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What Were We Thinking—Central Garden and Pet

by Jeffrey Bronchick, CFA on January 15, 2013

Central Garden and Pet (CENTA) has been in and out of the portfolio several times over the last eleven years with results varying from stunning (a 6-bagger from the 2002 lows) to a lot less than that (repurchased the stock at $11 and bought it all the way down to $3 in 2008/09).

Business/Value/People: Central has a perfectly understandable set of businesses that should be operating at industry peer levels. The valuation “always” seems very cheap relative to this normalized set of margins. That leaves “people” and in the words of the great investor George W. Bush, “There’s an old saying in Tennessee—I know it’s in Texas, probably in Tennessee—that says, fool me once, shame on—shame on you. Fool me—you can’t get fooled again.”

I had about given up on the “people” aspect for a variety of VERY frustrating reasons, and we were on our way out the door when the stock was in the $10 range about 18 months ago. Then, the control voting founder—Bill Brown—appeared to have finally given up the reins to a turnaround-type-of-guy with a strong record of value creation, Gus Halas. All the right things were happening, and with the share count reduced by 20% as a result of buybacks, Central had the potential to put up some explosive numbers if weather cooperated for a season.

No so fast. Mr. Halas wasn’t given the CEO spot, Mr. Brown kept his hands in the pot, and then we woke up Monday to a new CEO announcement—a 66-year old board member John Ranelli? And all three are staying to work together? And no conference call? Awful. Given the seasonality of the industry, and the work in progress, this is not a disaster; it is just a true case of defeat being snatched from the jaws of victory via poor management and corporate governance…again…we have no one to blame but ourselves.

Attached is a series of correspondences that under normal circumstances would not be public fodder. But for a company that maintains what is an artifact of voting control—voting and not-voting shares—sometimes a little public air and good old-fashioning shaming is in order, since it’s the only recourse we have. Once upon a time, I was in the camp of “invest with the control shareholders—they are on your side.” I am older now.

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The opinions expressed herein are those of Cove Street Capital, LLC (CSC) and are subject to change without notice.  Past performance is not a guarantee or indicator of future results. Consider the investment objectives, risks and expenses before investing.   You should not consider the information in this letter as a recommendation to buy or sell any particular security and should not be considered as investment advice of any kind. You should not assume that any of the securities discussed in this report are or will be profitable, or that recommendations we make in the future will be profitable or equal the performance of the securities listed in this newsletter. Recommendations made for the past twelve months are available upon request.  CSC is a registered investment advisor.  Additional information about CSC can be found in our Form ADV Part 2a, http://www.covestreetcapital.com/FAQ.aspx

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