Higher Costs Dent Cal-Maine's 2Q

Cal-Maine Foods Inc.’s (CALM - Snapshot Report) second-quarter 2013 earnings of 60 cents per share missed the Zacks Consensus Estimate of 99 cents. Earnings also deteriorated sharply from the year-ago level of 97 cents. The year-over-year decline in earnings was due to lower profit as a result of increased input costs.

Inside the Headline Numbers

Total revenue in the quarter under review grew 13.3% year over year to $328.9 million, surpassing the Zacks Consensus Estimate of $322.0 million. The upswing resulted from strong demand for eggs as well as higher average selling prices.

The largest U.S. producer and distributor of fresh-shell eggs stated that net average selling prices for shell eggs increased 4.0% year over year. Specialty eggs, which have higher and less cyclical selling prices, continued to see improved sales and accounted for 16.4% of total dozens sold. Around 22.9% of total shell egg sales revenue came from Specialty eggs in the quarter. Specialty egg prices were up 4.8% year over year.

Gross profit declined 16.6% from the prior-year quarter to $51.3 million, mainly due to the hike in feed cost. The drought in the Midwest growing region over the summer months has caused a spike in grain costs to a record level.

During the quarter, feed cost climbed 23.4% to nearly 57 cents per dozen on the back of higher corn and soybean prices.

Liquidity

Cal-Maine ended the quarter with cash and short-term investment of $163.1 million and long-term debt (less current maturities) of $29.3 million.

Our Take

Jackson, Mississippi-based Cal-Maine, which engages in production, grading, packaging, marketing and distribution of shell eggs, remains skeptic about the profitability environment in rest of fiscal 2013. We are also supportive of management’s cautious view.

The company has been struggling with input cost pressure for some time. Feed costs continued to hurt the company’s production costs. Management predicts feed costs to remain high and volatile for the rest of the fiscal year.

However, revenue growth momentum continued on strong retail demand. Further, demand for eggs at the retail level should surge during the fourth quarter owing to the holiday season. The company’s inorganic expansion also remains steady.

Cal-Maine Foods, along with its peer BRF - Brasil Foods S.A. (BRFS - Snapshot Report), currently carries a Zacks #3 Rank (short-term Hold rating).