Diamond Foods cracking into consumer trends

by Monica Watrous
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Diamond Foods will be introducing bold flavors, clean labels and convenient protein snacks in its product lines.

SAN FRANCISCO — In the coming months, Diamond Foods, Inc. will launch a line of seasoned cashews in such flavors as jalapeño, sriracha and dill pickle. The product leverages flavor technology from the company’s Kettle Brands business and capitalizes on growing consumer demand for convenient protein snacks.

“As we continue to think about our long-term vision for the company, we are encouraged by the progress we’re making to strengthen our brand alignment with consumer trends for nutrient-dense, convenient protein and salty snacks with natural, organic, gluten-free and non-G.M.O. product attributes,” said Brian Driscoll, president and chief executive officer, during a June 4 earnings call with financial analysts. “In fact, by the end of fiscal 2016, we expect that 70% of our sales in North America will be Non-G.M.O. Project verified.

“We’re also actively evaluating additional opportunities to deepen our participation in on-trend categories through new product innovation as well as accretive strategic acquisitions if the right opportunities present themselves.”

For the third quarter ended April 30, Diamond Foods had net income of $6,290,000, equal to 20c per share on the common stock, which compared with a loss of $105,633,000 for the comparable period. Earnings were boosted by margin growth in the Nuts segment and strong sales of Kettle products. Net sales slipped 2.5% to $186,067,000 from $190,892,000, reflecting the negative impacts of foreign currency translation and the company’s decision to exit high-volume, low-margin nut products.

In addition to the cashews, Diamond is debuting three flavors of Kettle chips, which include pepperoncini, dill pickle, and Carolina barbecue, plus three organic varieties, which are sea salt and vinegar, jalapeño and baked sea salt.

Diamond is debuting several new varieties of Kettle chips, including pepperoncini and Carolina barbecue flavors.

“Our product innovation team has done an excellent job creating new Kettle flavor varieties, which have historically proven to be important components of growth for the brand and continue to receive very positive PR,” Mr. Driscoll said.

But not all recent innovation has proven successful for Diamond. Last year, the company extended its Pop Secret microwave popcorn and Kettle potato chip brands into the rapidly growing ready-to-eat popcorn category. Initial performance of the products has been softer than expected.

“In terms of ready-to-eat popcorn, let’s face it, that launch has not been what we had hoped it would be,” Mr. Driscoll said. “It’s certainly not a launch that we’re reliant on in terms of our outlook… That said, we haven’t given up on it. We just are in the midst of relaunching, if you will, the Kettle packaging, and time will tell how that begins to materialize. We just got some new distribution on Pop Secret ready-to-eat that we feel good about. We’ll see.

“I would not view that launch and that platform organically as being a substantial growth driver for us going forward.”

Extending a brand name into a new segment is always risky, he said.

“But I would say that we learned quite a bit in terms of the way we executed Kettle initially, and that’s why we haven’t ruled out that it can still be successful,” Mr. Driscoll said. “So just honing in on that one in particular, I think we have the execution, the way I wish we would have had it initially and again, that was because I pushed it too fast. And now we’ll see.

“I think our pricing and merchandising cadence is right. I think our packaging is right. It’s a great product. We would not put out less than a great tasting product with the Kettle brand name on it. Now it’s just a matter of time to see if it will correct itself.”

Diamond extended its Pop Secret microwave popcorn and Kettle potato chip brands into the ready-to-eat popcorn category, and initial performance of the products has been softer than expected.

For the third quarter, Diamond’s snacks segment posted sales of $113,897,000, down 0.3% from the prior-year period as the company faced competitive dynamics in the microwave popcorn category. Gross profit for the segment declined 2% to $40,862,000.

Net sales for the nuts segment fell nearly 6% to $72,170,000. Gross profit more than doubled to $12,095,000, which compared with $3,397,000 in the same quarter of the previous year.

The company has raised its fiscal-year outlook based on year-to-date performance. Executives now expect to achieve adjusted earnings before interest, taxes, depreciation and amortization of $118 million to $123 million, up from its previous range of $117 million to $123 million.

“In sum, we remain confident in the foundation we’re building across our brands to support future growth with solid based fundamentals and a more robust innovation pipeline,” Mr. Driscoll said.
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