in at $1.61 for the year.

Higher number of shares outstanding negatively impacted EPS by $0.13 and a higher tax rate reduced EPS by an additional $0.06 compared to last year. If we combine these factors with the dilutive effect of Bell in the first two quarters, the three factors together eroded EPS by the entire $0.30 shortfall compared to last year. In summary, while certainly not the type of year we were hoping for when we began 2019. I continue to feel confident about the fundamentals of the underlying business.

Our tax rate for the year of 22.3% percent was higher than 19.5% rate a year ago, even after adjusting out the benefit received last year due to revaluation of our net deferred tax liabilities. Changes in the accounting standards for our non-cash equity compensation which benefited last year's tax rate had less of a positive effect on this year's tax rate. I also want to point out that our operating cash flow for the year of $205 million was an increase of $91 million from $114 million in the prior year.

Turning now to the quarter. Fourth quarter consolidated sales increased 8% to $541 million with organic sales rising 5%, both Garden & Pet contributed to the organic increase. Consolidated gross profit for the quarter rose 1% and our gross margin decreased 180 basis points to 27.5%. Higher expenses relating to off -- to writing off inventory in our Pet segment and a mix shift in Garden were the primary drivers of the decline.

SG&A expense for the quarter increased 7% or $9 million versus a year ago and as a percent of sales decreased by 10 basis points to 25.5%. Operating income for the quarter declined to $11 million compared to $18 million a year ago. Our operating margin decreased a 160 basis points to 2% due to the receivables and inventory write-offs, as well as the CEO transition cost. Absent those expenses, operating income and margin were up versus a year ago.

Net interest expense decreased to $8.1 million from $8.9 million in the fourth quarter of last year. Other expense for the fourth quarter decreased $4.2 million compared to the prior year due to our purchase of the remaining part of Arden, which is now reflected in the Garden operating results. Our tax rate for the quarter of 22.8% was up over the prior year quarter, which benefited from a gain from the revaluation of our deferred tax accounts and changes in the accounting standards around non-cash equity compensation expense. The latter has smaller positive effect on this year's tax rate.

Our net income for the quarter was $2.4 million and our diluted earnings per share was $0.04 compared to $0.10 in the fourth quarter of 2018, after adjusting for the benefit of the revaluation of the deferred tax accounts. Shares outstanding increased to 56.6 million from 55.4 million in last year's fourth quarter. Now, I'll give some insight in those segments starting with Pet.

Pet sales for the fourth quarter increased 5% or $70 [Phonetic] million to $356 million, aided by our C&S acquisition. On an organic basis, sales increased 2% on strength in the dog and cat and wild bird businesses. Our live fish business were down due to a large customer exiting the category and our aquatics business also declined due to temporary supply constraints, which have been largely resolved.

The Pet segment operating income decreased $1 million or 4% compared to the prior year quarter, with results in the Animal Health and Pet Bedding business with lower results in the Animal Health and Pet Bedding businesses and large part due to receivables and inventory write-offs. Pet operating margin declined 80 basis points to 8.7% due primarily to that lower profitability in our Animal Health and Pet Bedding businesses.

I do want to point out that while we are projecting improvement in our Animal Health businesses in 2020, we are taking a more pragmatic approach to the rate of the improvement that we expect due to the normal weather. Also this is one area where we will be likely to increase demand creation spend, as we seek to reignite growth after a disappointing year.

Moving onto Garden. For the quarter, Garden segment sales increased 13% or $22 million to $185 million, partly due to the inclusion of our Arden acquisition, but more sort due to organic growth. Organic garden sales increased 10% on higher sales of other manufactured products, as well as strengthen our wild bird, life plant and grass seed businesses. Unfavorable weather held back sales of control products offsetting portion of the game. Garden's operating income for the quarter decreased $1.2 million to 300,000 and operating margin decreased 80 basis points to 0.2%.

