Can Diamond Foods' Strategic Efforts Aid a Turnaround?

Specialty food company, Diamond Foods, Inc. DMND is focused on the processing, marketing and distribution of snack products and culinary, ingredient and in-shell nuts. The company's products are sold in over 60,000 retail locations in the U.S., and also overseas in more than 100 countries, primarily in Germany, Japan, Spain and Italy.

The company recently reported soft first-quarter fiscal 2016 results as both earnings and sales missed expectations. The top line also declined year over year due to the exit of certain high volume, low margin nut SKUs, coupled with lower net price realization in international walnut sales and negative foreign currency impact.

A look at the company's bottom-line performance reveals that despite remaining flat year over year, earnings succumbed to a miss after beating estimates in five consecutive quarters. The benefits from margin expansion, sustained strength of Kettle U.S., signs of recovery in the U.K. and progress related to the Emerald transition, were more than offset by soft sales.

Though management retained its outlook for fiscal 2016, it expects these currency woes to persist and weigh on the company's overall performance going forward, thereby raising concerns.

Apart from this, Diamond Foods has a highly leveraged balance sheet, as evident from the fact that at the end of first-quarter fiscal 2016, its long-term debts were almost double the stockholders' equity. This has been hurting the company's bottom line due to high interest expenses. If Diamond Foods fails to generate higher cash flow, it might not be able to undertake strategic initiatives.

While these factors raise concerns about the company's prospects, Diamond Foods' focus on the smooth execution of its turnaround strategies, such as improving price realization, lowering underperforming SKUs and reducing dependence on discounts, have been growth drivers. These, along with product innovation and improved cost structure, are expected to deliver sustained growth in the future.

Zacks Rank

Diamond Foods currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the same industry include B&G Foods Inc. BGS, Campbell Soup Company CPB and Omega Protein Corporation OME, each sporting a Zacks Rank #1 (Strong Buy).

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