However, those good vibes didn't last too long as investors turned their attention towards CALM's near-term prospects. The company does not provide specific financial guidance, but, in its earnings press release, management offered some cautious commentary. Specifically, it noted that rising hen numbers are causing egg supplies to ramp higher, negatively impacting market prices. This boost in supply caused its average customer selling price to dip by about 11%.
At the same time, the company is facing higher feed costs, mainly due to less favorable crop conditions, negatively impacting feed ingredients from some of CALM's larger feed operations. Additionally, while there was a record harvest for U.S corn and soybean crops in 2018, grain prices have been volatile due to the ongoing uncertainties surrounding tariffs and trade agreements with China. These factors led to its farm production costs per dozen increasing by 6.9% and its feed costs per dozen lifting by 6.3%.
With that backdrop in mind, it isn't surprising that CALM's gross margin slid sharply lower to 21.5% from 27.6% in the year ago period. In fact, on a yr/yr basis, most of CALM's financial metrics turned south. For instance, revenue fell by 12% to $384 mln, essentially in line with expectations, and operating income plummeted by 50% to $38.2 mln. But, these decreases aren't quite as bad as they look. A significant reason for the yr/yr declines is that the company is lapping more difficult comparables as several acquisitions bolstered its growth in 2017.
For instance, in October 2016, it acquired Dixie Egg Company, adding 1.6 mln laying hens. It also acquired the Egg-Land's best franchise for part of Alabama, Florida, and Georgia. Then, in February 2017, CALM bought the assets of Happy Hen Egg Farms, which included another 350,000 laying hens. Finally, CALM acquired the assets of Featherland Egg Farms on October 10, 2018 which added processing facilities for 600,000 hens.
Going forward, acquisitions figure to remain a key aspect of its growth strategy due to the highly-fragmented nature of the industry. In particular, the company plans to continue focusing on growing its specialty egg business, including cage-free and organic. For the quarter, specialty eggs represented 24.7% of total sales volume, up from 24.3% a year ago. Consequently, specialty egg revenue was 35% of total shell egg revenue, compared with 30.2% for 3Q18 reflecting slightly higher volumes and a 2.1 cent per dozen increase in average selling price for specialty eggs.
So, the good news is, specialty eggs command higher market prices. The not-so-good news is that specialty eggs require higher priced feed formulation, at least partially off-setting the higher selling prices.
To conclude, the initial knee-jerk reaction higher was driven by the big earnings beat, which was due to solid cost management as SG&A expense was virtually flat yr/yr. It also should be noted that there are only two analysts covering CALM, making it more susceptible to wide earnings beats and misses. Once the elation from the earnings beat faded, the stock sold off sharply, giving up all its gains, as CALM's cautious outlook regarding the business climate became the focal point.