Diamond Foods: A diamond in the rough (economy)

Bagging a key competitor in the snack food aisle, streamlining costs and playing to consumers’ at-home meal needs has put Diamond Foods Inc. (Nasdaq:DMND) on track to achieve or surpass its lofty future goals despite an unstable economy.

The Stockton, Calif.-based producer of culinary nuts and snack foods completed a $190 million purchase of the Pop Secret microwaveable popcorn brand from General Mills on Sept. 16 just days before reporting record fourth-quarter and fiscal 2008 earnings. The acquisition was aided by a new five-year, $250 million credit facility led by Bank of America.

Experts say Pop Secret, which is worth $85 million to $90 million in annual sales, is an ideal complement to Diamond’s current snack food portfolio.

“Pop Secret gets them into another tangential category where they can leverage existing sales infrastructure given similar buying complexes at retail,” Mark Argento, research analyst for Craig-Hallum Capital Group, said in an email to SmallCapInvestor. “It should generate good financial leverage over time.”

Diamond said Pop Secret is the second-largest brand in its category, commanding a 25% share in U.S. grocery stores, and its established line of 100-calorie packs plays right into Diamond’s marketing strategy aimed toward healthier snack options.

“Pop Secret fits our acquisition criteria, and we plan to invest behind the brand to position it for long-term success,” Michael J. Mendes, Diamond’s chief executive officer, said in a statement. But Mendes also was quick to say that it’s too early to tell exactly how Pop Secret will fit into those long-term plans, and the company’s immediate focus remains on promoting its entire snack line.

Diamond’s fourth-quarter net income grew 220% year over year to $2.6 million, or $0.16 a share. That helped boost its fiscal-year profit by 72% to $14.8 million. Meanwhile, sales increased 1% to $113.1 million in the quarter and 2% to $531.5 million in the fiscal year.

The record earnings, according to Diamond, were aided by North American retail sales – up 24% quarterly and 11% yearly – and several cost-cutting measures. These measures included restructuring several walnut receiving/processing facilities, reductions in packaging costs, reductions in warehouse/shipping costs through consolidation and a streamlining of transportation costs.

Additionally, Diamond’s culinary sales grew 39% in the fourth quarter as more people scaled back on eating out in response to the poor economy.

“The number of out-of-home meals is declining,” Mendes said in the company’s earnings conference call Sept. 25. “This plays nicely for our culinary product line.”

Diamond’s stock reached a one-year peak of $32.14 on Oct. 14, likely prompted by the earlier approval of cash dividend payout of $0.045 a share for common stockholders of record by Oct. 16. Shares continued to hover between $28 and $30 as the end of the fiscal 2009 first quarter approached. Analysts and Diamond management were somewhat in agreement on Q1 estimates, forecasting between $0.60 and $0.63 EPS.

Founded in 1912, Diamond became the first nut producer to launch a nationwide advertising campaign (in 1919) and the first to advertise on TV (in the 1950s). And it has shown no signs of slowing that aspect of its business. Among its many promotional strategies, Diamond forged partnerships with the U.S. Olympic team, the San Francisco Giants and NCAA football as the title sponsor of the Emerald Bowl – all before going public in 2005.

Now, as a new member joins its snack family for 2009, it remains to be seen whether Diamond will let its secret to success pop out of the bag.
 

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