Cal-Maine's Q2 2026 Earnings Call: Contradictions Emerge in Prepared Foods Growth, Specialty Eggs Strategy, and Pricing Models

Date of Call: None provided

Financials Results

• Revenue: $769.5M net sales in Q2, down 19.4% YOY ($769.5M vs $954.7M)
• EPS: $2.13 diluted EPS, down 52.3% YOY ($2.13 vs $4.47)
• Gross Margin: ≈27.0% (gross profit $207.4M vs $356.0M, down 41.8% YOY; prior gross margin ≈37.3%)
• Operating Margin: 16.1%, down from ≈29.1% prior year (operating income $123.9M vs $278.1M, down 55.5% YOY)

Guidance:

• Prepared foods target ~19% EBITDA margin.
• Prepared foods targeted to grow ~30% over the next 18–24 months.
• Echo Lake $15M network optimization adds ~17M lbs scrambled eggs by mid‑fiscal 2027; $14.8M pancake line adds ~12M lbs by early fiscal 2027.
• Crepini Foods investing $7M through fiscal 2028 to add ~18M lbs capacity.
• Expect temporary lower volumes and higher costs at Echo Lake through remainder of fiscal year as expansions ramp.
• Variable cash dividend ~ $0.72/share (payable Feb 12, 2026) and share repurchase program remains available.

Business Commentary:

* Financial Performance and Market Conditions: - Cal-Maine Foods reported net sales of $769.5 million for Q2 fiscal 2026, a down 19.4% from the previous year's Q2. - The decline was primarily due to a 26.5% lower selling price and a 2.2% reduction in sales volumes for shell eggs. - The decrease in sales is attributed to the current low egg prices and the ongoing supply-demand imbalances.

• Shift in Sales Mix and Specialty Eggs:
• Specialty eggs accounted for 44% of total shell egg sales in Q2 fiscal 2026, up from 31.7% in the previous year.
• The specialty eggs and prepared foods combined represented 46.4% of net sales, compared to 31.2% in the previous year.

• This shift in sales is due to increased demand for specialty eggs and strategic investments in prepared foods to drive growth.

• Earnings and Expense Management:

• Gross profit for Q2 fiscal 2026 was $207.4 million, down 41.8% from the previous year, primarily due to lower shell egg prices and volumes.
• Operating income was $123.9 million, reflecting a 55.5% decrease year-on-year.

• The decrease in operating income is a result of lower egg prices, increased prepared foods costs, and higher SG&A expenses due to the acquisition of Echo Lake Foods.

• Capital Allocation and Growth Investments:

• The company is expanding its specialty cage-free and free-range egg capacity with the acquisition of Clean Egg LLC, which includes 677,000 layers.
• Cal-Maine is investing $15 million in network optimization and capacity expansion at Echo Lake Foods, aiming to add 17 million pounds of annual scrambled egg production by mid-fiscal 2027.
• These investments are aimed at supporting long-term growth and enhancing the company's resilience in the face of market fluctuations.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management emphasized momentum and resilience: "We built real momentum...delivered solid results" and framed the company as "a rare combination of both value and growth." They highlighted a strong balance sheet ("virtually debt free"), prepared foods growth targets ("30% growth over the next 18 to 24 months") and strategic diversification into specialty eggs and prepared foods as drivers of durable earnings and mid‑cycle resilience.

Q&A:

• Question from Heather Jones (Heather Jones Research): Given current low spot egg prices, how do you think about earnings power/trajectory given the shift into prepared foods and cost‑plus models?
  Response: Company is materially better positioned to withstand depressed egg markets due to diversification into specialty and prepared foods (targeting ~30% prepared‑foods growth) and hybrid pricing that improves mid‑cycle resilience.

• Question from Heather Jones (Heather Jones Research): Given these changes, can Cal‑Maine weather down markets like this without generating losses?
  Response: Management believes the business is far better positioned than prior cycles—stronger balance sheet, specialty/prepared‑foods mix and hybrid pricing reduce downside risk—though they did not give explicit guidance or guarantees.

• Question from Pooran Sharma (Stephens): Prepared foods margins fell to ~19.6% this quarter—should we model ~19% going forward or expect more slippage?
  Response: Prepared foods are expected to target ~19% EBITDA margin; near‑term (next quarter) may see additional slippage due to expansion work but full‑year posture remains ~19%.

• Question from Pooran Sharma (Stephens): Will depressed egg markets limit your M&A pipeline for prepared foods?
  Response: Prepared‑foods M&A attractiveness is tied to stability; management will continue disciplined, selective M&A and does not see depressed egg prices as a major constraint on pursuing relevant opportunities.

• Question from Leah Jordan (Goldman Sachs): How do you think about specialty egg capacity growth, M&A vs organic, and cadence of mix shift toward specialty long‑term?
  Response: Management expects specialty to continue double‑digit CAGR and long‑term to exceed 50% of shell‑egg sales, using both timely acquisitions (e.g., Clean Egg adding ~677k layers) and organic expansion to drive capacity.