Our Arden acquisition had a negative impact on operating income in margins as the fourth quarter is its lease profitable quarter of the year and an unfavorable mix of sales in our organic business is also -- was responsible for the margin decline. Now to the balance sheet and cash flows. For the quarter, cash flow provided by operations was approximately $112 million compared to $96 million in the fourth quarter a year ago.

The difference was primarily due to improvements in working capital accounts. Capex for the quarter of $11 million was approximately flat versus the prior year. For the year, capex totaled $32 million compared to $38 million in fiscal 2018. We anticipate higher capex spend in fiscal 2020. Depreciation and amortization for the quarter increased to $14 million up from $12 million in last year's fourth quarter due to the acquisitions in the past year.

Cash and equivalents including short-term investments increased to $498 million from $482 million a year ago. We ended the quarter with a leverage ratio of 3.1 times, up from three times a year ago. We are comfortable with our current gross leverage level, which is right around our targeted level of three times to 3.5 times.

During the fourth quarter, we repurchased 1.8 million shares. As at the end of the fiscal year, we still have a 100 million remaining on our 2019, 100 million repurchase authorization, as well as an additional 1.2 million shares remaining under the board equity dilution authorization.

In terms of EPS guidance for next year, we currently expect diluted EPS to be at or modestly above to $1.61 of diluted EPS we earned in fiscal 2019. This excludes any impact from potential M&A activity undertaken during the year. The reason for the lack of significant growth expected in fiscal 2020 EPS rest primarily with the sizable additional demand creation investment we expect to spend in fiscal 2020.

We also are being pragmatic about our expectations for the recovery in our Animal Health businesses and on the uncertainties regarding the impact of tariffs. As Tim mentioned earlier, he's still assessing the organization and will share his thoughts on the strategic direction of the company in more detail in the Spring. I will also mention that we currently expect our first quarter results to be lower than the prior year with us currently projecting a loss of $0.10 or higher due to several factors.

The timing of customer orders in the Garden segment, continuing challenges in our Animal Health businesses and higher corporate expenses. Our EPS estimates for the quarter and year exclude the impact of a recent fire in a Pet Bedding facility. We believe our insurance coverage is sufficient to cover asset losses, as well as the business interruption associated with this event, but while we believe the fire will not have a material impact on the fiscal year's results, the timing aspect of when we recognize the losses versus when we receive insurance proceeds may impact our quarterly results, especially our first quarter.

In conclusion, despite fiscal year '19 being a difficult year for Animal Health and Pet Bedding businesses and with next year expected to have its earnings impacted by investments for future growth, our company remains strong, well capitalized and well positioned to grow in the years ahead. We look forward to giving you an update on our first quarter call in early February.

Now let's open it for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Brad Thomas with KeyBanc. Please proceed with your question.

Bradley Thomas -- KeyBanc -- Analyst

Hi, good afternoon, everyone. And Tim, welcome.

Tim Cofer -- Chief Executive Officer

Thank you.

Bradley Thomas -- KeyBanc -- Analyst

I guess hope -- first I was hoping to kick-it off with a high level question for Tim and then ask a couple of follow-ups on the financials to Niko, if I could. Tim, I guess as you analyze the business and think about some of these investments that could position Central for accelerating growth, I guess how do you think about the level of investment that may be needed and the pay-off with which you may be able to see some return on those investments?

Tim Cofer -- Chief Executive Officer

Sure. I think it's important to say upfront, it's only been a few weeks in the saddle, so there is still a lot to learn. But as I have done the first round of business reviews and had a chance to meet our leadership on the ground in many of our business units around the country, I do think we find ourselves with a lot of opportunity and that opportunity can be further unlocked I think with some investment in the way I think about it is in a few buckets.

