The company is coming off a difficult Q1 (reported on October 1) in which it badly missed on both the top and bottom lines. Specifically, EPS came in at $0.26, well short of the $0.45 consensus, on revenue of $340.6 mln versus the $346.8 mln expectation. Pressuring its profitability was a 7.3% increase in farm production costs, which resulted mostly from higher feed costs. Feed cost per dozen climbed by 10.1%, driven by a jump in feed cost ingredients, including soybean meal. In its earnings press release, management commented that grain prices were volatile due to trade tariffs.
The Q1 miss led to a sharp initial dive in the stock, but shares quickly and impressively rebounded in the weeks that followed. Outside of missing the Street's numbers, CALM's Q1 performance actually looked solid, with EPS dramatically improving from the ($0.33) it suffered in the year ago period, as gross margin rocketed to 16.8% from 6.6% and revenue jumped by 30%. CALM was able to more than offset the bump in feed costs as its average customer selling price for shell eggs rose by 28.5% while volumes remained consistent year/year. Furthermore, higher margin specialty eggs (nutritionally enhanced, cage-free, organic) continued to see strong consumer demand, and CALM benefited from higher and less cyclical selling prices for specialty eggs.
More broadly speaking, CALM's growth has really been augmented through acquisitions. 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. In February 2017, it bought the assets of Happy Hen Egg Farms, which included another 350,000 laying hens. Most recently, CALM acquired the assets of Featherland Egg Farms on October 10, which added processing facilities for 600,000 hens.
On top of these acquisitions, CALM has also spent over $310 mln over the past five years to expand and upgrade its existing facilities, with projects in Kentucky, Texas, Arkansas, and Florida. These projects have especially ramped up its cage-free and organic capacity.
With a number of acquisitions now in the rear-view mirror, the company is lapping some difficult year/year comparisons heading into tomorrow's print. Namely, analysts are expecting the company to report Q2 EPS and revenue of $0.43 and $362.7 mln, respectively, which would equate to a year/year EPS decline of 22% on flat sales. That would follow the strong top-line growth rates of 30%, 61% in 4Q18, and 42% in 3Q18, illustrating the challenge of depending on acquisitions to drive consistent growth.
The sell-off in the market has pressured shares over the past several weeks, but the stock seems to be perking up just ahead of tomorrow's report. And with expectations more subdued for the company than they have been in recent quarters, CALM also looks better positioned for a positive reaction should it produce a reasonably sound report.