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Diamond Foods Reports Dismal 4Q

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Diamond Foods Inc.'s fourth-quarter fiscal 2012 earnings of 5 cents per share plummeted 78% from the prior-year earnings of 23 cents per share, primarily driven by poor top-line performance, increased costs and soft margins. The fourth-quarter earnings were also way below the Zacks Consensus Estimate of 41 cents.

The company’s full-year earnings per share of 58 cents declined 67% from the year-ago earnings of $1.76 per share.

Revenues for the reported quarter were $224.0 million, down 5% from $234.7 million recorded in the year-ago quarter. During the quarter, sales decline in the non-retail segment was slightly offset by strong performance in retail division. The top line also missed the Zacks Consensus Estimate of $234.0 million.

Total retail sales increased 9% year over year to $210.1 million in the fourth quarter of fiscal 2012, including snack sales of $159.2 million that were up 8%. The rise in snack sales was attributed to the boost in Emerald sales. On the flip side, total non-retail sales witnessed a massive decline of 66.7% to $13.9 million over the prior-year quarter.

For fiscal 2012, net revenue increased 2% year over year to $981.4 million largely driven by a 10% increase in retail sales, greatly offset by a 44.8% decline in non-retail sales.

Quarter in Detail

Gross profit for the quarter declined 13.6% year over year to $42.3 million. Gross margin contracted 190 basis points to 18.9% for the quarter compared with the prior-year quarter’s gross margin of 20.8%.

Selling, general and administrative expenses in the quarter rose 29.5% year over year to $33.6 million, including $10.0 million related primarily to audit committee investigation, restatement, and related expenses. However, advertising expenses in the quarter declined 40.2% year over year to $6.4 million.

Consequently, operating loss in the quarter came in at $18.9 million compared with an operating loss of $0.5 million in the year-ago quarter.

Financial Gist

Diamond Foods ended the quarter with cash & equivalents of $3.3 million compared with $3.1 million at the end of the fourth quarter of fiscal 2011. Total debt at the end of the quarter came in at $605.0 million, compared with $531.7 million in the prior-year quarter.

Cash and availability on Diamond's bank revolving line of credit on November 30, 2012 was approximately $88 million.

Capital expenditures for the fourth quarter totaled $4.4 million, with full year capex summing to about $45.0 million. The company’s major recent expansions including the U.K. and Beloit, Wisconsin Kettle expansions were completed in the fall of 2011 and spring of 2012, respectively.

Our Take

Diamond Foods is swiftly moving ahead with its recently announced cost savings and operational effectiveness initiatives. Though the company’s fiscal 2012 results do not reflect much of the strategic changes, the company believes future results will reflect sustained growth of its brands coming from innovation and differentiation, improving cost structure and rebuilding walnut supply.

Diamond Foods, which faces intense competition from Mondelez International Inc. (MDLZ - Free Report) and ConAgra Foods Inc. (CAG - Free Report) , currently holds a Zacks #5 Rank, implying a short-term "Strong Sell" rating on the stock. Besides, the company retains a long-term "Neutral" recommendation on the stock.

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