I mean one, clearly, as I said in my comments in the whole consumer space really understanding the way that our consumer approaches these categories, knowing our categories better than our competition, enhancing our brand equity, building distinctive brands, driving some disruptive innovation and winning in the highest growth channel in the United States today, which is the e-commerce channel, those are all big opportunities I think for us. But it's not just in that space, I think the other areas are actually on the cost side. I think we've got some meaningful opportunities to advance our productivity agenda and that will provide two different benefits, one is obviously as fuel into that growth agenda. And the other is obviously to enhance our margin structure from where it is.

And I'm encouraged by what I see on that, that too may require some investment and they require some capx, etc.

Finally, to the second part of your question, clearly, I have a strong eye on returns and we will be assessing these opportunities as on a ROI basis. I think it's fair to say that some of these won't return in the first year in the first fiscal year. And so I'm looking at it obviously as a new CEO to have a clear eye on returns, but make sure we're doing the right thing for the long-term of this business and to really drive that long-term sustainable profitable growth.

Finally, as mentioned, I'd like to take a few more months to really do the deeper dive and I will come back in the Spring with a more comprehensive and cogent view on your question.

Bradley Thomas -- KeyBanc -- Analyst

That's very helpful. Thank you, Tim. Niko, as we look at the quarter and try and get a sense for some of the margin puts and takes, can you help us think about quantifying sort of the one-time items in here, like when we think about some of the receivable and inventory writedowns. Could you quantify those aspects for us in the quarter?

Nicholas Lahanas -- Chief Financial Officer

We're a little remiss to quantify and because if we wanted to, we would have non-GAAP service. But what I will tell you is, it's absent the receivables, the inventory and the CEO costs, our -- both our dollars and our margin would have been higher than the year before.

Bradley Thomas -- KeyBanc -- Analyst

Perfect. That's very helpful. And then just lastly from me, I guess, as we think about the first quarter, can you help us think a little bit more on puts and takes and from a margin perspective and sales perspective that are driving that earnings range that you've got hit us toward?

Nicholas Lahanas -- Chief Financial Officer

Yeah. So largely the first quarter, keep in mind, it's the smallest quarter for Central. So small puts and takes can have large impacts on the bottom line. So overall we came into the quarter with a very soft grass seed planting season because of the excessive heat in October. So that was sort of an immediate headwind coming into the quarter.

Then if you recall a year ago, we had one retailer on the Garden side, that was very aggressive with respect to their load-in. They signaled that that's not going to repeat. So we have kind of those two headwinds going on. And then on the Pet side, it's really timing of orders around the Animal Health and bedding businesses. So we're seeing some timing effects there as well. And then lastly, higher corporate costs around executive comp, as well as some investment in IT.

Bradley Thomas -- KeyBanc -- Analyst

That's very helpful. I'll turn it over -- over to others and good luck to you all.

Tim Cofer -- Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Chris Carey from Bank of America, please proceed with your question.

Chris Carey -- Bank of America -- Analyst

Hi, good evening.

Tim Cofer -- Chief Executive Officer

Hello.

Chris Carey -- Bank of America -- Analyst

And Tim, welcome.

Tim Cofer -- Chief Executive Officer

Thank you.

Chris Carey -- Bank of America -- Analyst

So few questions here, I guess just first on the quarter and then have questions on some other dynamics over time, but I guess if you think about some of the pricing initiatives that have been part of the story over the course of the year and certainly heading into next year, it doesn't really seem like any of that has provided much help. And I appreciate that mix has been a dynamic here, right. But this is kind of like the second year when gross margins are declining and mix gets called out and I just and it sounds like probably gross margins are going to decline again next year if investments are happening. And I suppose I don't know exactly where all those investments are occurring, but it seems to me like that that's the case. And so I guess because top line came in fine, certainly comps helped, but I think the full picture is still a little confusing. And I guess you know Niko, am I off here is, is this -- is this the case where we're not going to get a lot of visibility on the gross margin line for a while. And maybe if Tim and Niko, if you could comment on where some of these investments are going to be happening?

