Executive Summary / Key Takeaways

• Calavo Growers is executing a strategic turnaround ("Project Uno") aimed at improving operational efficiency and driving profitable growth across its Fresh and Prepared segments, moving beyond a period of challenges and stabilization.
• Recent Q2 fiscal 2025 results demonstrate progress, with consolidated net sales increasing 3.3% year-over-year, driven by higher avocado pricing in the Fresh segment, despite volume declines in both Fresh (avocados, tomatoes) and Prepared.
• Operational improvements, including a new transportation management system, streamlined operations, and enhanced labor/yield efficiencies, are contributing to cost reductions and margin optimization, particularly evident in decreased SG&A expenses.
• The company faces significant external risks, including ongoing Mexican tax disputes (with a large assessment and VAT receivables), potential U.S. trade policy shifts impacting Mexican imports, and agricultural risks like the avocado weevil, which could pressure supply and costs.
• While near-term volume softness and margin volatility persist, particularly in the Fresh segment due to supply dynamics and in the Prepared segment facing macro headwinds and customer-specific challenges, management's focus on strategic initiatives, new customer acquisition (especially in Prepared deli), and disciplined capital allocation aims to drive sequential improvement and long-term value.

The Roots of Calavo: From Grower to Global Player

Calavo Growers, Inc. stands as a significant force in the global fresh produce and prepared foods landscape, built on decades of expertise in sourcing, packing, and distributing avocados. What began with a focus on fresh fruit has evolved into a dual-segment business encompassing Fresh (avocados, tomatoes, papayas) and Prepared (guacamole, avocado pulp). This evolution reflects a strategic journey to diversify offerings and capture value across the avocado lifecycle, from grove to table.

However, this journey hasn't been without its challenges. Recent years saw the company grapple with operational inefficiencies, market volatility, and strategic missteps that necessitated a fundamental reassessment. This led to the launch of "Project Uno" in fiscal 2021, a comprehensive initiative designed to stabilize the business, streamline operations, and pave the way for sustainable profitability. Key actions included reorganizing segments, refreshing the brand, and implementing various cost-saving and efficiency-boosting programs. The divestiture of the Fresh Cut business in August 2024 marked a significant step in this restructuring, allowing the company to sharpen its focus on its core Fresh operations and the retained guacamole business within the Prepared segment.

Cultivating an Edge: Operations, Technology, and Competitive Grounding

Calavo's competitive position is rooted in its extensive sourcing network, operational capabilities, and a strategic shift towards leveraging process improvements and targeted technology. The company procures avocados from key growing regions globally, including California, Mexico, Peru, and Colombia. This multi-region sourcing provides a degree of flexibility, allowing Calavo to navigate regional supply fluctuations and price dynamics, a critical capability in the volatile avocado market.

Operationally, Calavo's facilities are equipped for sorting, packing, ripening, and shipping fresh produce, alongside processing and packaging guacamole. While the company appears to lack proprietary, quantifiable technology differentiators in the traditional sense (like a unique processing machine design), it highlights significant investments in operational technology and process optimization that function as key differentiators. For instance, the implementation of a new transportation management system is designed to improve the competitiveness of freight costs by enabling RFPs on outsourced freight. This system, fully implemented in Q2 2023 and likely refined since, directly impacts the cost of goods sold and logistics efficiency. Furthermore, the company has emphasized labor productivity gains (9% sequentially in RFG in Q1 2022), yield enhancements, and disciplined raw product sourcing methodologies (93% of raw products in the former RFG business sourced under contract using an online tool as of Q3 2022). These process-driven "technologies" and operational disciplines are aimed at reducing waste, improving throughput, and controlling input costs, providing a tangible benefit in a margin-sensitive business. The achievement of a 99% customer fill rate in the former RFG business by the end of Q2 2022 also underscores the impact of operational focus and process reliability on customer service, a critical competitive factor.

In the competitive landscape, Calavo faces established players like Mission Produce (AVO), Fresh Del Monte Produce (FDP), and Dole plc (DOLE). Mission Produce, with its vertical integration, often demonstrates strong operational efficiency and resilience to market disruptions. Fresh Del Monte and Dole leverage vast global distribution networks and diversified product portfolios. Calavo differentiates itself through its strong brand recognition, particularly in value-added products like guacamole, which supports premium positioning and customer loyalty in North America. While competitors may have advantages in scale or vertical integration, Calavo's strategic focus on operational efficiency improvements, disciplined sourcing, and its established brand in key product categories provides a competitive moat. The ability to buy the full crop from growers and allocate different grades to its Fresh and Prepared segments also offers a strategic advantage in managing supply and maximizing value extraction, a capability not always as pronounced in competitors focused solely on fresh distribution.

Financial Performance: Navigating Headwinds, Seeking Traction

Calavo's recent financial performance reflects the ongoing efforts to improve profitability amidst challenging market conditions. For the three months ended April 30, 2025 (Q2 fiscal 2025), net sales increased 3.3% year-over-year to $190.5 million. This growth was primarily fueled by a 4.7% increase in Fresh segment sales, largely attributable to higher avocado pricing, which offset a decline in carton volume. Conversely, the Prepared segment saw a 9.9% decrease in sales, primarily due to lower sales volumes.

The six-month period ended April 30, 2025, showed a more robust 10.6% increase in net sales to $344.9 million, driven by a 12.4% rise in Fresh segment sales, again led by higher avocado prices offsetting volume declines. The Prepared segment's sales for the six months decreased by 5.4%.

