Executive Summary / Key Takeaways

• Calavo Growers is actively transitioning from a period of operational stabilization to strategic growth, leveraging enhanced efficiencies from "Project Uno" and a diversified fresh and prepared produce portfolio.
• The company reported robust Q3 2025 Prepared segment sales growth of 40% year-over-year, alongside a 201% increase in Prepared gross profit, demonstrating the impact of strategic initiatives and lower fruit input costs.
• Despite macroeconomic headwinds and specific regulatory challenges, Calavo is focused on expanding market share in guacamole and international markets, supported by a strong balance sheet and disciplined capital allocation.
• Operational improvements, including a new transportation management system and real-time plant management, are enhancing efficiency and customer service, forming a critical competitive moat in the perishable goods industry.
• The company's outlook includes projected Prepared segment sales of $115 million in fiscal 2026 and a commitment to maintaining Fresh segment gross margins within the $3-$4 per carton range, while actively managing ongoing tax and trade policy risks.

The Cultivation of a Global Leader: Strategy and Competitive Edge

Calavo Growers, Inc. (NASDAQ:CVGW) stands as a venerable name in the global fresh produce and prepared foods industry, with a history stretching back to 1924. The company has evolved into a leader in sourcing, packing, and distributing fresh avocados, tomatoes, and papayas, alongside processing guacamole and other avocado products. Calavo's strategic pivot from operational stabilization to aggressive growth underpins its current investment thesis, aiming to leverage its diversified portfolio and enhanced efficiencies in a dynamic market. The avocado market itself is experiencing robust growth, with projections indicating a rise from $19.37 billion in 2024 to $30.85 billion by 2029, driven by increasing health awareness, demand for organic and exotic fruits, and the convenience food trend. This expanding market provides a fertile ground for Calavo's strategic initiatives.

The company operates in a competitive landscape alongside major players like Mission Produce (AVO), Fresh Del Monte Produce (FDP), Limoneira (LMNR), and large foodservice distributors such as Sysco (SYY). Calavo differentiates itself through its strong brand recognition, extensive global sourcing network, and a diversified product offering that spans both fresh and value-added categories. While competitors like Mission Produce may exhibit a narrower, avocado-centric focus, potentially leading to specialized efficiencies, Calavo's broader portfolio, including its prepared foods, offers a more comprehensive solution to customers and a buffer against commodity-specific volatility. Its strategic partnerships, such as the exclusive U.S. manufacturing agreement for Old El Paso brand fresh guacamole and salsas with General Mills (GIS), further bolster its market presence and brand leverage.

Technological Differentiation and Operational Excellence

Calavo's competitive edge is increasingly defined by its operational and supply chain "technology"—a suite of sophisticated systems and processes designed to enhance efficiency and responsiveness in the perishable goods sector. A key differentiator is the implementation of a new transportation management system (TMS), which enables competitive bidding through RFPs for most outsourced freight, aiming to significantly improve freight cost competitiveness. This system, fully implemented in the second quarter of 2023, is critical for managing logistics in a cost-effective manner.

Furthermore, the company has revolutionized its sourcing for the Prepared segment, with 93% of raw products now procured using an online sourcing tool and contract methodology. This strategic shift, which was not in place a year prior to the Q3 2022 earnings call, enhances price discovery and contract management, contributing to cost mitigation and yield enhancements. On the production floor, Calavo's real-time plant management capabilities allow plant managers to monitor labor deployment and productivity hourly, enabling "on the fly line balancing decisions." This granular control over operations has led to tangible benefits, including a 9% sequential increase in labor productivity in the RFG (now Prepared) segment from Q1 to Q2 2022.

These operational advancements translate into superior customer service, with the company achieving an "industry-leading 99%" order fill rate by the end of Q2 2022, alongside a significant reduction in customer and consumer complaints by over 17% year-over-year. For investors, these technological and operational differentiators are foundational to Calavo's competitive moat, driving cost efficiencies, improving product consistency, and strengthening customer relationships, all of which are vital for sustained financial performance and market leadership in a highly competitive and volatile industry. The company's focus on "product and ingredient optimization" through strategic R&D initiatives, including the elimination of inefficient new product development projects, underscores its commitment to leveraging innovation for profitable growth.

Segment Performance and Financial Health

Calavo's business is structured into two primary segments: Fresh and Prepared. The Fresh segment, encompassing avocados, tomatoes, and papayas, experienced a 5% decrease in net sales for the three months ended July 31, 2025, reaching $155.85 million. This was primarily due to a 5% decline in avocado carton volume, despite a 2% increase in average selling price, and a notable 40% drop in tomato sales following the termination of the U.S.-Mexico Tomato Suspension Agreement. However, for the nine-month period, Fresh segment net sales increased by 6% to $470.31 million, largely driven by a 22% increase in average avocado selling prices. Gross profit for the Fresh segment in Q3 2025 declined by 32% year-over-year to $12.43 million, significantly impacted by approximately $4.2 million in discrete costs from an FDA detention hold on certain Mexican avocado imports.

