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Diamond Foods Reports Weak 1Q

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Diamond Foods Inc.'s first-quarter fiscal 2013 adjusted earnings of 24 cents per share plummeted 66.2% from the year-ago quarter’s earnings of 71 cents, primarily driven by weak top-line performance and deleveraged operating expenses. However, the earnings were above the Zacks Consensus Estimate of 23 cents.

Including certain items, the company reported a loss of 49 cents during the quarter against earnings of 47 cents in the first quarter of fiscal 2012.

Total sales for the reported quarter were $258.5 million, down 10.1% from $287.4 million recorded in the year-ago quarter. Moreover, the top line missed the Zacks Consensus Estimate of $274.0 million. The year-over-year decline in total sales was mainly due to weak performances delivered at the company’s both segments.

Total retail sales decreased 4.1% year over year to $244.8 million in the first quarter of fiscal 2013, including snack sales of $154.1 million that were down 2.0%. The decline in snack sales was attributed to the fall in Emerald and Kettle sales, partially offset by better Pop Secret sales. Moreover, total non-retail sales plunged 57.5% to $13.7 million over the year-ago quarter.

Quarter in Detail

Gross profit for the quarter declined 4.5% year over year to $58.5 million primarily due to a drop in sales. However, gross margin expanded 140 basis points to 22.7% compared with the year-ago quarter’s gross margin of 21.3%. The expansion in gross margin was a result of better price realization and benefit coming from reducing underperforming SKUs.

Selling, general and administrative (SG&A) expenses augmented 29.6% year over year to $38.2 million, including $11.8 million primarily related to audit committee investigation, restatement, and related expenses. However, excluding these costs, SG&A expenses came at $26.4 million, which is 10.2% of net sales versus 9.5% in the comparable quarter last year.

Advertising expenses in the quarter declined 29.1% year over year to $9.0 million primarily due to shift in timings of spending to the remaining period of fiscal 2013.

Consequently, on a reported basis, operating income in the quarter came in at $3.8 million compared with an operating income of $1.9 million in the year-ago quarter.

Financial Gist

Diamond Foods ended the quarter with cash & equivalents of $9.9 million compared with $4.5 million at the end of the first quarter of fiscal 2012. Total debt at the end of the quarter came in at $613.1 million, compared with $576.8 million in the prior-year quarter.

Cash and availability on Diamond's bank revolving line of credit on Dec 14, 2012 was approximately $95.0 million.

Capital expenditures for the first quarter totaled $2.9 million. The company’s major recent expansions including the UK 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 first quarter fiscal 2013 results do not reflect much of the strategic changes, the company believes future results will reflect sustained growth of its brands arising 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.

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