Despite the top-line growth, consolidated gross profit for Q2 2025 decreased by 11.9% to $18.1 million, primarily impacted by performance in the Fresh segment. Fresh gross profit declined due to lower volumes in both avocados and tomatoes. Avocado per-carton profitability was negatively affected by $0.9 million in tariffs during a brief period in March 2025, an unexpected cost that could not be passed on to customers. Tomato gross profit saw a significant decrease driven by volume reduction and lower pricing due to weak demand and strong domestic supply.

For the six-month period, consolidated gross profit increased by 8.0% to $33.8 million. This was largely driven by strong first-quarter performance in the Fresh segment, where favorable pricing and cost discipline boosted gross profit per carton, partially offsetting the volume and margin pressures experienced in the second quarter. The Prepared segment's gross profit per pound for guacamole improved slightly in Q2 2025 due to better operational efficiency, but the six-month period saw a modest decline year-over-year primarily due to higher raw fruit costs in the first quarter and lower volume/average selling price.

Selling, general, and administrative (SGA) expenses showed positive trends, decreasing by 20.9% in Q2 2025 and 22.3% for the six-month period compared to the prior year. These reductions stemmed from lower compensation costs (reduced headcount, severance), decreased professional and consulting fees (lower legal costs), and optimized IT expenses. This indicates progress in controlling operational overhead, a key component of the Project Uno initiative.

The discussion of recent sales trends, gross profit performance, and SG&A reductions provides context for the company's overall top-line growth and profitability efforts.

Liquidity remains adequate, with cash and cash equivalents totaling $60.4 million as of April 30, 2025. Cash provided by operating activities was $11.3 million for the six months ended April 30, 2025, a significant improvement from the $2.2 million provided in the prior year period, reflecting better net income performance and changes in working capital. Working capital stood at $90.1 million. The company's credit facility, amended in August 2024, provides approximately $59.5 million in available borrowing capacity as of April 30, 2025, with minimal amounts outstanding. This financial flexibility is crucial for managing working capital fluctuations inherent in the produce business and funding strategic investments.

Outlook and Strategic Trajectory

Management anticipates that inflationary and other cost pressures will persist through fiscal 2025. The outlook for the Fresh segment is tied to supply dynamics; while volume is expected to increase commensurate with supply changes, per-case margins are anticipated to be at or near the low end of the $3 to $4 range due to expected volatility as California and Peru seasons commence.

In the Prepared segment, volume growth is expected to be supported by the newly introduced avocado squeeze pouches and expanding demand across core offerings, particularly as customer programs scale in the second half of the fiscal year. Management is focused on onboarding new national deli grab-and-go customers, a strategic focus that began in the latter half of fiscal 2023 and continues. Gross margins in the guacamole division are expected to approximate 20-25%, contingent on raw fruit costs and production efficiencies. The fresh cut portion (now part of Prepared) was targeted to exit fiscal 2023 delivering a 10% to 12% gross margin run rate, a goal the company continues to work towards despite recent volume softness.

The company continues to execute its strategic plan, aiming to shift from stabilization to growth. This involves expanding grower partnerships, strengthening customer relationships, and leveraging operational improvements. Disciplined capital allocation remains a priority, with a stock repurchase program authorized in March 2025 signaling a potential avenue for returning value to shareholders, although no shares have been repurchased to date.

Risks on the Horizon

Several risks could impact Calavo's trajectory. The ongoing Mexican tax audits, particularly the significant 2013 Assessment and the large VAT receivables, represent material financial and operational uncertainties. While the company is challenging the assessment and believes it will prevail, the process is lengthy and costly (incurring professional fees), and an unfavorable outcome could have a substantial impact. The recent partial VAT refund provides positive momentum but does not resolve the larger issues.

Uncertainty surrounding U.S. trade policy with Mexico, including the potential for new tariffs or the termination of the U.S.-Mexico Tomato Suspension Agreement, poses a risk of increased input costs that may not be fully offset by price increases, potentially compressing margins.

Agricultural risks, such as a severe outbreak of the avocado weevil, could disrupt supply chains, increase costs, and impact product quality and volume, as evidenced by the temporary packinghouse pause in Q1 2025.

Furthermore, the lease contingency related to the Fresh Cut business sale exposes Calavo to potential liability if the buyer defaults on assigned leases, although the company currently deems this improbable. Macroeconomic challenges, including persistent inflation and shifts in consumer demand, continue to create a volatile operating environment.

Conclusion

Calavo Growers is in a period of strategic transition, working to translate operational improvements and cost discipline into sustainable, profitable growth. The recent financial results for Q2 fiscal 2025 highlight progress in revenue growth driven by pricing and cost management benefits, particularly in the Fresh segment, while also revealing persistent volume challenges in both segments and margin pressures from market-specific factors like tariffs and supply dynamics. The company's focus on enhancing operational efficiencies, leveraging its sourcing network, and pursuing targeted growth initiatives in the Prepared segment, especially in high-potential areas like deli, forms the core of its investment thesis. However, investors must weigh this turnaround potential against significant external risks, including complex Mexican tax issues, trade policy uncertainty, and agricultural challenges. Calavo's ability to navigate these headwinds, successfully execute its strategic initiatives, and demonstrate consistent sequential improvement will be critical determinants of its future value creation.