Investing in the agribusiness sector can sometimes feel as risky as buying a high-flying tech stock: The increasingly unpredictable weather patterns that are resulting from global warming seem to put every harvest at greater risk.
It's encouraging, then, when a pure-play fruit-farming company can string together several quarters of vibrant growth, as avocado collective Calavo Growers (NASDAQ:CVGW) has done in its current fiscal year. Following the release of its fiscal third-quarter report after markets closed on Thursday, shares of the small-cap agriculture concern popped by nearly 7% on Friday.
Calavo Growers: The raw numbers
|Metric||Q3 2019||Q3 2018||Change|
|Revenue||$359.3 million||$296.4 million||21.2%|
|Net income||$10.6 million||$12.4 million||(14.5%)|
|Diluted earnings per share||$0.60||$0.70||(14.3%)|
What happened this quarter?
- Net sales of nearly $360 million set an all-time quarterly record for the company.
- Growth was led by its core "Calavo Fresh" segment. Total segment volume dropped from 4.9 million units in Q3 2018 to 4.7 million units in the current quarter. However, rising avocado prices and a double-digit increase in tomato sales pushed revenue higher by an impressive 38% to $207 million, while gross margin jumped by 220 basis points to 12.2%. Gross profitability in the fresh business has widened significantly over the last several quarters, due to rising efficiency in the company's sourcing, production, and sales processes.
- Renaissance Food Group (RFG) sales improved by 5% year over year to $127.5 million. The top line was supported by new customer relationships in areas where the business has extended its manufacturing capacity outside Calavo's home base of California -- management specifically cited RFG's new production plant in Georgia. RFG's gross margin dropped 220 basis points to 6%. Nonetheless, gross margin rebounded sequentially from fiscal Q2 2019, during which a food-safety issue with one of RFG's co-packing partners resulted in segment gross margin of just 2.5%.
- Calavo Foods, the company's smallest segment, saw sales slip roughly 2% to $24.8 million. It produces and sells guacamole and other refrigerated foods, and its profitability was affected by sharply higher avocado prices. Gross margin for the segment tumbled to 11.4%, against a 32.1% gross margin in the prior-year quarter.
- Due to the powerful performance of the fresh segment, total operating income rose by $2.4 million year over year to $21.6 million. However, realized and unrealized losses of $5.1 million from the company's stake in lemon grower Limoneira weighed on net income and earnings per share.
- The impact from the Limoneira stake was partially offset by shrinking losses from the company's unconsolidated interest in meal-kit provider FreshRealm. Loss attributable to FreshRealm declined by approximately $1.2 million to $2.5 million. The improved results in the subsidiary derived from new customer additions and cost-cutting.
What management had to say
In recent years, Calavo has extended its business in the consumer staples arena beyond its core avocado sourcing and sales, and into fresh foods, prepared meals, and meal kits. In the organization's earnings press release, CEO Lee Cole emphasized the diversity of its revenue streams as an inherent business strength:
We advance toward the conclusion of fiscal 2019 in a very strong position that underscores my confidence for Calavo's potential for the current year and well into the future. Our company has in place a very strong, flexible strategic platform – with multiple revenue and profit drivers – capable of performing well across a range of market conditions as Calavo has repeatedly demonstrated.
Calavo is anticipating a crisp finish to its fiscal year. The company expects 2019 gross profit growth of over 50% in its fresh segment, which will provide a foundation for overall results. Management is targeting high-single-digit percentage revenue growth in RFG for the year, which will be aided by the opening of the segment's newest production facility in the Pacific Northwest in the fourth quarter. Calavo Foods is expected to recover ground on gross margin in the last three months of the fiscal year.
Calavo Growers has advised shareholders that it still expects to book record revenue for fiscal 2019, and it's forecasting growth in adjusted earnings per share of more than 20%. That goal can be seen as something of an upward revision, as previously, the company had simply said it was targeting "double-digit" expansion in adjusted EPS. The specificity is also a reflection of executives' confidence in the business's ability to execute through the home stretch of the current 12-month period.