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Can Dean Foods' Cost-Cutting Plans Provide Respite to Stock?
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Dean Foods Company has seen its shares tumble 17.2% in the past three months, whereas the industry declined 17.6%. The dairy products company has been battling input cost inflation and soft volumes for quite some time now, which also weighed on its second-quarter 2018 earnings as well as the outlook for the year.
Though these factors have hurt investors’ sentiment, we expect Dean Foods’ robust cost-saving initiatives and focus on product diversification to provide some respite. On that note, let’s delve deeper into both sides of the story.
Soft Volumes & Input Cost Inflation Hurt Dean Foods
Dean Foods has been grappling with lower volumes and loss of share in U.S. fluid milk for a while now. In fact, soft volumes and greater mix of private label products led the company’s adjusted gross profit to a 6% decline year over year in the second quarter of 2018, with adjusted gross margin contracting 170 basis points. Further, quarter to date through May, fluid milk category witnessed a dip of 1.4% in USDA results. Management expects low volumes and greater mix of private label to linger through 2018, which was also a reason behind the view cut.
Further, Dean Foods is battling significant input cost inflation. Greater-than-expected increases in resin, freight and fuel expenses hurt the company’s margins and bottom line in the second quarter of 2018. Non-dairy inflation along with constant retailer investments in the private label space is also hurting Dean Foods’ branded product mix. Well, freight cost inflation can be accountable to industry-wide hurdles associated with limited trucking capacity. Adding to these concerns, fuel rates surged 31% during the second quarter and are expected to remain high throughout the year.
The impact of these hurdles is also reflected in the company’s lowered outlook for 2018. The company now envisions 2018 earnings to range between 32 cents and 52 cents, significantly down from the previous range of 55-80 cents.
Will Cost Reduction Efforts & Focus on Product Diversification Aid?
Nevertheless, Dean Foods has been taking strategic steps to reduce unnecessary costs throughout the organization and improve efficiency. It is particularly paying attention to improve waste management and operating efficiency. Under the OPEX 2020 cost productivity plan introduced in 2017, the company had targeted annual productivity of $80-$100 million. Going forward, this plan will be extended to the company’s manufacturing and logistics footprint alongside targeting reduction in SG&A expenses. These savings are likely to provide some cushion from input cost inflation and volume deleverage throughout its operational phase.
Moreover, Dean Foods is on track with its plans to boost operational excellence via execution of the enterprise-wide cost-productivity program in order to generate additional savings in 2018 and beyond. This productivity program mainly revolves around three major areas including enhancement of its supply-chain network, optimizing spending across all key categories to ensure greater efficiency and integration of operating model along with minimizing general and administrative expenses. The enhancement of supply chain focuses on consolidating plant network and maintaining quality, value and service. The company completed the initial phase of reducing the general and administrative expenses in fourth-quarter 2017.
In second-quarter 2018, Dean Foods revealed plans to shut down seven manufacturing facilities in order to rescale its supply chain. Also, during the quarter, this program generated considerable productivity and helped lower G&A expenses by about $13 million. Dean Foods is further implementing plans to alleviate headwinds related to high freight and fuel expenses, while continuing to boost its brands and private label business to fuel volumes. Notably, the cost-productivity program is likely to deliver an incremental annual run rate savings of $150 million by 2020. These initiatives should help the company offset some negative impacts from volume declines and higher non-dairy input costs.
We also commend Dean Foods’ commitment toward optimizing capital allocation, concentrating on core business activities and diversifying portfolio by moving beyond the pure milk products. To this end, the company remains focused on strengthening its DairyPure and TruMoo brands through product innovations and improved marketing. Additionally, the company’s acquisition of Friendly’s Ice Cream manufacturing and retail operations is delivering results. Apart from this, we applaud the company’s efforts to grow in the organic space, evident from its deals with Good Karma and Organic Valley Fresh milk brand as well as the acquisition of Uncle Matt's Organic juices. Markedly, Dean Foods raised its stake in Good Karma toward the end of second-quarter 2018 and is now a major shareholder of this fast-growing provider of plant-based alternatives.
The aforementioned endeavors should provide some cushion to Dean Foods against the cost and volume hurdles, and also position the Zacks Rank #3 (Hold) company well for the long run.
Chefs’ Warehouse (CHEF - Free Report) , with long-term earnings per share growth rate of 22%, carries a Zacks Rank #2 (Buy).
Pinnacle Foods has long-term earnings per share growth rate of 8% and a Zacks Rank #2.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.
