Santa Paula, California-based agribusiness Calavo Growers (NASDAQ:CVGW) followed the stabilization of earnings in the fiscal first quarter of 2019 with record results in the fiscal second quarter. While the company has diversified operations over the last few years, higher sales and profit margins in its core avocado marketing and distribution business provided most of the financial firepower this quarter. Note that in the discussion that follows, all comparative numbers refer to the prior-year quarter.
Calavo Growers: The raw numbers
|Metric||Q2 2019||Q2 2018||Growth (YOY)|
|Revenue||$286.2 million||$264.4 million||8.2%|
|Net income||$16.3 million||$14.1 million||15.6%|
|Diluted earnings per share||$0.93||$0.80||16.3%|
What happened this quarter?
- Both Calavo's net income and diluted earnings per share (EPS) represented all-time quarterly earnings records at the company.
- Higher avocado and tomato sales propelled a 10% increase in the organization's Calavo Fresh segment, to $150.9 million. Volume increased by one million units (i.e., units of avocados, tomatoes, and papayas) to 5.7 million. Gross profit in this segment leaped by 80% to $27.8 million, as gross margin expanded by 740 basis points to 18.4%. Management attributed the robust rise in profitability to "strong avocado sourcing, sales and production management."
- The Renaissance Food Group (RFG) segment's top line improved 9% to $114 million. Gross margin decreased by 650 basis points to 2.5% due to continued high raw ingredient costs and a food safety issue with one of the company's co-packing partners.
- In the company's smallest segment, Calavo Foods, sales dipped by roughly 3% to $21.9 million, while gross margin dropped to 29.7% versus 34.5% in the prior-year quarter.
- Calavo Growers recorded a $2.7 million noncash loss from its unconsolidated meal kit subsidiary, FreshRealm, LLC. This was a significant sequential improvement from the $6.4 million loss booked in the first quarter of fiscal 2019. Calavo attributed the smaller loss to cost reductions and FreshRealm's signing of a multinational retail customer last quarter.
- In addition to the loss from FreshRealm, Calavo recognized an unrealized gain of $1.4 million on its ownership interest in publicly traded agribusiness Limoneira Company, and a $1.9 million gain on sale from a sale/leaseback transaction involving the company's Temecula, California, packing house.
What management had to say
In Calavo Grower's earnings press release, CEO Lee Cole illuminated progress in the organization's primary business line that enabled the quarter's extremely strong results:
The leading contributor to these results was our Fresh segment, especially our core avocado business, which registered yet another outstanding performance. Avocado unit volume and gross profit increased significantly year over year—indicative of consumer demand that continues to track strongly. I previously expressed optimism and confidence about the prospects for our Fresh segment for this year and for the longer term, due to the world-class global avocado operation we have built. The second quarter performance is gratifying validation that our initiatives to develop dynamic sourcing, production and sales management have enabled this business to prosper and generate sustained, strong results.
While Calavo Growers doesn't issue finely detailed forward guidance, it does share broad segment and overall performance expectations with shareholders. Looking ahead to the remainder of the year, management expects gross profit in the Calavo Fresh segment to expand at least 50% over the $54.2 million in gross profit recorded in the 2018 fiscal year. The packing partner issue in RFG mentioned above will limit top-line growth in that business to the high single digits for the full year. Calavo Foods expects to bump revenue up by the mid-single digits in fiscal 2019, while gross margin may dip yet again, due to a recent "sharp" increase in the higher-grade avocados this segment uses in its packaged food products. As for total company guidance, Calavo Growers anticipates that it will finish the year with record revenue and a double-digit increase in diluted EPS.