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DMND Shares Dip on Y/Y Earnings Decline

DMND CAG PF

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Shares of Diamond Foods Inc. (DMND - Analyst Report) fell 2.73% in the after-hours trading session as the company posted a 25% decline in its first-quarter fiscal 2014 earnings due to continued challenges in walnut supply and higher Emerald re-launch costs. However, quarterly earnings of 18 cents per share rose considerably from the Zacks Consensus Estimate of 14 cents.

Including one-time items, the company reported a loss of $1.92 per share during the quarter against a loss of 49 cents in the first-quarter of fiscal 2013.

Quarter in Detail

Total sales for the reported quarter were $234.7 million, down 9.2% from $258.5 million recorded in the year-ago comparable quarter. The top line also missed the Zacks Consensus Estimate of $241.0 million. The decline in total sales was mainly due to weak performance at the company’s Nuts segment, partially offset by improved sales at the Snacks segment.

Net sales at the company’s Snacks segment reflected a marginal 1.2% increase to $112.3 million, while the Nuts segment net sales fell 17.1% to $122.1 million.

Gross profit for the quarter inched down 1.0% year over year to $57.9 million compared with $58.5 million in the year-ago quarter. Nevertheless, gross margin expanded 200 basis points (bps) to 24.7% compared with the year-ago quarter’s gross margin of 22.7%. The expansion in gross margin resulted from better price realization, effective cost management and enhanced productivity at the company’s operating segments.

Gross profit at Diamond Foods’ Snacks segment increased 2.9% year over year to $39.4 million, while as a percentage of sales it improved 60 bps to 35.0%. Gross profit at Diamond Foods’ Nuts segment dipped 8.9% to $18.5 million, whereas gross margin expanded 140 bps to 15.2%.

Selling, general and administrative (SG&A) expenses escalated 48.1% year over year to $56.6 million, including $23.5 million primarily related to the cost of settling the securities class action litigation as announced on Aug 21. Advertising expenses rose 18.9% to $10.7 million from $9.0 million in the year-ago quarter.

Adjusted EBITDA in the quarter came in at $29.1 million compared with $31.0 million in the year-ago comparable quarter.

Financial Gist

Diamond Foods ended first-quarter fiscal 2014 with cash & availability of $85.3 million under its total revolving credit facility. As of Oct 31, 2013, net debt was $583.0 million, including the Oaktree notes.

Fiscal 2014 Outlook

Diamond Foods expects adjusted EBITDA to improve year over year in fiscal 2014, primarily benefiting from the implementation of its ongoing multi-year turnaround initiatives. Moreover, the company expects year-over-year earnings improvement through the rest of fiscal 2014.

Further, the company remains on track to achieve its targeted cost savings of $35 – $40 million through fiscal 2013 and 2014, driven by improved procurement and manufacturing output as well as continued effort to lower costs.

Other Stocks to Consider

Currently, Diamond Foods has a Zacks Rank #3 (Hold). Better-ranked stocks in the specialty food industry include Omega Protein Corp. , Pinnacle Foods Inc. (PF - Snapshot Report) and ConAgra Foods Inc. (CAG - Analyst Report). Of these, Omega Protein has a Zacks Rank #1 (Strong Buy), while Pinnacle Foods and ConAgra carry a Zacks Rank #2 (Buy).

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