At the end of the third quarter of fiscal 2018, Calavo Growers' (NASDAQ:CVGW) management affirmed in its earnings press release that the organization was on track for double-digit adjusted earnings per share (EPS) growth for the current year. Calavo made good on this goal when it released fourth-quarter results on Thursday, yet it limped to the finish line with a surprising quarterly loss.
Let's look first at the headline numbers, which were read in boldface by investors, as shares traded down as much as 16% during the trading session that followed the earnings release. Note that all comparative numbers are presented against the prior-year quarter (the fiscal fourth quarter of 2017).
Calavo Growers: The raw numbers
|Metric||Q4 2018||Q4 2017||Year-Over-Year Growth|
|Revenue||$280 million||$277.2 million||(1%)|
|Net income (loss)||($1.3 million)||$10.3 million||N/A|
|Diluted earnings per share||($0.08)||$0.59||N/A|
What happened this quarter?
- In Calavo's fourth-quarter earnings press release, CEO Lee Cole stated that the company's fiscal 2018 earnings "were impacted by several unique, unforeseen events that affected each of [our] business units during the fourth quarter."
- In fresh foods, Calavo's largest segment, avocado volumes, surged 53%. Despite this impressive spike in unit volumes, avocado prices fell for 11 out of 12 weeks in the quarter. Conversely, the prior-year quarter saw unusually higher pricing due to tight supply. Thus, revenue in this important segment dipped 3.4%, to $141.1 million, while gross margin fell to 7% against 16.3% in the fourth quarter of 2017.
- In Calavo's Renaissance Food Group (RFG) segment, sales rose 6%, to $117 million, while gross margin improved 1 percentage point, to 6.6%. Yet results fell below management's expectations as the RFG business was hit with food safety issues, including the recall of sweet corn by a supplier during September and the issuance of credits to customers from a melon recall in July.
- Calavo Foods, which sells refrigerated, high-pressure packaged guacamole along with other packaged fruits, reported a revenue increase of 7%, to $21.9 million. The division achieved a gross margin reading of 21.2%, which compares favorably to the prior-year quarter in which extremely high input prices for avocados reduced gross margin to 7.7%. Nonetheless, the segment experienced a guacamole packaging issue during the fourth quarter, which reduced both revenue and gross profit by approximately $1 million.
- Despite these various headwinds and execution problems, Calavo still managed a positive, if anemic, operating income of $7.5 million. This result was reduced by a non-cash loss of $8.5 million in subsidiary investments, however, primarily from the company's stake in FreshRealm, LLC, a provider of meal kits to retail grocers.
- Perhaps contributing to investor uncertainty around the FreshRealm subsidiary's potential for further losses (and surely impacting Calavo's share price, as well), Calavo's earnings release didn't address the specific details of the contributed loss. Instead, Calavo promised that further details would be forthcoming upon the filing of its annual report for the fiscal year.
- On the other hand, the company's earnings release appeared to indicate that its recent $9 million debt-based financing of FreshRealm would further the smaller company's growth in the meal-kit business. Nonetheless, more information would have been welcomed by shareholders.
What management had to say
Despite the multiple setbacks endured by the company during this quarter, CEO Cole projected firm confidence in Calavo's growth prospects for fiscal 2019:
We continue to see long-term growth potential in each of our three business segments and Calavo remains in a strong position -- both operationally and financially -- to capitalize on this opportunity. To that end, the company expects top-line growth in each of its three business segments, which will put Calavo on a trajectory to deliver record revenues and double-digit growth in consolidated adjusted earnings per share this fiscal year. My optimism is enhanced by a strong start to the current year in our Fresh and Foods businesses, which is already apparent in the fiscal 2019 first quarter.
Aside from the general parameters outlined directly above, Calavo Growers typically refrains from providing detailed revenue and earnings guidance. In its earnings report, the company discussed a strong outlook for avocado industry demand in 2019. Thus, the basic driver of Calavo's earnings success (and share price ascension) in recent years remains in place.
However, Calavo Growers will need to provide investors with more clarity regarding FreshRealm, LLC, avoid execution mishaps, and demonstrate an improved ability to handle external headwinds if it's to remedy the sudden and unforeseen swoon of its stock.