Tim Cofer -- Chief Executive Officer

So I'll kind of comment on some of your comments. So as far as pricing goes, we did take fairly broad-based pricing across many of our businesses. I will tell you that there were some pockets where -- we took actually some price decrease because commodity did come down. And that's something that is very transparent to the retailers. So they know exactly what's going on the commodity markets. And there is no hiding from that. So I would say that's one issue that's out there.

The other issue is obviously when you do take price, you -- there are some elasticity implications as well. Third would be as we mentioned in our earlier comments, we are lapping. If you look at the acquisitions we did, we did take on some negative quarters with respect to Bell and now this most recent one with Arden, those things all are going to have impacts on the gross margin line. The other thing I would say is, I can't overstate enough really and I know you're obviously tired of hearing it, but the mix issue and when our Animal Health businesses don't perform, you're going to see it, you're going to see it at the gross margin line and you're going to see that the operating margin line is and that's just a fact around our business.

Now I'll address the other issue around gross margin in 2020. I can tell you that we are planning to expand margins in 2020. We're going to give more detail on that probably later in the year, but we have every intention of expanding margins -- their gross margin line.

Chris Carey -- Bank of America -- Analyst

Okay. Okay. And maybe just on the buyback program, right? So maybe let me know if my read here is wrong, but you still have the $100 million authorization and you basically had already bought back shares when you had announced the authorization. So maybe haven't been as active recently and perhaps you thought that there is a potential that the stock would be down tomorrow, which I suppose it could be. And so is there a way to think about the cadence of this deployment going forward, if your stock is down tomorrow as much as it was initially indicated, is that the type of time when you would be opportunistic or is there another type of way that you're thinking about deploying that program over time?

Tim Cofer -- Chief Executive Officer

Well, I mean, the way -- the way we're thinking of it is, you know, if the stock drops and we find ourselves at an implied multiple of 6 or 7 times, that's extremely attractive. As we look at M&A, we can find differences that are -- that are attractive on the outside. So when we see our stock drop to those levels, that's something we're going to act on because it's the right thing to do is a tremendous value. We believe in our story. We believe in our people and why wouldn't we support that.

I will tell you internally -- the way we think about it, though, is the $500 million that we raised in both debt and equity, that's really earmarked for M&A. That's not something we're going to be really going after and buying our stock back. And the way we think of the stock buyback is we really want to do that with our cash flow. So really you can see we've been buying back and we still have the same amount of cash on the balance sheet. So we have an effect compartmentalize it, but if our stock drops to a certain level, we're going to support it, because it's a tremendous value.

Chris Carey -- Bank of America -- Analyst

Okay that makes sense. And then just one final one, just trying to understand is flat to slightly up guidance for earnings next fiscal year. And if you could kind of I suppose frame it between how much of that is getting impacted by the proactive investments that you're doing just to drive longer-term sustainability versus say some of the challenges that you're seeing in the business like in Animal Health or otherwise. So how much of one versus the other. And then maybe how much of the impact we could see from the facility fire that you highlighted in the press release. So that's it for me. Thank you.

Nicholas Lahanas -- Chief Financial Officer

We'll probably be able to dimensionalize the impact between the investment spend and the Animal Health business later in the year. We're going to give more detail going forward, but I'll give you a couple of comments. In the last few years, we have cut our spend and for good reason. If you go back to '18, poor garden season and we didn't want to lean into that. This year it was Animal Health as well as our Gen-1 COMFORT ZONE product that wasn't performing. So we didn't want to lean into that either. So in that respect, it was really the right thing to do given that we believe the returns were not going to be there for us. But what I would tell you, as we went -- when we went through our 2020 planning process, we began -- really challenging to plan and really asking some tough questions around, are we happy with our current growth rates, are we happy with our share? Are we losing share? Are we being aggressive enough around digital in our consumer-facing agenda and that the answers are no, are we sufficiently investing the steps to substantiate the higher growth as well as the market share gains.

