A Jump in Gross Margin Compensates for Calavo's Sales Slip

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In a similar narrative to its last sequential quarter, the second quarter of fiscal 2018, avocado specialist Calavo Grower's (NASDAQ: CVGW) results for its most recent three months were characterized by a modest revenue contraction of roughly 2%, accompanied by vigorous growth in net income and earnings per share. Below, we'll review the raw numbers and relevant details of the company's report, which was issued earlier this month.

Calavo: The raw numbers

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What happened this quarter?

  • Volume in fresh foods, Calavo's largest segment, improved by 18% year over year. Yet higher avocado supply industrywide resulted in lower selling prices for avocados, thus, segment revenue declined by 11.3%, to $149.8 million.
  • Fresh segment gross profit of $14.9 million equaled 10% of sales. This gross margin was impressive given the revenue compression due to lower avocado prices, and to a lesser extent, lower tomato prices during the quarter.
  • Calavo's Renaissance Food Group, or RFG, produced tangible gains over the prior year. Calavo's refrigerated packaged-foods business improved sales by 8% to $121.2 million, while gross profit increased by $3.2 million to $10.0 million-a 46% leap. Segment gross margin of 8.2% rose more than two percentage points from 6% in the prior-year period.
  • Management attributed RFG's rise in profitability to operating efficiencies and economies of scale related to new and expanded manufacturing facilities, as well as the introduction of additional fresh foods programs with retail customers.
  • The star of the quarter was likely Calavo Foods, which primarily sells refrigerated, high-pressure packaged guacamole. This segment generated a top-line improvement of 25%, as sales expanded to $25.3 million. Gross profit of $8.1 million rocketed up from just $1.1 million in the third quarter of 2017, translating to gross margin of 32.1%, against a prior-year margin of just 5.4%. The leverage in profitability was primarily due to the higher sales volume, but lower commodity costs in comparison to the comparable quarter also played a role.
  • Taking all segments' progress into account, Calavo Grower's total gross margin jumped by nearly 300 basis points to 11.1%. This more than offset the slight sales decline, leading to substantially higher net income and earnings per share, as shown in the table above.
  • During the quarter, Calavo Growers invested an additional $3.5 million in its subsidiary FreshRealm, LLC, and committed to $12 million in future debt financing, as the fledgling meal-kit enterprise ramps up operations with retail customers.

What management had to say

CEO Lee Cole discussed each of the individual segments in the company's press release. For shareholders, his comments on the organization's smallest but fastest-growing segment, Calavo Foods, are probably the most important to note:

Looking forward

Calavo Growers avoids issuing quantitative, detailed guidance. But heading into the last quarter of the fiscal year, CEO Cole did affirm that the company is on track for a record year in terms of revenue and gross profit, and is set to achieve double-digit adjusted earnings-per-share growth. Given the boost from significantly higher margins in the third quarter, it appears that Calavo may indeed deliver on all three fronts when it reports on its final fiscal 2018 quarter in December.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.