2023-03-09 13:24:33 ET
Summary
- Calavo Growers is a leading distributor of avocados and prepared fresh fruits and vegetables in the U.S.
- Calavo's restructuring and turnaround plan continues, with mixed results. After improvement in Q2/2022, the company has now delivered 3 bad quarters in a row.
- Until the company can find some consistency, I am taking my losses and moving to the sidelines.
A few weeks ago, I wrote an optimistic follow-up article on Calavo Growers inc. (CVGW). Despite headline earnings misses, the company still seemed to be on track for an operating turnaround, with gross margins steadily improving.
However, on March 6th, 2023, Calavo once again reported Q1 fiscal 2023 earnings results that were not well received by the market, with the company's stock plummeting by over 20% on the earnings announcement (Figure 1).
What happened in the quarter and was it really such a disaster?
Q1/F23 Was A Miss
For Q1/F23, Calavo reported revenues of $226 million (-17.5% YoY), missing consensus estimates by $40 million. However, revenues are a function of avocado prices, which can be volatile. What likely spooked markets was an adj. net loss of $1.4 million or $0.08 / share vs. analyst estimates for a $0.18 / share profit and an adj. loss of $0.02 in Q1/F2022. On a GAAP basis, EPS was a loss of $0.17 vs. a loss of $0.23 in Q1/F2022 (Figure 2).
Gross profit for the quarter was $14.4 million or 6.3% gross margin, a sizeable decline compared to 8.4% in Q4/F22, but an improvement vs. 4.8% in Q1/F22. Gross margin in the Grown Segment did relatively well, coming in at 8.0% vs. 7.2% last quarter despite volatile avocado prices (Figure 3).
However, the corporate margin decline was driven by a QoQ gross margin decline in the Prepared segment, which delivered a 4.6% gross margin vs. 9.4% in Q4/F2022. Importantly, this was a big miss compared to management's 2023 guidance of 10-12% gross margins for the Prepared segment. To be fair, management did guide that Q1/F23 would be softer due to seasonality, but I doubt anyone would have expected gross margins to be less than half of the full year rate.
2023 Guidance Tempered But Is It Achievable?
Looking forward, the poor performance in Q1 caused management to lower their full year guidance, with the company now expecting full year adjusted EBITDA in the range of $40-45 million.
Unfortunately, the company did not provide a reconciliation estimated adjusted EBITDA to reported GAAP financials, so it is hard for analysts like myself to gauge management's estimate of profitability at this time.
For reference, in my financial model from figure 3 above, I estimate Calavo generated $23 million in EBITDA for 2022, and will generate $37 million in EBITDA for 2023 at a 7.5% gross margin.
However, investors should bear in mind that $40-45 million in adjusted EBITDA would be a steep increase from Q1/F23, where Calavo generated only $3.6 million in adjusted EBITDA (Figure 4).
Exiting Non-Core Salsa Business
Along with the quarterly earnings, Calavo also reported that the company is exiting the non-core salsa business in its Prepared Segment. The company will take a one-time $3.2 million charge related to the exit that is expected to save $1.5 million annually.
The business decision to exit salsa is a bit confusing. In our last article, we noted that Calavo was very excited to be partnering with General Mills ( GIS ) to be the exclusive U.S. manufacturer of the Old El Paso brand fresh guacamole and salsas. As readers should be aware, guacamole and salsa go hand-in-hand in Mexican cuisine, so I really do not understand the decision to exit the salsa business especially as Calavo is looking to gain market share as Old El Paso's manufacturer.
I think this decision speaks poorly to management's vision and decision-making process.
Valuation Not Cheap For Current Fundamentals
Wall Street analysts currently expect Calavo to earn $1.08 in 2023, which is actually a bit higher than my forecast for $0.89, based on a 7.5% gross margin. Based on a current $24 stock price, this translates into a Fwd P/E of 22x, which does not look particularly cheap against Consumer Staples peers which are trading at a 18.3x Fwd P/E or the S&P 500 Index which is trading at a forward P/E of 18.0x (Figure 5).
The real value in Calavo is if the company can return to historical gross margins of ~10%, then there is upside to profitability to ~$2 / share, as Wall Street appears to be assuming for fiscal 2024.
However, given how fiscal 2023 is currently progressing, I am no longer confident the company can achieve that level of gross margin and profitability by 2024.
Risks To Calavo
The biggest risk to Calavo continues to be management's execution of the turnaround plan. So far, results have been mixed, with a good rebound in margins in Q2/2022 followed by 3 straight poor quarters. It is also concerning that management is exiting the prepared salsa business months after promoting a partnership to produce guacamole and salsas for General Mills' Old El Paso Brand.
Conclusion
In summary, the turnaround story at Calavo continues. After a poor start to fiscal 2023, I have less confidence that Calavo can return to historical margins and upside to current valuations. I am downgrading Calavo to a hold until it can string together a few good quarters.
For further details see:
Calavo Growers: 3 Bad Quarters Make A Trend