So those are really some tough questions we were asking ourselves and those are things were going to probably come back with in more detail later in the year. Let me shift the Animal Health really quick and just talk a little bit about the challenges there, which include both the consumer as well as the pro business. And the challenges have been -- will be to get our market share back in that consumer business around the COMFORT ZONE product and that's on us. We have to go out there, spend wisely, have a high return on investment and take share back simple as that.

On the pro, side there's a little more complexity. So if you look at the challenges that are going on the ag market around Pro some of which have been exacerbated by trade tensions. And if you look at that pro business, many of our end customers are the farmers and they've had a really rough goal this year. The weather side, there were some real macro trends affecting the ag market like the overall health of the beef and the dairy industry.

I'll give you some examples. I think last quarter I mentioned a one million calves dying in the winter spring flooding. In '18 2700 diaries went out of business. And this year between January and May there were 300 shut down in Wisconsin. So 300 dairy shut down in that timeframe. And then just this month -- month Dean Foods, the largest producer of dairy products filed bankruptcy. So do I expect another year like '19? No, but our view is that there is still a fair amount of uncertainty around that Animal Health business for us to be a lot more thoughtful in our guidance and not to expect a full rebound in 2020.

If you take anything away from the comments here, I think we're taking a longer-term approach. We want to create a situation where we can create long-term sustainable growth going forward. And I think really that's the message.

Chris Carey -- Bank of America -- Analyst

Thanks, Niko. Appreciate that.

Operator

Our next question comes from the line of Bill Chappell with SunTrust. Please proceed with your question.

Grant Blandford O'Brien -- SunTrust -- Analyst

Hi, this is actually Grant on for Bill. Thanks for taking my questions and hi to Tim.

Tim Cofer -- Chief Executive Officer

Yeah.

Grant Blandford O'Brien -- SunTrust -- Analyst

First one for us. Just on the -- on the Pet segment, just for the charge-off in the quarter on the Pet Bedding side. I'm assuming that's all related to the fire in not any lower demand, but just wanted to double check that.

Nicholas Lahanas -- Chief Financial Officer

No, so both the receivables and the inventory were on the pet side, the receivables were due to -- we had two bank customers go bankrupt in the fourth quarter where we had to write-off those receivables. And then the inventory was largely due to the write-off of the COMFORT ZONE generation-one product. So those are the two primary drivers -- so not related to the fire. The fire is a very recent thing and we're still getting reports in terms of the investigation that's going on. So we're still pulling the facts together, we'll obviously have a lot more information come February, but it is -- it's fresh news even for us. So, unfortunately, we don't have a ton of detail there.

Grant Blandford O'Brien -- SunTrust -- Analyst

Got it, OK. And then maybe thinking longer-term, your capital allocation strategy, it sounds like next year, the capex spend is going to step up. But do you still feel like you have a number of potential M&A opportunities in the pipeline. And is that really the focus still going forward?

Tim Cofer -- Chief Executive Officer

Absolutely. It's really the focus is going to be M&A and then also capital projects internally meaning growth as well as cost savings. So those are really that the top two. And then as I mentioned earlier, when we see our stock drop to the levels that I've mentioned, we're going to be buyers at those levels just because we really believe in what we're doing here.

Grant Blandford O'Brien -- SunTrust -- Analyst

Got it. Thank you. I will pass upon.

Operator

Our next question comes from the line of William Reuter with Bank of America. Please with your question.

Michael -- Bank of America -- Analyst

Hi guys, this is Mike on for Bill. Following up on commentary about the M&A pipeline, is there a maximum size we should expect for potential target?

Tim Cofer -- Chief Executive Officer

No, I think we remain fairly open to size, it's kind of across the board. I don't see us doing something over $1 billion, just to be fully transparent. The other way to think about it too is, we're going to -- we're going to look at M&A from a product standpoint, but also from a capability stand point. So that's another thing we really look at in terms of -- we see a business that has really strong digital capabilities and we want to up our game that's something we might look at. So we're going to look at M&A across a number of factors. And I think 1 billion is going to be on the high end, but, you know, we do have about 1.1 billion of dry powder. So that gives you sort of an idea of what we could do and I suppose if we saw something bigger, you could always do some deal financing along with it.