• Question from Leah Jordan (Goldman Sachs): Any update on prepared foods optimization/expansion progress and expected higher costs in back half of year?
  Response: The 18–24 month expansion (~$36M CapEx) will cause short‑term volume/efficiency penalties and higher costs, but management expects to hit the 19% EBITDA target and sees ramp starting in Q4, building over 12–18 months.

• Question from Benjamin Klieve (Benchmark StoneX): Specialty volumes were flat in Q2—what caused the flatness despite acquisitions and trend?
  Response: Q2 faced a tough prior‑year comp when conventional tightness boosted specialty; holding flat against that is positive and management remains confident in long‑term double‑digit specialty growth.

• Question from Benjamin Klieve (Benchmark StoneX): How receptive are retail customers to hybrid/cost‑plus pricing now that egg prices have normalized?
  Response: Receptivity depends on each customer's go‑to‑market strategy; hybrid/cost‑plus provides customer protection and supports mid‑cycle earnings and supply reliability, strengthening long‑term relationships.

• Question from Heather Jones (Heather Jones Research): How should we think about the cadence of prepared foods revenue in H2—Q2 to Q3 step‑down and recovery timing?
  Response: Expect continued Q3 pullback as changes are implemented; recovery begins in Q4 and builds over the following 12 months as capacity comes online.

• Question from Heather Jones (Heather Jones Research): SG&A came in higher—what run‑rate should we model?
  Response: SG&A likely to run a bit higher due to elevated professional fees and promotional expenses tied to specialty growth; some prior‑year contingency charges are reduced, but promotional and specialty‑related costs will keep SG&A elevated.

• Question from Benjamin Mayhew (BMO Capital Markets): Are outside egg purchases declining as your supply recovers and will benefits from lower‑priced outside buys persist?
  Response: Outside purchases are opportunistic gap‑fillers; produced‑share is ~90% now and expected to rise toward ~93–95% as company production increases, which should reduce reliance on outside buys over time.

• Question from Benjamin Mayhew (BMO Capital Markets): Why has bird flu incidence changed so rapidly—any structural reasons or luck?
  Response: High‑path AI remains widespread globally and incidence rates are still significant; management views the situation as uncertain and a continued material risk rather than resolved.

Contradiction Point 1

Prepared Foods' Growth and Strategy

It involves differing expectations for the growth and operational strategy of the Prepared Foods segment, which is a key area for long-term growth according to the company.

How is Cal-Maine generating earnings in the current depressed egg market, given the portfolio shift toward prepared foods and cost-plus models? - Heather Jones (Heather Jones Research LLC)

20260107-2026 Q2: Prepared foods and hybrid pricing models are essential for mid-cycle performance. They support customer go-to-market strategies, enhancing long-term value. - Sherman Miller(CEO)

Can you provide quantitative or qualitative details on the shift in your pricing mix between cost-plus and market-based models this quarter compared to previous periods? - Heather Jones (Heather Jones Research LLC)

2026Q1: Echo Lake is exceeding initial goals... The synergies and opportunities are expected to continue, with a $14.8 million investment in a new production line for pancakes, which will increase annual volume by almost 10%. - Sherman Miller(CEO)

Contradiction Point 2

Specialty Eggs' Growth and Market Dynamics

It highlights differing perspectives on the growth trajectory and market dynamics of specialty eggs, which are crucial for Cal-Maine's future profitability and market position.

What caused the flat specialty volumes in Q2 despite market trends? - Benjamin Klieve (Benchmark StoneX)

20260107-2026 Q2: Specialty egg volumes remained flat despite a tough comparison, considering last year's surge due to conventional eggs' high prices. Focus remains on maintaining double-digit CAGR growth, with strong performance in subcategories like free-range and pasture-raised. - Sherman Miller(CEO)

Can you provide details on specialty eggs, trends, and capacity growth plans, and what is the desired long-term mix between conventional and specialty eggs? - Leah Jordan (Goldman Sachs Group, Inc., Research Division)

2026Q1: Sherman highlights double-digit growth in cage-free and pasture-raised eggs. The strategy is to produce what customers want, with investments in both cage-free and pasture-raised for the long term. - Sherman Miller(CEO)

Contradiction Point 3

Pricing Strategy

It involves changes in the company's pricing strategy, which directly impacts revenue and profitability.

How does Cal-Maine generate earnings in depressed egg markets by shifting to prepared foods and cost-plus models? - Heather Jones (Heather Jones Research LLC)

20260107-2026 Q2: Prepared foods and hybrid pricing models are essential for mid-cycle performance. They support customer go-to-market strategies, enhancing long-term value. - Sherman Miller(CEO)

Pricing this quarter has been lower than in previous quarters. Can you provide quantitative or qualitative details on the shift in your pricing mix between cost-plus and market-based pricing to help improve our future forecasts? - Heather Jones (Heather Jones Research LLC)

2026Q1: On pricing, this quarter's price capture relative to industry benchmarks was materially lower than in the past. Can you share some quantitative or qualitative color on the shift that's gone on in your mix as far as cost plus versus market-based pricing, so we can be more accurate in our projections going forward? - Sherman Miller(CEO)