DMND (MM)

Driven by improved net price realization and effective cost management, Diamond Foods Inc.’s (DMND) adjusted earnings for the second quarter of fiscal 2013 jumped fivefold to 5 cents per share compared with a penny in the comparable year-ago quarter. Moreover, quarterly earnings were in line with the Zacks Consensus Estimate.

Including one-time items, the company reported earnings of 43 cents per share during the quarter against a loss of 93 cents in the second quarter of fiscal 2012.

From second quarter fiscal 2013, Diamond Foods decided to report its operating results under two segments – Snacks and Nuts. Products sold under Kettle U.S., Kettle U.K. and Pop Secret brands will be reported in the Snacks segment, while products sold under the Diamond of California and Emerald brands will be included under Nuts segment.

Quarter in Detail

Total sales for the reported quarter were $220.8 million, down 15.8% from $262.4 million recorded in the year-ago comparable quarter. Moreover, the top line missed the Zacks Consensus Estimate of $241.0 million. The year-over-year decline in total sales was mainly due to weak performances delivered at the company’s Nuts segment, partially offset by improved sales at Snacks segment.

Net sales at the company’s Snacks segment grew 7.2% to $105.4 million in the quarter, primarily driven by a 2% rise in volume and improved net price realization. However, net sales at the Nuts segment plummeted 29.6% to $115.4 million due to a fall of 37.1% in volume.

Gross profit for the quarter surged 20.6% year over year to $50.6 million compared with $41.9 million in the year-ago quarter. Gross margin expanded 690 basis points (bps) to 22.9% compared with the year-ago quarter’s gross margin of 16.0%. The expansion in gross margin was a result of better price realization, effective cost management and benefit coming from reducing underperforming SKUs.

Gross profit at Diamond Foods’ Snacks’ segment increased 22.5% year over year to $34.8 million, while as a percentage of sales it improved 410 bps to 33.0%. The year-over-year improvement in the segment’s gross margin was primarily driven by enhanced net price realization.

Gross profit of Diamond Foods’ Nuts segment increased 16.8% to $15.7 million, whereas gross margin expanded 540 bps to 13.6%. The year-over-year increase in gross margin was a result of better price realization, effective cost management and benefit coming from reducing underperforming SKUs.

Selling, general and administrative (SG&A) expenses declined 5.9% year over year to $32.3 million, including $6.7 million primarily related to restatement and related expenses, contract termination costs, and accrued retention and severance expenses, which were partially offset by recoup of bonuses paid to the former CEO and reversal of prior recorded stock compensation expenses.

However, excluding onetime costs, SG&A expenses came in at $25.6 million, which is 11.6% of net sales versus 9.0% in the comparable quarter last year. SG&A expenses in the second quarter of fiscal 2012 were $23.6 million, which exclude $10.7 million related to audit committee inquiry and settlement of walnut labeling.

Advertising expenses in the quarter surged 5.6% year over year to $12.3 million, primarily due to celebration of 100^th anniversary of Diamond of California nut brand and program associated with Pop Secret brand.

Consequently, on a reported basis, operating income in the quarter came in at $24.6 million compared with an operating loss of $16.1 million in the year-ago comparable quarter. Operating margin for the quarter was 11.2%.

Financial Gist

Diamond Foods ended the quarter with cash & equivalents of $4.6 million compared with $1.3 million at the end of the second quarter of fiscal 2012. Total debt at the end of the quarter came in at $558.4 million. On Mar 8, 2013, cash and availability under the company’s bank revolving line of credit was nearly $80.0 million. Capital expenditures for the second quarter totaled $1.6 million.

Fiscal 2013 Outlook

Diamond Foods intends to continue with its strategy of improving price realization, lowering underperforming SKUs and reducing dependency on discounting. The company believes that due to these strategies, sales on a year-over-year basis will fall more in the remaining two quarters of fiscal 2013 compared with the fall registered in the first half. Moreover, Diamond Foods will remain focused on investing in advertisement.

Diamond Foods is swiftly moving ahead with its cost savings and operational effectiveness initiatives, which are reflected in its second quarter fiscal 2013 results. Moreover, Diamond Foods believes that future results will reflect sustained growth of its brands arising from innovation and differentiation, improving cost structure and rebuilding walnut supply.

Other Stocks to Consider

Currently, Diamond Foods has a Zacks Rank #4 (Sell). Other stocks in the specialty food industry that are performing far better include ConAgra Foods, Inc. (CAG), Campbell Soup Company (CPB) and The Hain Celestial Group, Inc. (HAIN). All these stocks hold a Zacks Rank #2 (Buy).

 
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HAIN CELESTIAL (HAIN): Free Stock Analysis Report
 
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