Diamond Foods (DMND.DL), and its snack brands such as Emerald nuts, Kettle Brand chips, and Pop Secret popcorn, has become a staple in the American diet. With a long history that started in 1912, this company is trying to return to its past glory. After a rough couple of years , plagued by losses and accounting scandals, Diamond is hoping to shine again. First-quarter results are on deck, and investors want to know if Diamond can fend off competitors like PepsiCo (PEP 3.62%), ConAgra (CAG 0.96%), and John B. Sanfilippo & Son.
Diamond Foods reports first-quarter earnings on Dec. 5. Here are three things to watch for.
An end to the drama
Diamond's most recent quarter was a rough one, with sales dropping 11% for the quarter. Sales also dropped 12% for the fiscal year. Part of what has held this company back is the effects of a lasting accounting scandal, as Diamond had to pay out $96 million to the SEC in August for admitted accounting shennanigans.
With a newer CEO and CFO now firmly in place, we'll want to hear that the drama is past them. Obviously the scandal is past them, but its effects and the "built-in" excuse they offer for poor results needs to be absent from Diamond's earnings call. It's time to judge this business on its own merits and see how it stacks up to an industry with heavy competition.
Emerald nuts relaunch and the second-quarter outlook
Speaking of competition, it is worth noting that Diamond is the only one of the aforementioned competitors not turning a profit currently. I only mention PepsiCo's and ConAgra's results because Diamond's stock has rallied on the hopes of a turnaround. The stock now trades at a premium to its profitable competitors, as you can see in the chart below, largely due to the promise of a turnaround.
DMND P/E Ratio (Forward 1y) data by YCharts.
The numbers in the chart above track forward P/E ratios, which I believe carries a critical distinction. Not only does Diamond trade at a premium, it has done so all year on the hopes that profits were coming; clearly that hope is still alive. But if Diamond isn't ready to turn the corner now, when will it be?
Now, it is worth mentioning that Diamond has cited a tight walnut supply, and rising nut costs, as a reason for recent woes. It's also worth mentioning that Fisher nut parent company John B. Sanfilippo & Son also recently reported a subpar first quarter, despite being profitable. In the quarter, Sanfillippo, which only sells nuts, felt the impact of tight supply to the tune of a 10.1% drop in net income.
Perhaps then it's not surprising that Diamond Foods' CEO, Brian Driscoll, gave a muted view on the first quarter during the most recent quarterly call. The biggest worries hinged on the nut group, and the costs associated with the relaunch of Diamond's Emerald nuts.
If Diamond's results disappoint, it will be important to listen to management's outlook for the second quarter and to hear how the relaunch of Emerald is panning out. If the next quarter looks bright, and the relaunch is a success, Diamond may be turning around at last.
Brian Driscoll
While the results of this quarter will depend on how Diamond's brands did, its new CEO will be critical to the company's long-term success, and investors should evaluate him as well. Since joining the company in 2012 he's been very hopeful of a turnaround, but we need more details and results.
So as he tells us about how Diamond's Kettle Brand chips and Pop Secret popcorn did, let's evalaute the reasons for success or failure with the results of PepsiCo's Frito-Lay and ConAgra's Orville in mind. How Driscoll responds to a rough quarter, should it happen, will be key. My hope is that he avoids blaming the previous regime's obvious blunders.
Much is still unknown about Driscoll; he had a long and successful tenure at Kraft but was also the CEO of Hostess Brands during their bankruptcy. I don't know if his brief time at Hostess even had anything to do with the Twinkie maker's demise, so let's give Driscoll a fresh slate.
Let's listen in and hope that he has a clear message, a detailed plan, and that he avoids making excuses.
Accountability is the key to success
Diamond Foods in the midst of a transformation process of sorts, and investors should try to determine if it's for real. Watch for these three keys things; they'll tell you if Diamond's management is following through on their promises from last quarter.
With any "turnaround" story, the company's accountability to you, the shareholder, is critical to its success.