Michael -- Bank of America -- Analyst

Great. And then just could you talk about the private label performance and if there is any change as a percentage of total sales? Thanks.

Tim Cofer -- Chief Executive Officer

So right now I'll just talk overall company private label and then I'll let our segment heads talk about their respective areas of business. Overall we're north of 15% as far as private label. And a lot of that has been due to the acquisitions we've made. So some of the acquisitions we've done recently tended to have a big portion of their business being private label. Overall, as everyone knows, very strong consumer trend. We like the business particularly when we're the low cost producer typically with retailers were able to get our own product on the shelf, as well as the private label. We know it's going to get bid it out to somebody may well be us is the way we look at it and that way we have really a more meaningful relationship with the retailer if you think about it.

The other thing it does for us internally, it fills up our manufacturing plant. So we get a lot of operating leverage out of that and it really helps all the products flying to the plant. So that's sort of how we think about on a macro scale. I'll turn it over to our segment heads.

J.D. Walker -- President of Garden Branded Business

This is J.D., I'll speak to the Garden segment. We plan the private label brands across a number of our categories fertilizers, controls, grass seed, wild bird feed, outdoor replacement cushions even in live goods and it's important business to us. Niko touched on the key drivers behind that, it gives us larger share of the shelf. It gives us more critical mass with that retailer. It also helps with factoring plant utilization favorable variances as a result of that. And then the last thing I'll touch on just a strategic relationship with that retailer because you are co-developing that brand with the retailer. And I think that we've been able -- effectively able to leverage additional branded business as a result of our private label business. John?

John Hanson -- President of Pet Consumer Products

Yeah, this is John Hanson, I would echo with in Pet as well. We continue to like the opportunity in private label some categories more than others, but it does give us a partnership with our customers and it absorbs overhead and it also gives us an ability to help the customer in the category and protect our brands and lead our brands and become a category leader and a business partner with our customers. So we continue to like it very much and very much on consumer trend. Thank you.

Operator

Our next question comes from the line of Jim Chartier with Monness, Crespi & Hardt. Please proceed with your question.

Jim Chartier -- Monness, Crespi & Hardt -- Analyst

Hi, thanks for taking my questions. I know you talked about the impact of Animal Health and some other things on the full-year, but just in terms of the fourth quarter sales performance versus what you expected back in August. How do things come in versus your plan?

Nicholas Lahanas -- Chief Financial Officer

We were a little bit short to plan on the sales side, but we again we had nice organic growth on that top line in both Pet and Garden. So we felt pretty good about the top line in Q4.

Jim Chartier -- Monness, Crespi & Hardt -- Analyst

Okay. And the Pet Bedding business last quarter you guys I think called that out as reason for the top line shortfall and you expected -- so you had a good visibility into orders for fourth quarter. How did Pet Bedding play out in fourth quarter?

Nicholas Lahanas -- Chief Financial Officer

So Pet Bedding really slowed down in the quarter toward the end. And it came up a tad short even though we, I know we mentioned we had like 56% [Phonetic] of the orders on the last call, but things that really, really slowed down in that bedding business in the quarter, so it was a little under.

Jim Chartier -- Monness, Crespi & Hardt -- Analyst

Okay. And then I know you've talked about kind of the investments for next year, just understanding I think this year for fourth quarter, yeah, it looks like some one-time-ish type items cost you guys like $0.11 in fourth quarter. You've also talked about earlier this year and impacted some legal expenses last quarter, you wrote up the Arden inventory earlier this year, which is a drag on earnings, wrote down some home decor inventory last quarter. And so there's a lot of one-time expenses within that $1.16. So how do we think about that in terms of your expectations for next year?

