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Cal-Maine Foods reports

Economic downturn impacts nation’s largest egg producer

Net sales were down slightly. Net income was down quite a bit. Yet Fred Adams took delivering the tepid news of Jackson-based Cal-Maine Foods (NASDAQ: CALM) quarterly financial report released March 30 in stride.

“We had a good performance for our third quarter ended Feb. 28,” said Fred Adams, CEO of the largest producer and distributor of fresh shell eggs in the U.S. “Egg prices were lower compared with the year earlier period — which were at record high levels.”

Adams emphasized strong demand for Cal-Maine food products at retail stores. “However, food service and restaurant volumes were reduced because of the slowdown in the economy and fewer consumers eating away from home,” he said. “Liquid, frozen and dried egg demand was fairly good at lower prices. Our feed costs were lower than they were the same period a year ago.”

Net sales for the third quarter of fiscal year 2009 were $270 million, compared with $278 million the same quarter of FY08, down three percent. However, net income dropped 46 percent, from $57.2 million to $30.8 million for the prior-year period ($1.30 compared to $2.41 per basic share).

For the first nine months of FY09, net sales were $715.2 million, down five percent compared with net sales of $680.3 million for the prior-year period. Net income comparison for the same time period represented a 40 percent drop, from $69.2 million (FY09) to $115.3 million in FY08 ($2.91 compared to $4.87 per basic share).

“Our revenue and earnings are directly tied to egg prices, which are highly volatile and subject to wild fluctuations,” said Adams. “The shell egg industry has traditionally been subject to periods of high profitability, followed by periods of significant loss. In the past, during periods of high profitability, shell egg producers have tended to increase the number of layers in production, with a resulting increase in the supply of shell eggs, which generally has caused a drop in shell egg prices until supply and demand return to balance. As a result, our financial results from year to year may vary significantly.”

Adams explained that shorter-term retail sales of shell eggs historically have been the strongest during the fall and winter months, and the lowest during the summertime.

“Prices … fluctuate in response to seasonal factors and a natural increase in shell egg production during the spring and early summer,” he said. “Shell egg prices tend to increase with the start of the school year and are highest prior to holiday periods, particularly Thanksgiving, Christmas and Easter. Consequently, we generally experience lower sales and net income in our first and fourth fiscal quarters ending in August and May, respectively. As a result … comparisons of our sales and operating results between different quarters within a single fiscal year aren’t necessarily meaningful comparisons.”

For Q3, Cal-Maine declared a dividend of 43 cents per share payable to shareholders May 14.

Financial analysts favor companies such as Cal-Maine whose executives have significant stock ownership. In the shadow of AIG’s prolific implosion, The Motley Fool’s Dan Caplinger called Cal-Maine one of “five stocks that won’t steal from you.”

“The best way to make sure an executive will watch out for shareholders is to pick companies where executives own a big portion of the company’s shares,” he said, noting that Adams, CEO since the company’s formation in 1969, owns 37 percent of Cal-Maine shares. “Having the CEO on the side of shareholders means that you have one less thing to worry about when you decide to invest your hard-earned money.”

Contact MBJ contributing writer Lynne W. Jeter at Lynne.Jeter@gmail.com.

About Lynne W. Jeter

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