Cal-Maine Foods' Q2 2026: Contradictions Emerge on Specialty Egg Capacity, Prepared Foods Growth, and HPAI Risk

Date of Call: None provided

Financials Results

• Revenue: $769.5M, down 19.4% YOY (vs $954.7M prior year)
• EPS: $2.13 per diluted share, down 52.3% YOY (vs $4.47 prior year)
• Gross Margin: 27.0% (gross profit $207.4M, down 41.8% YOY vs $356.0M prior year)
• Operating Margin: 16.1% (operating income $123.9M, down 55.5% YOY vs $278.1M prior year)

Guidance:

• Prepared foods: targeting ~30% volume growth over the next 18–24 months; Echo Lake expansion to add ~17M lbs scrambled eggs by mid-FY2027 and a high-speed pancake line to add ~12M lbs by early FY2027, with temporary lower volumes/higher costs through the remainder of the fiscal year.
• Prepared foods profitability: expect ~19% EBITDA margin for Echo Lake/prepared foods on a full-year basis despite near-term slippage.
• Specialty eggs: long-term goal for specialty to represent >50% of shell egg net sales; Clean Egg acquisition expands cage-free/free-range capacity.
• Capital allocation: maintain strong balance sheet, continue dividends (~1/3 of net income), share buybacks under existing authorization, and pursue disciplined M&A.

Business Commentary:

* Sales Mix Shift toward Specialty and Prepared Foods: - In Q2 fiscal 2026, total net sales were $769.5 million, down 19.4% year-on-year, primarily due to lower shell egg prices and volumes. - However, the sales mix shifted significantly: specialty eggs drove 44% of total shell egg sales compared to 31.7% in the prior year, and specialty eggs and prepared foods combined accounted for 46.4% of net sales, up from 31.2%. - This mix shift is expected to enhance the durability and predictability of earnings over time, reflecting effective execution of the long-term diversification strategy.

• Prepared Foods Growth and Capacity Expansion:

  • Prepared foods sales surged 586.4% year-on-year in Q2 to $71.7 million, but declined 14.5% sequentially due to temporary volume reductions and higher costs from announced expansion projects.
  • The company is investing $36 million in a network optimization and capacity expansion project, expected to add 17 million pounds of annual scrambled egg production by mid-fiscal 2027 and another 12 million pounds through a high-speed pancake line by early fiscal 2027.
  • These projects, which will cause short-term earnings impacts, are designed to position the prepared foods platform for sustained double-digit volume growth and improved efficiency.

• Impact of Expansion on Financials and Earnings Trajectory:

  • Gross profit declined 41.8% year-on-year in Q2 to $207.4 million, driven by lower shell egg selling prices and volumes, partially offset by lower costs for outside egg purchases.
  • Diluted EPS was $2.13, down 52.3% year-on-year.
  • The company’s strategic diversification into specialty eggs and prepared foods, along with a stronger balance sheet, is intended to improve mid-cycle earnings performance. Specifically, hybrid pricing models are expected to provide benefits in lower egg price markets, and prepared foods (which run countercyclical) should strengthen in depressed conditions.

• Specialty Egg Volume Performance:

  • Specialty egg sales were down 0.4% year-on-year in Q2 to $285.7 million, with relatively flat volumes.
  • This occurred despite a tough comparison to Q2 fiscal 2025, when conventional egg shortages drove consumer demand to specialty eggs.
  • The company remains confident in achieving double-digit specialty egg growth over the long term, supported by recent acquisitions like Clean Egg LLC and strong fundamentals in premium segments.

• Industry Context and High Pathogenicity Avian Influenza (HPAI) Outlook:

  • Total layer hens expanded 2.6% year-on-year in Q2, but the current HPAI situation is described as a "structural reality" with global outbreaks continuing.
  • The epi curve (disease spread) for November 2025 resembles that of 2022, indicating ongoing, unpredictable volatility.
  • This underscores the importance of scale and operational execution as a durable competitive advantage, as reliable supply builds trust with customers. [/INST]
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management: "we built real momentum. We delivered solid results..." and "we are more diversified and more resilient and better positioned to compound value over the long term." They repeatedly highlight diversification into specialty eggs and prepared foods, capacity expansions, and a strong balance sheet as reasons for confidence despite near-term headwinds.

