February CPI – food at home v food away from home (SYY)
February’s CPI increased 1.7%, with food inflation remaining much higher than the overall growth rate. The CPI for food and beverages increased 3.5% in February, decelerating 20bps from the prior month. Food at home CPI increased 3.6% in February, decelerating 10bps from January. Food away from home CPI decelerated to 3.7% from 3.9% in January. The differential between food at home and away from home remained the same as January, as seen in the chart below. The increase for alcoholic beverages decelerated 40bps to 2.0% in February. Inflationary pressures from higher row crop prices will increase this year. Also, stimulus checks could have an insulting effect on consumers’ food budgets.
Passing on the guacamole (AVO)
Mission Produce reported FQ1 EPS of $.11 vs. $.04 last year and a consensus of $.07. Overall revenues decreased 12% YOY, with the volume up 7% offset by an 18% ASP decline. This compares to an 11% decrease in FQ4 driven by a 24% decline in ASP and volume growth of 16%. Marketing and distribution segment revenues decreased 13%, while international farming segment sales increased 27%. Gross margins expanded 330bps, up from +70bps sequentially, as the company could benefit from the lower prices at the farm. SG&A decreased $.2M. The company had use of FCF of $32.1M in FQ1.
Management explained the rationale for diversifying into the mango business to keep laborers in the off-season, which allows for improved employee retention and lower training costs. So far, in Q2, avocado pricing continues to be down. Consumption patterns at retail have been strong, with growth in January 16% higher. Volumes QTD through February is trending up 14%, while sales prices are trending down 20%.
We are removing Mission Produce from our short bias list. The pace and prospects of recovery do not seem to matter as long as the comparisons are easy from the pandemic, so we are not looking to make AVO a best idea short. Our concern was the recovery would look like for Mission Produce – gross margin contraction and lower volumes combined with a multiple over 20x EPS.
Projecting a 2H recovery (CVGW)
Calavo Growers reported an EBITDA of $9.4M, slightly above the consensus estimate, but revenue and EPS were below. Revenue in FQ1 declined 19% YOY, with avocado volumes up 2% and prices down 14%. Foodservice demand continued to be weak, but the segment was only 20% of the sales mix pre-pandemic. Gross margins expanded 230bps as the company was able to manage the price spread. The company returned to its historical gross profit per case range of $3-4. SG&A expenses declined 13%. EPS of $.17 was up from $.04 last year.
Management guided FQ2 revenue to $255-275M vs. consensus estimates of $260M. EBITDA was guided to $14-18M vs. a consensus of $16M. Calavo Growers’ valuation is much higher than Mission Produce, with EPS still expected to be down by half this year compared to pre-pandemic levels. Looking out to F22, where consensus estimates project a return to pre-pandemic F19 levels, the valuation is still 28x EPS and 18x EBITDA.
The Mexican avocado crop is plentiful, and restaurant demand is still lower. Lower prices have had a disappointing demand response. The lower avocado prices will be a tailwind for restaurants, notably Chipotle, for longer as producers are still planning on-demand to catch up to supply growth.
