Diamond Foods: Q2 call notes/Color on Qurter (17.60 )
Mgmt is encouraged by the turnaround process. The shift away from discounting (sales headwind) continues, but the 'heavy lifting' in SKU rationalization is behind the co. The focus on price improved gross profit/margin (+690 bps YoY to 22.9%) and EBITDA, which can lead to profitable top line growth in time -- Emerald sales growth may be expected in 1Q14 (ending Oct) after co cycles SKU reductions. Improvement in GPM was from removing unprofitable SKUs. Margins may fluctuate on strategic changes or increased costs/investments. Retailer shelf distribution in response to lower promotional spend has been encouraging (apparent reflection of strong brands).
Price and margins were up significantly in the nuts segment but biz is still in early stages of overall transformation. Co continues to focus closely on walnut supply and grower relationships, which has been encouraging but crop receipt visibility will be much better by mid-summer. Lower costs came from operational improvements and aligning capacity with demand, not walnut procurement. Co continues to reduce discounting for the Kettle Brand; Pop Secret continues to be strong. Co reduced debt by ~$50 mln or ~10% QoQ.
Mgmt's actions are clearly impacting results; margins are up on lower sales as co re-establishes its pricing strategy and cuts costs; commentary regarding retail shelf distribution is encouraging, which seems to confirm that the co's brands are strong. Still, the turnaround will take some time.
Northland raised their tgt to $15 from $13 as lower sales ests are offset by higher EPS ests; they believe DMND is still at an early stage of its turnaround, which will likely take a couple of years; Market Perform.
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