Q&A:

• Question from Heather Jones (Heather Jones Research): Given current spot egg prices and your shift into prepared foods and cost-plus models, how do you think about earnings power/trajectory in depressed egg markets?
  Response: Prepared foods growth and hybrid pricing materially improve mid-cycle earnings power and overall resilience versus prior cycles.

• Question from Heather Jones (Heather Jones Research): Given these changes, can Cal‑Maine weather down markets like this without generating losses?
  Response: While not providing guidance, management says a stronger balance sheet, specialty mix and prepared foods (plus hybrid pricing) position the company far better to withstand low-price environments.

• Question from Pooran Sharma (Stephens): Prepared foods gross margin slipped to ~19.6% this quarter — is ~19% a reasonable level to expect for the rest of the year?
  Response: Yes — Echo Lake target is ~19% EBITDA; expect some near-term slippage through next quarter but remain comfortable with the full‑year 19% target.

• Question from Pooran Sharma (Stephens): Does depressed egg pricing limit your M&A opportunity in prepared foods (given valuation/earnings dynamics)?
  Response: Prepared foods attractiveness is tied to stability; M&A pipeline remains viable and Cal‑Maine will continue disciplined evaluations — depressed egg markets are not expected to meaningfully constrain targeted acquisitions.

• Question from Leah Jordan (Goldman Sachs): How are you thinking about specialty egg capacity growth over time and M&A vs organic expansion after the Clean Egg acquisition?
  Response: Expect specialty to continue double‑digit growth and to exceed 50% of shell egg net sales over time; Clean Egg (677k layers) is a timely, accretive addition and both M&A and organic expansion will be used.

• Question from Leah Jordan (Goldman Sachs): Any update on progress of Echo Lake optimization/expansion, near‑term higher costs and cadence of growth as investments come online?
  Response: The 18–24 month expansion (~$36M CapEx) is underway; expect temporary volume/efficiency penalties and higher near‑term costs, but still targeting 19% EBITDA and growth that begins to reappear in Q4 and into next year.

• Question from Benjamin Klieve (Benchmark StoneX): Specialty volumes were roughly flat in Q2 — what caused the flat performance?
  Response: Flat volumes reflect a tough year‑ago comparison when conventional was extremely tight; maintaining flat specialty volumes is viewed as a positive and underlying specialty subsegments show double‑digit growth.

• Question from Benjamin Klieve (Benchmark StoneX): How receptive are retail customers today to hybrid/cost‑plus pricing versus the prior high‑price environment?
  Response: Receptivity varies by retailer go‑to‑market (high‑low vs everyday low price), but hybrid models provide upside protection and downside benefits and reliability of supply is a key selling point.

• Question from Heather Jones (Heather Jones Research): How much step‑down should we expect in prepared foods in H2 '26 given Q1→Q2 decline?
  Response: Expect a continued pullback in Q3 as changes are implemented, with improvement beginning in Q4 and building through the following 12 months.

• Question from Heather Jones (Heather Jones Research): SG&A was higher than expected — what run‑rate should we assume for SG&A the rest of the year?
  Response: SG&A elevated due to Echo Lake addition, higher professional/legal fees and expected promotional activity tied to specialty growth; anticipate SG&A running a bit higher near‑term.

• Question from Benjamin Mayhew (BMO Capital Markets): Have outside egg purchases declined as your production recovered, and should we expect ongoing COGS benefits from outside purchases?
  Response: Percent produced has moved back to ~90% and is expected to rise toward the mid‑90s as supply comes online, reducing outside purchases; outside buys remain opportunistic and will fluctuate with market disruptions.

• Question from Benjamin Mayhew (BMO Capital Markets): Why has there been a rapid decrease in bird flu cases — is it industry action or luck?
  Response: Management says virus presence remains widespread globally and industry risk persists; while layer numbers vary, incidence is still significant and they remain cautious.