Diamond Foods Inc. Reports Higher Earnings In Second Quarter

Diamond Foods Inc. reported record sales growth and a more than doubling of earnings in its second quarter of fiscal 2011. The company is increasing full-year non-GAAP earnings per share (EPS) guidance by $0.02 to a range of $2.45 to $2.51, while at the same time increasing its fiscal year advertising investment to a range of $43 million to $45 million. Advertising is being increased to provide support for distribution of new products, which gained widespread customer support in the past few months.

For the three months ended Jan. 31, 2011, diluted EPS grew 67 percent to $0.87 compared to $0.52 for the prior year's comparable period. Excluding $0.9 million in integration costs related to the Kettle acquisition last March, non-GAAP EPS was up 90 percent to $0.91 compared to $0.48 for the prior year's quarter. Retail sales grew 63 percent to $215.6 million and snack sales increased 133 percent over last year due to both the addition of Kettle and strong organic growth in snack revenues.

"We achieved double-digit organic sales growth in our snack portfolio due to securing key new distribution in the club, mass and drug channels," said Michael J. Mendes, chairman, president and CEO in a prepared statement. "To support these new distribution gains, we plan to increase our advertising investment during the remainder of the year, which we believe will position our portfolio for continued growth in the future."

The launch of Emerald Breakfast on the go! extends the brand's footprint into the Convenient Breakfast category, which more than doubles Emerald's addressable markets. In the first four weeks on shelf, Breakfast on the go! scanned in 59 percent of U.S. grocery stores.

Emerald brand revenue grew double-digits in the quarter, excluding new product slotting, primarily due to distribution gains in non-scanned channels. Emerald's distribution increased 800 basis points to 85 percent distribution in all outlets. The brand set a new market share record in the grocery channel at 11.6 percent by gaining 150 basis points of market share. 

Pop Secret achieved significant new distribution in the mass merchandise channel expanding distribution with over 1900 additional stores. In the club channel, the brand has been authorized in 300 outlets with a new 38-count better-for-you 100 calorie item.  The brand gained 130 basis points of market share in all outlets. 

Shelf space for Kettle Brand potato chips doubled in 1,000 mass merchandise stores and increased significantly in several grocery retailers while Kettle Brand TIAS! distribution continued to expand in the quarter with authorizations in the natural, mass and club channels. Kettle Brand's dollar sales continued to outpace the category growth rate by more than two times resulting in an increase in market share of ten basis points. In the natural channel, where Kettle is already the largest brand in the salty snack category, market share increased 20 basis points.  

In the U.K., Kettle significantly outpaced category growth and increased share in the premium segment by 80 basis points5 during the key holiday selling period. Sales of Kettle Ridge crisps and multi-packs led the growth along with continued strong performance in the impulse channel.

Diamond of California culinary revenue was up seven percent in the quarter and the brand continued to lead the category with a market share of 28 percent, which is eight times larger than the next branded competitor. 

A quarterly dividend of $0.045 per share was paid on February 4, 2011 to shareholders of record as of Jan. 28, 2011. 

Net sales during the quarter were $257.6 million, 40 percent above the prior year, and retail sales were $215.6 million, up 63 percent, driven by significant snack revenue growth due to the addition of Kettle and strong organic snack sales. In-shell retail sales were up 15 percent driven by strong sell through during the holiday season. Non-retail sales declined 19 percent, reflecting a decrease in North American ingredient/foodservice revenue as a result of the USDA school lunch program not being offered this year. 

For the quarter, gross profit as a percentage of net sales was 27.5 percent compared to 22 percent in the prior year period.  The increase in gross margin was mainly due to favorable product mix and the result of cost efficiency initiatives.

Selling, general and administrative expense (SG&A) was $24.0 million during the quarter, or 9.3 percent of net sales. Advertising expense was on plan at $10.0 million for the quarter. A greater portion of consumer support will be spent in the second half of the fiscal year.  

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