Nicholas Lahanas -- Chief Financial Officer

Yeah and again really for next year the two main drivers are going to be that investment spend and also our tempered outlook on Animal Health. In the Animal Health space, there's more going on than just weather, there's trade, there is some real macro factors. We don't know how quickly or if at all we'll be able to gain market share back in the COMFORT ZONE product. So, there is just enough uncertainty there for us to temper our outlook. And then again we plan on being very aggressive on the spend side. So that's kind of where we are right now, that's very high level I know and I know everyone wants more, but we're going to give -- we're going to give more detail later in the year. Keep in mind, Tim -- Tim has only been here a matter of weeks and we need to get him properly on-boarded. And he's got to get his arms around the business and then think strategically going forward.

Jim Chartier -- Monness, Crespi & Hardt -- Analyst

And just finally on the behavior modification of COMFORT ZONE. Understanding kind of the sales challenges and market share challenge, how is the reform related product performed in testing and at the consumer level?

John Hanson -- President of Pet Consumer Products

Yeah, so we've talked about -- this is John. We talked about COMFORT ZONE before. We did have a missed up and we worked really diligently on reformulating the products. And over the past quarter in Q4, investing in digital and e-commerce as well as brick-and-mortar to get that product back to where we need it. I wouldn't say it's all the way back, but I think where you feel very confident about the category in the brand and we're very excited about the future that we can get this turned around for growth in fiscal '20.

Jim Chartier -- Monness, Crespi & Hardt -- Analyst

Great. Thanks and best of luck this year.

Tim Cofer -- Chief Executive Officer

Thank you.

John Hanson -- President of Pet Consumer Products

Thank you, OK.

Operator

Our next question comes from the line of Peter Grom Peter with JP Morgan. Please proceed with your question.

Peter Grom -- JP Morgan -- Analyst

Hey, good evening, everyone.

Tim Cofer -- Chief Executive Officer

Good evening.

Nicholas Lahanas -- Chief Financial Officer

Hello, Peter?

Peter Grom -- JP Morgan -- Analyst

So, Tim kind of given your background at Mondelez and kind of the context of what we've seen in CPG I guess over the past few years or this year with Pepsi, Colgate, I can't help but think that the increased investments you're talking to and kind of the earnings growth you're looking to deliver this year kind of looks like a rebase in. I know it's been talked a lot about during this call, but clearly something in the first year just pointing to investments being a driver of improved performance.

So just kind of, is there anything you can share that gives you comfort that higher spend is going to be enough to improve market share performance. And is there anything you can share in terms of where this spend is going to be directed. And then I guess lastly, do you feel your kind of current FY '20 guidance reflects the appropriate level of spend or is this reinvestment commentary still in the early innings and kind of could be ratcheted up higher later in the year. Thanks.

Tim Cofer -- Chief Executive Officer

Yeah, thank you. Look again I'll preface by saying it is early days and only a few weeks in the role, but I am to I guess one of the three sub questions you asked. I am confident that we can get a good return on the spend certainly overtime again whether all occurs in a fiscal year. I think my experience would suggest that it doesn't always work that way and realize to as everyone knows their fiscal calendar. We're already the better part of two months into the fiscal. So I'm not necessarily seeing for fiscal ' 20, but certainly over time that's going to be my orientation and our orientation.

I think many of you have followed our company for some time. You know that our level of investment spend on the consumer side, in the area of insights and marketing and innovation is actually a smaller part relative to some of the other firms you referenced in your question from a consumer standpoint. And therefore that marginal impact of that investment I think can be quite meaningful. As I've gone around to many of the business units and talked about -- talk to our folks about return on investment in these areas, particularly in the digital space, I'm actually seeing some very encouraging numbers that gives me confidence that when we put a little more fuel into that system that we can see -- we can see a nice pop.

