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DMND Shares Soar on Robust Earnings

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Driven by improved net price realization and effective cost management, Diamond Foods Inc. posted adjusted earnings of 5 cents per share for third quarter fiscal 2013 that fared better than a loss of  22 cents a share in the comparable year-ago quarter, and  the Zacks Consensus Estimate of a loss of 16 cents.

The market welcomed the news as the shares of this specialty food company jumped 8.0% to close at $17.54 yesterday.  Including one-time items, the company reported loss of 71 cents per share during the quarter that also portrayed a substantial improvement over a loss of $2.02 in the third quarter of fiscal 2012.

From second quarter fiscal 2013, Diamond Foods started to report its operating results under 2 segments – Snacks and Nuts. Products sold under Kettle U.S., Kettle U.K. and Pop Secret brands were included in the Snacks segment, while products under the Diamond of California and Emerald brands came under Nuts.

Quarter in Detail

Total sales for the quarter came in at $184.9 million, down 11.0% from $207.7 million in the comparable year-ago quarter. Moreover, the top line remains almost in line with the Zacks Consensus Estimate of $185.0 million. The year-over-year decline in total sales was mainly due to a weak performance by the company’s Nuts segment, partially offset by higher sales at Snacks.

Net sales at Snacks inched up 1.6% to $104.2 million in the quarter, primarily driven by improved net price realization but partially offset by a 5.5% decline in volume. However, net sales at the Nuts segment plummeted 23.2% to $80.7 million due to a fall of 40.3% in volume.

Gross profit for the quarter surged 26.9% year over year to $43.4 million versus $34.2 million in the year-ago quarter. Gross margin expanded 690 basis points (bps) to 23.4% compared with the year-ago quarter’s gross margin of 16.5%. The expansion in gross margin came on the back of better price realization and effective cost management.

Gross profit at Diamond Foods’ Snacks division increased 30.6% year over year to $36.7 million, while as a percentage of sales it rose 780 bps to 35.2%. Higher net price realization and lower unit processing costs primarily drove the year-over-year improvement in this segment’s gross margin.

Gross profit of the company’s Nuts segment increased 9.8% to $6.7 million, whereas gross margin expanded 250 bps to 8.3%. The year-over-year increase in gross margin was attributable to better price realization, effective cost management and benefits from the reduction of underperforming SKUs, partially offset by rise in commodity cost for certain items.

Selling, general and administrative (SG&A) expenses rose 6.0% year over year to $35.3 million, including charges of $12.9 million primarily related to Fishers plant closure, impairment of an intangible asset, consulting fees and legal expenses.

SG&A expenses in third quarter fiscal 2012 were $33.3 million, which included $8.3 million related to audit committee inquiry, restatement and legal expenses. However, excluding one-time costs, SG&A expenses came in at $22.4 million, which is 12.1% of net sales versus 12.0% in the comparable year-ago quarter.  

Advertising expenses in the quarter surged 11.4% year over year to $8.0 million, primarily due to increased advertisement expenses to support Pop Secret and Kettle brands.

Consequently, on a reported basis, operating loss in the quarter came in at $1.9 million versus $17.6 million in the comparable year-ago quarter.

Adjusted EBITDA jumped over twofold to $23.2 million in the quarter compared with $11.2 million in the year-ago comparable quarter. Consequently, adjusted EBITDA margin improved 720 bps year over year to 12.6%.

Financial Gist

Long-term debt at the end of the quarter came in at $579.2 million. On Jun 7, 2013, cash and availability under the company’s bank revolving line of credit was nearly $96.0 million. Capital expenditure for the third quarter totaled $2.1 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 further in fourth quarter fiscal 2013 as compared with the third quarter. Moreover, Diamond Foods will remain focused on investing in advertisements.

Notably, the company is progressing well with its cost savings and operational effectiveness initiatives, as reflected in its third-quarter fiscal 2013 results. Moreover, the company believes that future results will reflect sustained growth of its brands arising from innovation and differentiation, an improved cost structure and restored walnut supply.

Other Stocks to Consider

Currently, Diamond Foods carries a Zacks Rank #3 (Hold). Better performing stocks in the specialty food industry include Annie's Inc. , Campbell Soup Company (CPB - Free Report) and Boulder Brands, Inc. , all of which have a Zacks Rank #2 (Buy).

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