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We have downgraded our long-term recommendation on Diamond Foods (DMND) to Underperform following its dismal first quarter fiscal 2013 results. Its adjusted earnings of $0.23 per share plunged 67.6% from the year-ago quarter, primarily due to weak top-line performance and increased operating expenses as a percentage of sales.
Total sales dipped 10.1% year over year to $258.5 million, and missed the Zacks Consensus Estimate of $274.0 million. The company's performance may also get a hit due to difficulty on its part to secure walnut supplies and repair its ties with growers.
Otherwise, a highly leveraged balance sheet may stop it from taking strategic initiatives. Further, continued macroeconomic headwinds, intense competition, product recalls and fluctuations in raw material prices may undermine the company's future growth prospects and sustainability.