So a lot more to come, a lot more diligence to follow. And I wanted to assure you and others that our orientation is going to be around investing where we feel like there is a good return in the years to come. Then the last part of your question was, do we think the amount of investment for '20 is appropriate and consistent with that guidance that Niko provided and my short answer is yes. It does provide while on this call, we're not in a position to break out the exact detail of the numbers. I would say, it gives us a good basis for reinvestment across a number of areas. And as Niko outlined that's one of the reasons why we guided where we guided is because we feel good about that level of investment and I don't anticipate that will change as we progress through fiscal '20.

Peter Grom -- JP Morgan -- Analyst

That's helpful. Thank you.

Operator

[Operator Instructions] Our next question comes from the line of Hale Holden with Barclays Bank. Please proceed with your question.

Hale Holden -- Barclays Bank -- Analyst

Hi, thanks for taking the call. I had two questions. Tim, as part of your evaluation of the portfolio, is it possible we might see divestitures too, it's been a long time since the company's kind of prune some of the assets that it has.

Tim Cofer -- Chief Executive Officer

Well, look, I would say generally my point of view on portfolio strategy is it's a very healthy discipline to consistently look at your portfolio and make sure that each of the pieces are contributing to the party. And to me that's just kind of good housekeeping at this stage, nothing specific to share in terms of any sort of divestiture candidate, but to me it's just part of good general management. I would say overall this company in the last many years have built a nice track record of growth through acquisition and brought in nice additions both in for and adjacent categories that have added to the overall portfolio.

The other thing in my first few weeks, we've done I think a good job of kind of doing postmortems on recent acquisitions to understand, are they contributing as we had hoped, are they delivering on the investment thesis? And to the extent they are great how can we do more, to the extent they are what do we need to do to get those back on track. So that'll be a part of the continuing discipline we have as a leadership team.

Hale Holden -- Barclays Bank -- Analyst

Thank you. And then on the Pet Bedding facility fire, I was wondering if you could give us some insight into if you thought that was going to leave you short meaningful inventory to ship into the channel or if you're going to be able -- to be able to source it from third-party manufacturers or elsewhere?

John Hanson -- President of Pet Consumer Products

This is John. Yes, as we've stated, we had a fire in our distribution center of our Pet Bedding business in November, no one was injured. We have a team on the ground that were in the process of really understanding the damage and going through all the details of the business and the damage. We are doing our absolute best to continue to service customers and we're working through each customer individually in terms of can we do that with existing inventory or how we get that done. We do as we mentioned have very good insurance, the timing of the receiving that insurance and those benefits may impact quarters, but overall we expect minimal financial impact in total.

Hale Holden -- Barclays Bank -- Analyst

So you wouldn't expect to lose any shelf space or any -- have any issues with kind of your retail partners?

Tim Cofer -- Chief Executive Officer

I think it's hard to call right now, we're going to have to see how the season plays out, but right now it's sort of hard to call.

Hale Holden -- Barclays Bank -- Analyst

Okay, thank you. And Tim, congrats on the new seat.

Tim Cofer -- Chief Executive Officer

Thank you.

Operator

Since there are no further questions left in the queue, I would like to turn the call back over to Mr. Tim Cofer for any closing remarks.

Tim Cofer -- Chief Executive Officer

Okay, very good. I want to thank everyone for attending our earnings call and I wish everyone a wonderful Thanksgiving. Thank you.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

Steven Zenker -- Vice President Finance-Investor Relations, FP&A, and Corporate Communications

Tim Cofer -- Chief Executive Officer

Nicholas Lahanas -- Chief Financial Officer

J.D. Walker -- President of Garden Branded Business

John Hanson -- President of Pet Consumer Products

Bradley Thomas -- KeyBanc -- Analyst

Chris Carey -- Bank of America -- Analyst

Grant Blandford O'Brien -- SunTrust -- Analyst

Michael -- Bank of America -- Analyst

Jim Chartier -- Monness, Crespi & Hardt -- Analyst

Peter Grom -- JP Morgan -- Analyst

Hale Holden -- Barclays Bank -- Analyst

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