Diamond Foods Beats - Analyst Blog

Diamond Foods Inc.'s (DMND) first quarter of fiscal 2011 earnings came in at 65 cents per share, surpassing the Zacks Consensus Estimate of 60 cents. However, this compares unfavorably with 88 cents recorded in the year-ago period.

Net income before extraordinary items for the quarter was $14.5 million versus $14.9 million reported in first-quarter 2010. Including $0.5 million in integration costs related to the purchase of Kettle Foods in March, Diamond Foods reported a net income of $14.2 million or 64 cents per share.  

Revenue for the reported quarter was $252.6 million, up 40% from $180.6 million recorded in the year-ago quarter. Better-than-expected performance of retail brands and the acquisition of Kettle primarily resulted in the year-over-year increase. The top line also beat the Zacks Consensus Estimate of $242.0 million.

Total retail sales increased 58% year over year to $227.8 million in the first quarter of fiscal 2011, driven by an increase in Snack, Culinary sales, and In-shell sales. Total non-retail sales declined 32% to $24.8 million over the prior-year period attributable to weak performance in International non-retail sales and N. American Ingredient/Food Service sales.

Gross profit increased 39.8% year over year. Gross margin of 25.2% for the quarter came in flat compared with the prior-year quarter. Selling, general and administrative expense was $23.1 million, compared with $13.5 million in the prior-year quarter. Operating income in the quarter was $27.5 million, up 7.1% year over year, and operating margin came in at 10.9%. 

Financial Update

Diamond Foods ended the quarter with cash & cash equivalents of $8.0 million, compared with $6.6 million at the end of the first quarter of fiscal 2010. Total debt at the end of the quarter came in at $555.0 million, up by more than fourfold from $111.3 million in the prior-year quarter.

Dividend

The company paid a dividend of 4.5 cents a share as of November 3, 2010, to shareholders of record as of October 22, 2010.

2Q11 and Fiscal-Year 2011 Guidance

Diamond Foods guides earnings per share for the second quarter of fiscal 2011 in the range of 85 cents to 91 cents on expectation of sales between $225 million and $265 million.

Diamond Foods expects fiscal year 2011 earnings per share in the range of $2.43 to $2.49, revised upward from $2.38 to $2.48. Net income is expected to grow in a band of 48% to 51% year over year in fiscal 2011.

The company guided fiscal 2011 revenue in the range of $920 million to $945 million with Snacks sales estimated to come in between $540 million and $560 million. The company projects gross margin to grow 200 to 300 basis points year over year

The company intends to invest heavily in advertising for brand promotion; for this purpose, it expects expenditure under this head to be in the range of $40 million to $43 million for 2011.

The company forecasts operating margin in the range of 11.5% to 12.0% and the effective tax rate in a band of 32% to 34% for fiscal 2011. The company expects capital expenditure in the range of $35 million to $40 million.

Diamond Foods is focused on increasing market share by expanding the existing nut product lines and introducing new nut products in the United States and worldwide. Additionally, the company is allotting substantial investments in advertising for brand promotion to drive higher sales.

However, a high debt burden, intense competition, fluctuation in availability and prices of raw materials keep us on the sidelines. The company faces intense competition from national and regional competitors, including Planters, owned by Kraft Foods Inc. (KFT), Blue Diamond Growers, Sunkist, and John B Sanfilippo & Son Inc. (JBSS), which also owns the Fisher Nut Company.

We maintain our Neutral recommendation on Diamond Foods. The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates an upward directional pressure on the shares over the near term.

 
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