One potential turnaround that has received significant scrutiny from investors is that of Diamond Foods, Inc. (NASDAQ:DMND). Diamond’s stock plummeted after its Q2 earnings report showed lower revenue than what Wall Street analysts were expecting. However, the company has made significant improvements that may offset the disappointing revenue figure.
Overcoming Adversity
Diamond Foods was in the news not too long ago due to an accounting scandal involving payments to walnut producers. The company has been struggling to keep up with demand in the walnut market so it is not all that surprising that an accounting irregularity came from this segment.
The company also announced more bad news when it told investors that it had lost a bid to buy Pringles. The failed acquisition cost the company over $100 million.
But with the accounting scandal behind it and the Pringles charge-offs baked in, the company can resume its focus on turning the company around.
Despite the revenue miss, Diamond Foods, Inc. (NASDAQ:DMND) continues to improve its gross margin and free cash flow. The company has achieved these improvements by dropping low-performing products from its offering in addition to cutting back on discounting. The decline in revenue should level off as the company’s strongest brands start showing proof of pricing power.
Keys to Success
In a recent investor presentation, management laid out its four-pronged plan for turning the company around.
(1) Rebuild Walnut Supply
Demand for walnuts has grown rapidly over the last few years, but Diamond Foods, Inc. (NASDAQ:DMND) has struggled to supply the market with adequate quantities. As a result, management is re-working grower incentives and investing more heavily in its walnut brands in order to take advantage of the skyrocketing price of walnuts.
(2) Re-Position Emerald Brand
Management has traditionally tried focused on maximizing sales growth of the Emerald brand, but it is now determined to grow the brand at a slower and more profitable rate. Many of the underperforming products being eliminated are in the Emerald brand.
(3) Re-Invest in Brands
Diamond believes that introducing new products to the market is the best way to grow its brands.
(4) Optimize Cost Structure
The company is streamlining operations and adding capacity to its existing plants. Management expects savings of $20 million to $40 million from these efforts.
Competitors
Diamond’s turnaround will be made more difficult by its competition. PepsiCo, Inc. (NYSE:PEP) should be investors’ biggest concern. Its Frito-Lay division is the largest snack food company in the world. Frito-Lay has a 60% share of the North American salty snacks market and a 40% share of the global market. In addition, the company’s vast distribution network — originally built for its beverage segment — is an enormous asset that allows the company to deliver its products quickly and cheaply to retailers across the globe. Diamond will never be able to match PepsiCo, Inc. (NYSE:PEP)’s distribution network.
ConAgra Foods, Inc. (NYSE:CAG) is another competitor that could derail Diamond Foods, Inc. (NASDAQ:DMND)’s turnaround. ConAgra’s brands are well-known and cover a wide array of products. The company competes with Diamond’s Pop Secret popcorn brand as well as some of its snack brands.
But while ConAgra has strong brands, it has a bloated cost structure that makes it difficult to compete on price. Diamond’s streamlined cost structure allows it to be more nimble than its larger competitors.
Bottom Line
While PepsiCo, Inc. (NYSE:PEP) and ConAgra represent significant threats to Diamond’s recovery, the biggest threat to Diamond is itself. The company is the largest nut producer in North America — something that no other competitor can boast. The company needs to continue its efforts to streamline its brands and increase profitability — even if it costs sales growth in the short term. Only when it can finally boast wide and stable margins can it resume sales growth, but by then the stock will have doubled from current prices.
The article Snack Food Business Poised for Higher Profitability originally appeared on Fool.com and is written by Ted Cooper.
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