Diamond Foods Shines as Profits Grow

| About: Diamond Foods, (DMND)

Diamond Foods Inc.'s (NASDAQ:DMND) third-quarter fiscal 2011 earnings of 52 cents per share grew a robust 73.3% from the prior-year earnings of 30 cents per share, primarily driven by strong top-line growth and improved margins. The third-quarter earnings also surpassed the Zacks Consensus Estimate by 4 cents.

Revenue for the reported quarter was $223 million, up 61% from $138.7 million recorded in the year-ago quarter. Strong performance in non-retail brands and the snack division resulted in the year-over-year increase. The top line beat the Zacks Consensus Estimate of $218.0 million.

Total retail sales increased 44% year over year to $181.7 million in the third quarter of fiscal 2011, driven by healthy performance at Snack, partially offset by decrease in Culinary and In-shell sales. Total non-retail sales posted a massive increase of 226% to $41.3 million over the prior-year period attributable to strong supply especially in the international market.

Gross profit increased 91.6% year over year to $59.6 million. Gross margin improved by 430 basis points to 26.7% for the quarter compared with the prior-year quarter’s gross margin of 22.4%. Operating income in the quarter came in at $17.6 million compared with an operating loss of $1.9 million in the prior-year quarter. Operating margin came in at 7.9% for the quarter.

Diamond Foods ended the quarter with cash & equivalents of $1.5 million compared with $5.4 million at the end of the third quarter of fiscal 2011. Total debt at the end of the quarter came in at $572.4 million, compared with $558.5 million in the prior-year quarter.

The company paid a dividend of 4.5 cents a share as of May 3, 2011 to shareholders of record as of April 22, 2011.

Fourth-Quarter and Fiscal-Year 2011 Guidance

Diamond Foods provided earnings per share guidance for the fourth quarter of fiscal 2011 in the range of 40 cents to 44 cents. For fiscal 2011, the company expects earnings per share to be in the range of $2.48 to $2.52, revised upward from $2.45 to $2.51.

The company provided revenue guidance for fourth-quarter 2011 between $210.0 million and $220.0 million. The company expects revenue to be in the range of $943.0 million to $953.0 million for fiscal 2011, revised upward from $925.0 million to $950.0 million. Snacks sales are estimated to be in the range of $545.0 million to $560 million.

Net income is expected to grow in a band of 52% to 55% year over year in fiscal 2011.The company has projected gross margin to grow 200 to 300 basis points year over year. The company forecasts operating margin in the range of 11% to 12% for fiscal 2011 reflecting an increase of 1.5% to 2.5% over the prior fiscal.

For fiscal 2012, the company expects earnings per share to be in the range of $2.85 to $2.98, which represents an increase of 14% to 19% from the midpoint of the guidance for fiscal 2011. Including the Pringles business the company expects earnings in the range of $3.00 to $3.10. On April 5, 2011, the company had merged Procter & Gamble's (NYSE:PG) Pringles brand into Diamond in a Reverse Morris Trust transaction, which is expected to close by the end of calendar year 2011.

Diamond Foods, which faces intense competition from Kraft Foods Inc. (KFT), Blue Diamond Growers, Sunkist, and John B Sanfilippo & Son Inc. (NASDAQ:JBSS), currently holds a Zacks #2 Rank, implying a short-term "Buy" rating on the stock. Besides, the company retains a long-term "Neutral" recommendation on the stock.