Shares of materials science company Landec Corporation dropped as much as around 9% after the company lowered its net income guidance for fiscal 2014 due to industry-wide severe shortages of produce that resulted in higher-than-expected raw materials cost in its value-added vegetable business. Its shares eventually closed at $11.40 in the trading session following the announcement, losing around 8%.
The main reason behind the industry-wide shortage is an unusual confluence of extraordinarily unfavorable weather conditions along the East Coast, California and Mexico, the top three growing areas for vegetables in North America. Also, higher-than-expected costs are expected to lower gross margin in the value-added vegetable business in the second quarter of fiscal 2014 compared to the prior and year-ago quarters. Landec further presumes shortages and quality issues to continue into the third quarter.
Apio, Inc. the food business of Landec, has entered into annual contracts with growers for produce which depends on fixed price per delivered pound. It has also entered into contracts with its customers which depend on a fixed price per unit. Landec will buy produce on the open market at prices in excess of the contracted prices from the growers so as to meet the customers’ demand. Now, as the sales prices to the customers are fixed, the excess amount to be paid for produce above the contract at the times of shortage will unfavorably impact Landec's earnings.
Landec now estimates its consolidated net income for fiscal 2014 to be flat to up 5% compared with the original guidance for net income growth of roughly 20%, barring the $3.9 million earn out adjustment in fiscal 2013. The company expects net income for the second quarter to be 13 cents per share.
However, for fiscal 2014, Landec expects to meet or exceed its original revenue growth forecast of roughly 6%.
Moving ahead, Landec expects demand for value-added specialty packaged produce products to remain strong, particularly for the new vegetable salad products.
Landec currently holds a Zacks Rank #5 (Strong Sell).
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