After surprising shareholders with meager operating income and a net loss in the fiscal fourth quarter of 2018, avocado and fruit supplier Calavo Growers (CVGW -0.46%) posted appreciably higher operating income in its fiscal first-quarter 2019 report, released on Thursday. The improved results were primarily driven by better execution in avocado distribution despite a weaker pricing environment.

Calavo Growers: The raw numbers

Metric Q1 2019 Q1 2018 Growth (YOY)
Revenue $258.0 million $247.9 million 4.1%
Net income (loss) $4.5 million $7.1 million (36.6%)
Diluted earnings per share $0.26 $0.41 (36.6%)

Data source: Calavo Growers. YOY = year over year. 

Ripe avocados growing on a tree.

Image source: Getty Images.

What happened this quarter?

  • Revenue in Calavo's largest segment, fresh foods, dipped 4.8% year over year to $116.9 million, as a 7% increase in avocado volumes was offset by lower pricing against the prior-year period. However, gross margin jumped by more than 6 percentage points to 17.8%, as the company "leveraged its core strengths" in the areas of avocado sourcing, sales management, and production.

  • Sales in the company's Renaissance Food Group (RFG) segment rose more than 12% over the prior year's result to $119.1 million. However, higher raw ingredient costs and a consumer advisory on romaine lettuce pressured gross margin, which fell 270 basis points to 3%.

  • Calavo Growers' smallest segment, Calavo Foods, supplies distributors and retailers with refrigerated, pressure-packed guacamole and packaged fruit products. This segment enjoyed a 16% increase in sales year over year to $22.1 million. Gross margin retraced 230 basis points to 29.1%, but the higher sales level ensured that gross profit in dollars of $6.4 million exceeded the prior year's gross profit total of $6 million.

  • Calavo Growers enjoyed lower overhead expenses during the quarter. Selling, general, and administrative (SG&A) expenses of $14.3 million compared favorably to the $15.5 million of SG&A expenses booked in the first quarter of 2018. Management attributed the decreased expenses to lower costs associated with broker commissions and incentive compensation.

  • Due to the higher gross margin in fresh foods and the controlled overhead expenses, Calavo's operating income of $16.6 million handily outpaced the comparable quarter's operating income of $10.8 million.

  • However, new GAAP rules on investments required Calavo to include an unrealized loss of $4.5 million on its shares in Limoneira Company in this quarter's income statement.

  • Calavo also recognized a loss of $6.4 million in its interest in unconsolidated subsidiaries, which was primarily attributed to losses in the company's FreshRealm packaged-food and meal-kit subsidiary.

  • The investment and subsidiary losses outpaced Calavo's operating profits, resulting in the negative earnings growth seen in the table above. Removing these effects, adjusted earnings per share (EPS) of $0.74 exceeded the prior-year period's adjusted EPS by 37%.

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What management had to say

After several disparate factors combined in the previous quarter to produce low margins and scant operating income, Calavo Growers' three segments appear to have stabilized in the first quarter of the fiscal year. Calavo CEO Lee Cole commented on the favorable results in the company's earnings press release:

Calavo's businesses are executing well and we are excited about the course ahead in fiscal 2019 and beyond. With our deep breadth of resources -- operating, financial and human capital -- as well as planned initiatives during the current year, we think the future looks exceedingly positive and I am eagerly anticipating reporting on the company's continued progress.

Looking forward

Calavo Growers doesn't provide detailed earnings guidance. However, in addition to the optimistic outlook provided above, CEO Cole also expressed confidence in the company's FreshRealm subsidiary, which has contributed losses to Calavo of late, but has the potential to add to the company's bottom line.

Cole noted that Calavo has extended a loan package to FreshRealm (totaling nearly $20 million), which should help the organization expand its meal-kit operations. Cole also noted that Calavo Growers' confidence in FreshRealm has been boosted by cost-cutting initiatives in the subsidiary and a "meaningful" new supply contract signed in the first quarter with "a large multi-national, multi-channel retailer."

Further detail on FreshRealm should be available when Calavo files its more detailed 10-Q report for this quarter. Yet clearly, management is counting on the fresh packaged food segment to eventually bolster Calavo's already bright long-term growth prospects.