The Prepared segment, which includes guacamole and avocado pulp, demonstrated robust growth. Net sales for the three months ended July 31, 2025, surged by 40% year-over-year to $22.97 million, propelled by a 35% increase in pounds sold and a 3% rise in average selling price. This growth reflects successful expansion with existing customers and new customer acquisitions across retail and foodservice. The segment's gross profit for Q3 2025 dramatically increased by 201% to $5.77 million, benefiting from higher sales volumes, lower fruit input costs, and improved operating efficiencies. For the nine-month period, Prepared net sales grew 10% to $53.45 million, with gross profit rising 27% to $13.40 million. This strong performance underscores the strategic value of the Prepared segment in balancing the commodity risks inherent in the Fresh segment.

Calavo maintains a solid financial position, with cash and cash equivalents totaling $63.75 million as of July 31, 2025, an increase from $57.03 million at October 31, 2024. Working capital stood at $89.90 million, up from $85.40 million over the same period. The company's liquidity is further bolstered by approximately $50.50 million available for borrowing under its credit facility. This robust liquidity profile is deemed sufficient to cover future capital expenditures, grower recruitment, and working capital needs.

The company has demonstrated disciplined capital allocation, reducing its net debt position by approximately $38 million in fiscal 2022. While capital expenditures for fiscal 2023 were initially projected at $18 million, they were later reduced to approximately $13 million to navigate near-term uncertainties, with a focus on high-return, quick-payback projects. In March 2025, the Board authorized a $25 million stock repurchase program, though no shares have been repurchased to date. The Board also declared a quarterly cash dividend of $0.20 per share, payable on October 31, 2025. This dividend, while a commitment to shareholders, reflects a reset from previously elevated payout ratios, aiming for more market-aligned metrics.

Outlook and Strategic Initiatives

Calavo's outlook is characterized by a commitment to sequential improvement and strategic growth. Management anticipates Prepared segment sales of approximately $115 million in fiscal 2026, driven by expanded customer relationships and new product introductions. The Fresh segment is expected to maintain gross margins per carton within the historical $3 to $4 range, despite anticipated ongoing volatility as different avocado seasons converge.

The "Project Uno" initiative, launched in Q3 2021, continues to be a cornerstone of Calavo's strategy, targeting $70 million in annualized EBITDA improvement. By the end of Q2 2022, $13 million in positive impact had been achieved, with $46 million in annualized savings realized by Q4 2022, and the company remains on track to deliver the full $70 million by the close of fiscal 2023. These benefits are predominantly recognized in the Prepared segment, with the fresh-cut division aiming for an ongoing gross margin run rate of 10% to 12% by the end of fiscal 2023, and the guacamole division targeting approximately 20% gross margins. Calavo is also prioritizing international expansion, recognizing it as an under-indexed opportunity, and is investing in infrastructure to capitalize on global growth.

Risks and Challenges

Despite a clear growth trajectory, Calavo faces several material risks. Macroeconomic challenges, including persistent inflationary pressures and shifts in trade policies, continue to impact operations, driving cost fluctuations in fruit, labor, and packaging. The termination of the U.S.-Mexico Tomato Suspension Agreement, imposing a 17% anti-dumping duty on Mexican tomatoes, could lead to supply shortages and increased costs. Regulatory scrutiny also poses a risk, as evidenced by the July 2025 FDA Red List Detention Hold on Calavo de México, which incurred $4.2 million in costs, although the issue was resolved by September 2025.

Ongoing Mexican tax matters, including a significant 2013 assessment and disputes over IVA receivables, present financial and legal uncertainties. While a recent court ruling recognized Calavo de México's maquila status and directed IVA refunds, the Mexican Tax Administration Service (SAT) has appealed this decision. Furthermore, agricultural risks like avocado weevil outbreaks could disrupt supply chains and increase procurement costs. These factors underscore the importance of Calavo's agile operational strategies and diversified sourcing to mitigate potential impacts.

Conclusion

Calavo Growers is actively transforming its business, moving beyond a period of operational restructuring to focus on profitable growth across its Fresh and Prepared segments. The company's strategic investments in operational technologies, diversified sourcing, and brand partnerships are strengthening its competitive position and driving tangible financial improvements, particularly within its high-growth Prepared segment. While macroeconomic volatility, regulatory challenges, and commodity price fluctuations remain inherent risks, Calavo's disciplined management, robust liquidity, and clear strategic roadmap position it to capitalize on the expanding global demand for avocados and value-added produce.

The continued execution of Project Uno, coupled with a renewed emphasis on international markets and customer-centric growth, is expected to drive sustained earnings and cash flow. Investors should monitor the realization of targeted gross margins in the Prepared segment, the effective management of Fresh segment volatility, and the resolution of ongoing Mexican tax matters as key indicators of Calavo's long-term value creation. The company's ability to leverage its operational agility and strategic differentiators will be crucial in harvesting future success.