Calavo Growers' Margins Improve as Avocado Supply Stabilizes

Recently, I identified Calavo Growers, Inc. (NASDAQ: CVGW) as a "tiny, mighty dividend stock" due to its growth potential and steady dividend increases. This week, the avocado seller reported first-quarter fiscal 2018 earnings. Let's check in on Calavo's results, review the overall avocado industry, and examine a compelling opportunity in one of its subsidiaries.

Revenue and profits rise across segments

During Calavo's first quarter, which ended Jan. 31, the company's top line rose 9.4% to nearly $248 million. In Calavo's largest segment, fresh products, which consists primarily of avocado sales sourced from its cooperative growers in California (and secondarily, Mexican and Peruvian suppliers), sales rose 10% to $122.8 million. The fresh segment achieved a 13.2% increase in packaged units sold, which management attributed to strength in avocado sourcing and packaging, and unit improvement in the company's growing fresh tomatoes business.

Renaissance Food Group (RFG), Calavo Growers' second-largest segment, sells refrigerated packaged foods, and this division also reported vigorous improvement in its top line, with sales advancing 8.6% to $106.1 million. Calavo Foods, the company's smallest segment, manufactures high-pressure packaged guacamole. This line of business booked a 13.4% sales increase, to $19 million.

Improving market conditions supported results

The stabilization of global avocado supply proved to be one of the key factors behind Calavo Growers' successful first quarter. Last year, a combination of storms, drought, and uncontrolled fires in California, Mexico, and Chile cut into supply. These factors pushed the price of a wholesale box of avocados to $84, from just $35 in 2016. Supply trends are improving in early 2018, as higher production is expected from Latin American countries throughout the year.

In Calavo's earnings release, CEO Lee Cole discussed the state of the global avocado market -- always a key piece of information for shareholders: "We continue to see strong fresh avocado demand and it will be met with a larger all-source industry supply that is forecast to increase approximately 20 percent. Avocado consumption -- both domestically and internationally -- continues to trend upward and we are well-positioned to help satisfy this demand."

Calavo's earnings summary also noted that avocado consumption trends were similarly forecast to rise 20% in 2018.

The rebalancing of supply and demand in the avocado industry is reflected in the company's improving margin. Gross margin in the first quarter edged up 100 basis points to 10.6%. Within the fresh business, gross margin soared 82%, as costs stabilized and the organization capitalized on still-elevated avocado prices. However, this was offset by margin deterioration in RFG, due to a Hurricane Harvey-related labor shortage, and the ramp-up of production in a new facility located in Riverside, California.

Healthy profits and compelling opportunities

As for its bottom line, Calavo posted operating income of $11.3 million, representing an operating margin improvement of roughly 1 percentage point versus the comparable quarter, to 4.3%. Net income from controlling interests hit a first-quarter record of $6.9 million. Calavo also reported net income from non-controlling interests of $150,000, with the majority deriving from its subsidiary FreshRealm, LLC. After seeding FreshRealm over several years, Calavo deconsolidated it in 2014, while retaining an ownership stake of approximately 43%.

FreshRealm, though tiny, is an intriguing company, as it specializes in the prepared foods business at a time when interest in meal kits is exploding. Weight Watchers International Inc. (NYSE: WTW) recently announced that it's partnering with FreshRealm to produce Weight Watchers-branded meal kits, which will roll out to stores in the second half of this year.

As I discussed with my Foolish colleague Vincent Shen in January, Weight Watchers' part-owner and brand ambassador Oprah Winfrey is a shrewd businessperson with a nearly unmatched ability to expand the scale of products she endorses. Later this year, we should be able to gauge some of the economics of FreshRealm's deal with Weight Watchers, via the equity income passed on to Calavo Growers.

It's notable that Calavo CEO Cole himself invested $7.5 million in FreshRealm in October 2017. Executive skin in the game is typically one of the most telling signs of confidence in an entity's prospects. Stay tuned on FreshRealm's expansion alongside Weight Watchers. It's a fun story line within Calavo Growers' overall narrative of long-term opportunity in the global avocado and fresh foods markets.

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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.