Calavo Growers (CVGW), a producer and distributor of avocados, tomatoes, and prepared foods, saw a sharp rise in stock price after reporting Q2 results that exceeded EPS and revenue expectations. Despite a nearly 25% drop in revenue to $184.4 million, the decline is attributed to the sale of its fresh cut business, which is still classified as a discontinued operation.
- On an organic basis, CVGW showed strong growth, especially in its Grown segment. A 28% year-over-year increase in the average selling price of avocados led to a 19% rise in net sales to $166.8 million. This growth came even with a 13% drop in volume as CVGW focuses on prioritizing margins. The Grown segment's gross margin expanded by 110 basis points year-over-year to 11.0%.
- The Prepared segment also showed improved results following the divestiture of the fresh cut business. In the 3Q23 earnings report, which included the fresh cut business, net sales declined by 14%, and gross profit fell by $3.1 million. The drop was driven by an $8.1 million decline in the fresh cut division due to lower volume and higher input costs.
- Contrastingly, the Prepared segment's gross profit grew by $1.2 million to $4.3 million, with gross margin expanding to 24% from 17%. This improvement was mainly due to lower input costs and the divestiture.
- Although the sale of the fresh cut business to F&S Fresh Foods was announced in mid-January, the deal has yet to be finalized. CVGW disclosed in the Q2 report that terms such as price and structure are still being negotiated. Initially, the transaction was estimated at $100 million, but this figure may change. CVGW plans to use the proceeds to reduce debt and for shareholder returns.
The main takeaway is that CVGW's strategy of focusing on margins over volume, including the divestiture of the fresh cut business, is proving effective and should support solid earnings growth in the future.
