Shares of Dean Foods Company crashed 20.8% on Aug 8 after the company reported a dismal second-quarter 2017 result which compelled management to lower its earnings projection for 2017. Both the top and bottom lines fell short of estimates and earnings declined year over year. In fact, this marked the company’s third straight quarter of negative earnings surprise.

Well, yesterday’s slump has also caused this Dallas-based food and beverage company’s shares to plunge 45.5% year to date, wider than the industry’s downside of 30.4%.



Results were hampered by a tough retail scenario, which has been witnessing fast-evolving trends. Further, volumes remained pressured owing to both macro factors, as well as stiff competition. These obstacles are also expected to linger throughout the rest of 2017, as reflected in management’s curtailed guidance. Nonetheless, Dean Foods remains on track to speed up its commercial and cost productivity efforts, to enhance volumes and mix. Incidentally, it announced plans to expand its cost productivity program, which is expected to help the company achieve additional savings of $40–$50 million annually.

Q2 in Detail

Plagued by increased raw milk expenses, the company’s quarterly adjusted earnings of 21 cents per share lagged the Zacks Consensus Estimate of 30 cents and plunged 44.7% year over year.

On GAAP basis, the company posted earnings of 19 cents per share, compared with 36 cents reported in the year-ago quarter.

Net sales advanced 4.2% year over year to $1,926.7 million, while it came below the Zacks Consensus Estimate of $1,960.1 million. However, total volumes of 615 million gallons dipped 2.7% from 632 million gallons in the prior-year quarter.

For the quarter under review, raw milk costs escalated about 15% year over year, though it was down around 9% on a sequential basis.

Further, the milk category remained soft as the USDA data through May 2017 revealed that fluid milk volumes dipped 2.9% year over year, on a quarter-to-date basis. Likewise, Dean Foods' share of U.S. fluid milk volumes contracted 30 basis points.

Adjusted gross profit declined 6.1% to $460 million, while the adjusted operating income collapsed by 32.9% to $47 million in the second quarter.

Financial Position

Dean Foods ended the quarter with cash and cash equivalents of $31.5 million, long-term debt including current maturities of about $904.3 million, and shareholders’ equity of $608.2 million.

In the first half of 2017, the company generated nearly $79.2 million of net cash from operating activities and $45 million of free cash flow. This reflects Dean Foods’ 11th straight positive free cash flow. Management revealed that it used up its year-to-date free cash flows to make dividend payments, alongside making investments in Good Karma Foods and acquiring Uncle Matt’s Organic. Management expects free cash flow for the full year 2017 to come in a band of $60–$75 million.

The company deployed roughly $35 million as capital expenditure in the first half of 2017. As of the end of the second quarter, Dean Foods’ all cash netted leverage (net debt to bank EBITDA total leverage ratio) came in at 2.25 times, reflecting slight increase from the first quarter of 2017.

The Road Ahead

While management remained disappointed with its second-quarter performance, it remains on schedule with its growth and cost productivity plans, and expects it to ramp up throughout 2017. Evidently, the Zacks Rank #3 (Hold) company is progressing well on its OpEx 2020 cost productivity plan, which is aimed at generating annual savings in a range of $80–$100 million. In fact, as mentioned above, management also announced plans to expand this program, expecting additional savings in its general and administrative operations. The company targets to complete this by the end of 2017. These efforts, along with Dean Foods’ constant product innovations and strategic partnerships should place the company well for the long-run.

While the aggressive cost-structure is expected to address the hurdles associated with unfavorable volumes and mix, these challenges are likely to be more intense during the second half of 2017. Consequently, management lowered its 2017 earnings outlook, as it expects the volume pressure to dent financial performance. Moreover, raw milk costs are expected to inflate 8% sequentially, and 11% year over year in the third quarter.

All said, the company now envisions adjusted earnings per share in a range of 80–95 cents, much lower than the earlier forecast of $1.35–$1.55. The updated guidance also compares unfavorably with the current Zacks Consensus mark of $1.28.

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