Numerous Headwinds Hamper Calavo Growers, Inc
We have held high hopes for Calavo Growers (NASDAQ: CVGW) over the past year. The company is the leader in fresh avocados in North America and well-positioned 4 stay-at-home trends as well as the restaurant reopening. The bad news is that the restaurant reopening didn't have quite the impact on sales that it could have while other headwinds emerged to cut into results. While pricing for avocados is on the rise and seasonal headwinds have already been overcome, the rot of inflation will continue at least into the end of the third quarter and perhaps well into next year, and data from Pricetargets.com shows this is having a negative impact on the stock price.
“Our results for the third quarter of this year were adversely impacted by inflationary pressures on labor, raw materials and freight, all of which accelerated as the third quarter progressed. These factors taken together with the delayed summer avocado crops coming from California and Mexico impacted our margins and profitability,” said Steven Hollister, incoming Interim CEO of Calavo Growers.
Calavo Growers Beats Consensus And Shares Fall
Calavo Growers’ revenue grew 5.4% over last year to $285 million and beat the consensus estimate by 215 basis points. Despite this, shares are falling in early action because business is still 20% below the 2019 level and margins are being severely impacted by inflationary pressures. On a segment basis, the fresh segment was flat versus the prior year's quarter on a 10% increase in realized pricing offset by an 8% decline in volume. The decline in volume is due to late harvests in Mexico and California that have since come into fruition. The RFG and Foods segments both grew 14% and 12% on strength in US foodservice activity.
“Taken together, our third-quarter revenues were generally in line with our expectations, but with inflationary pressures still present, gross margin and profitability fell far short of our initial expectations. Looking ahead, the same trends impacting our bottom line have persisted into the current quarter. However, for the second half of the fourth quarter, we anticipate a more favorable environment in terms of avocado supply and pricing.”
Moving down to the earnings, the news only gets worse. The company experienced an 860 basis point contraction in the gross margin that resulted in both a GAAP and adjusted loss on the bottom line. The decline in margin is blamed on rising labor costs, raw material costs, and freight that were amplified by the late harvest mentioned before. On the bottom line, the GAAP loss of $0.74 missed the consensus by $0.56 while the adjusted loss of $0.17 outpaced expectations by a penny. Looking forward, the company says the business is still strong but near-term inflationary pressures will continue to cut into earnings. Management did not offer any guidance.
Is This The Pits For Calavo Growers?
Shares of Calavo Growers are moving lower in the wake of the Q3 earnings report but the stock may be approaching a bottom. Not only does the price action smack of capitulation within the market but the relatively high short interest is also in decline. This tells us that the bears have begun to see the stock as a value versus an overpriced issue and have begun to close their positions. Price action may continue lower in the near term but divergence in the indicators suggest the market is overextending and ready to rebound. When price action puts in a bottom, we’ll be ready to reevaluate the situation.
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