Calavo Growers, Inc. (NASDAQ:CVGW), which I've dubbed a "tiny, mighty dividend stock," reported fiscal second-quarter 2018 earnings on June 6. How has this dynamic avocado market specialist fared so far in its fiscal year? Let's dive into the quarter's details after first walking through headline numbers directly below.
Calavo: The raw numbers
|Metric||Q2 2018||Q2 2017||Year-Over-Year Growth|
|Revenue||$264.4 million||$270.2 million||(2.1%)|
|Net income||$14.2 million||$12.9 million||11.5%|
|Diluted earnings per share||$0.81||$0.74||9.5%|
What happened this quarter?
Calavo's largest segment, fresh foods, which derives sales from avocados sourced from its cooperative California growers and Latin American suppliers, achieved double-digit volume growth. However, revenue decreased from $155.6 million to $137.9 million as historic avocado prices from the prior year (due to a spike from short supply) normalized in 2018.
The fresh segment recorded gross profit of $15.1 million versus $23.8 million in the prior-year comparable quarter. Lower sales and slimmer gross profit in other produce categories, particularly tomatoes, also weighed on segment performance. Fresh foods realized an operating margin of 11% versus 15.3% a year ago.
Management pointed out that while margins declined from last year's windfall profit, the 11% gross margin in fresh foods remained above historic norms for the company.
Renaissance Food Group, or RFG, Calavo's refrigerated packaged-foods segment and second-largest revenue stream, achieved a sales improvement of 7%, to $105.6 million, versus Q2 2017. Revenue growth was crimped by industrywide food safety issues stemming from an outbreak of E. coli tied to romaine lettuce (none of it sourced from Calavo).
Gross profit in RFG increased nearly 36%, to $9.3 million, and gross margin advanced nearly 200 basis points, to 8.9%. Management attributed the higher profitability to manufacturing efficiencies and favorable raw commodity costs.
Calavo Foods, the company's third and smallest segment, manufactures high-pressure packaged guacamole for refrigerated sale. Calavo Foods enjoyed a top-line increase of 30%, to $21.9 million, while gross profit rose by $2 million, to $7.6 million.
The revenue and profit gains resulted from price increases instituted late last year, as well as a double-digit increase in pounds of prepared avocados sold, which, management observed, helped to offset rising fruit input costs. Gross margin advanced by a little over 1 percentage point, to 34.5%.
The company's share of income from its 43% stake in FreshRealm, LLC rose nearly tenfold, to $106,000. While this small number has a minor impact on Calavo Growers' financial statements, FreshRealm's growth is worth noting and keeping an eye on. As I recently discussed, FreshRealm is assisting Weight Watchers International Inc. with a first foray into the meal-kit business.
FreshRealm also supplies meal kits to Kroger Co., although this incipient relationship may soon wither as Kroger recently announced that it's buying meal-kit manufacturer Home Chef for at least $200 million. Nonetheless, Calavo's management announced that FreshRealm has secured multiple new client relationships in the last quarter and will launch related retail meal-kit offerings in the second half of the fiscal year.
What management had to say
In the company's earnings press release, CEO Lee Cole discussed the fresh-foods business and provided valuable insight into the avocado market for the remainder of the year:
The Fresh business experienced double-digit growth in avocado unit volume. Avocado market pricing remained near historic norms in the most-recent quarter versus last year, when the industry experienced a rapid increase toward historically high market pricing in the second quarter of 2017. Despite this year's higher volume, the combined result was lower year-over-year avocado sales. Calavo's Fresh segment gross profit remained strong in the second quarter, above historic norms, albeit lower than last year when the industry experienced extraordinary market dynamics in which consumer demand dramatically exceeded available supply.
Calavo Growers doesn't provide specific earnings or revenue guidance. However, CEO Cole stated that the company is on track to notch record revenue and a double-digit increase in earnings per share (EPS) for the full fiscal year.
Thus, revenue in the back half of the year should accelerate to compensate for the flattish performance of the first two quarters. Additionally, the EPS target suggests management is confident that both volumes and gross margin will remain healthy in the final two quarters of 2018.