Does Diamond Foods Feel Good About Q2 Earnings?

| About: Diamond Foods, (DMND)

Diamond Foods (NASDAQ:DMND) issued an 8K yesterday (Feb 26, 2013) that contained an updated investor presentation ("Diamond Foods Building Sustainable Premium Brands") summarizing its current situation and provides some interesting updates on its brand strategy progress and market potential. The information provided a more bullish look at the business than prior management comments. Maybe more importantly, I found the timing of the presentation even more interesting as they release Q2 earnings just 13 days after issuing this document. This typically is a bullish sign as it can indicate management confidence heading into the earnings announcement.

Summary of the information provided in the 8K:

  • Provided market size, growth, brand position, and market share for each Diamond brand for the 52 week period ending Jan 19, 2013. More on this data below.
  • Provided information on the growing walnut crop supply and the massive increase in price per pound (more than doubled since 2008) - the chart provides an inference that price increases driven by China and Turkey growing from 0% of market demand in 2005 to 20% in 2012.
  • Two new detailed charts on the reduction of promotion spending on snack brands:
    • Significant increase in Pop Secret Market share (100 basis points over past 6 months) during a sizable reduction (220 basis points) in Pop Secret promotional sales activities. This should translate to much higher revenues at higher gross margin for the brand. This is a critical update, as it shows that promotional spending could be cut and not slow the market share gains Pop Secret has been enjoying (400 bps increase over past 4 years).
    • Moving Kettle promotion sales to market competitive levels to increase margins
  • Re-iteration of the Emerald brand strategy from "top line growth" to "sustainable growth focus" by reducing SKUs from > 250 to < 90. Basically they are sacrificing some revenue potential for improved cash flow by eliminating low margin SKUs.
  • Update on the outstanding balance on the $255 million bank revolving credit facility:
    • As of Jan 31, 2013, the outstanding balance was reduced to $133 million, meaning that Diamond pulled $53M since October 31, 2012. We won't know what that money was utilized for until we see the financial statements for Q2.
    • The size of this credit facility will be reduced to $230 million on July 31, 2013, and to $180 million on Jan 31, 2014.
    • Diamond management has commented that they are well enough capitalized over the next year to withstand these reductions without issue.
  • Cost savings estimate reiterated in the range of $20-$40M. If successful, that would add $0.90 to $1.80 per share to earnings annually.

Figure 1: Diamond Foods Brand Market Chart Summary (from 2/26/2013 Investor Presentation)

As mentioned earlier, Diamond presented a new chart on brand potential and performance. I have summarized that chart here (Figure 1) and done a little math to total up the information. Diamond's culinary, walnut retail and snack market is estimated to be $17.4 billion with a growth rate of 5.3%. Nielsen estimated Diamond's market share for each segment, delivering implied trailing twelve month revenue for Diamond at $1.26 billion (or 7.3% market share in aggregate). That number far exceeds analyst estimates of $929M for the four quarters ending Jan 31, 2013. While there are bound to be disconnects between third party market estimates and company actuals, Diamond management did choose to present this data in its 8K and showcased the market share increases quoted by Nielsen in the document (Figure 2). While not conclusive on Q2 numbers, this does point to management confidence about progress and may provide some insight into Q2 performance.

Figure 2: Pop Secret Strategy is Working

I contacted the company to get their opinion on the data disconnect, but have yet to hear back.


Investors got an unusual pre-look at some company data just prior to the release of their earnings information. In general the data was very positive and focused on execution to improving costs and detailed market share gains on one of its key brands. Without company guidance, expectations by analysts are very low for Diamond's second quarter (8.9% Y/Y drop in revenue and only $0.06 in non-GAAP EPS). This release leads me to believe that Diamond may be feeling pretty good about its performance prior to the earnings release.

Disclosure: I am long DMND. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.