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Can Dean Foods' Cost-Cutting Plans Provide Respite to Stock?
Dean Foods Company has seen its shares tumble 17.2% in the past three months, whereas the industry declined 17.6%. The dairy products company has been battling input cost inflation and soft volumes for quite some time now, which also weighed on its second-quarter 2018 earnings as well as the outlook for the year.
Though these factors have hurt investors’ sentiment, we expect Dean Foods’ robust cost-saving initiatives and focus on product diversification to provide some respite. On that note, let’s delve deeper into both sides of the story.
Soft Volumes & Input Cost Inflation Hurt Dean Foods
Dean Foods has been grappling with lower volumes and loss of share in U.S. fluid milk for a while now. In fact, soft volumes and greater mix of private label products led the company’s adjusted gross profit to a 6% decline year over year in the second quarter of 2018, with adjusted gross margin contracting 170 basis points. Further, quarter to date through May, fluid milk category witnessed a dip of 1.4% in USDA results. Management expects low volumes and greater mix of private label to linger through 2018, which was also a reason behind the view cut.
Further, Dean Foods is battling significant input cost inflation. Greater-than-expected increases in resin, freight and fuel expenses hurt the company’s margins and bottom line in the second quarter of 2018. Non-dairy inflation along with constant retailer investments in the private label space is also hurting Dean Foods’ branded product mix. Well, freight cost inflation can be accountable to industry-wide hurdles associated with limited trucking capacity. Adding to these concerns, fuel rates surged 31% during the second quarter and are expected to remain high throughout the year.
The impact of these hurdles is also reflected in the company’s lowered outlook for 2018. The company now envisions 2018 earnings to range between 32 cents and 52 cents, significantly down from the previous range of 55-80 cents.
Will Cost Reduction Efforts & Focus on Product Diversification Aid?
Nevertheless, Dean Foods has been taking strategic steps to reduce unnecessary costs throughout the organization and improve efficiency. It is particularly paying attention to improve waste management and operating efficiency. Under the OPEX 2020 cost productivity plan introduced in 2017, the company had targeted annual productivity of $80-$100 million. Going forward, this plan will be extended to the company’s manufacturing and logistics footprint alongside targeting reduction in SG&A expenses. These savings are likely to provide some cushion from input cost inflation and volume deleverage throughout its operational phase.
Moreover, Dean Foods is on track with its plans to boost operational excellence via execution of the enterprise-wide cost-productivity program in order to generate additional savings in 2018 and beyond. This productivity program mainly revolves around three major areas including enhancement of its supply-chain network, optimizing spending across all key categories to ensure greater efficiency and integration of operating model along with minimizing general and administrative expenses. The enhancement of supply chain focuses on consolidating plant network and maintaining quality, value and service. The company completed the initial phase of reducing the general and administrative expenses in fourth-quarter 2017.
In second-quarter 2018, Dean Foods revealed plans to shut down seven manufacturing facilities in order to rescale its supply chain. Also, during the quarter, this program generated considerable productivity and helped lower G&A expenses by about $13 million. Dean Foods is further implementing plans to alleviate headwinds related to high freight and fuel expenses, while continuing to boost its brands and private label business to fuel volumes. Notably, the cost-productivity program is likely to deliver an incremental annual run rate savings of $150 million by 2020. These initiatives should help the company offset some negative impacts from volume declines and higher non-dairy input costs.
We also commend Dean Foods’ commitment toward optimizing capital allocation, concentrating on core business activities and diversifying portfolio by moving beyond the pure milk products. To this end, the company remains focused on strengthening its DairyPure and TruMoo brands through product innovations and improved marketing. Additionally, the company’s acquisition of Friendly’s Ice Cream manufacturing and retail operations is delivering results. Apart from this, we applaud the company’s efforts to grow in the organic space, evident from its deals with Good Karma and Organic Valley Fresh milk brand as well as the acquisition of Uncle Matt's Organic juices. Markedly, Dean Foods raised its stake in Good Karma toward the end of second-quarter 2018 and is now a major shareholder of this fast-growing provider of plant-based alternatives.
The aforementioned endeavors should provide some cushion to Dean Foods against the cost and volume hurdles, and also position the Zacks Rank #3 (Hold) company well for the long run.
Looking for More Promising Stocks? Check These
Medifast (MED - Free Report) , with a Zacks Rank #1 (Strong Buy), delivered positive earnings surprise in the last four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.
Chefs’ Warehouse (CHEF - Free Report) , with long-term earnings per share growth rate of 22%, carries a Zacks Rank #2 (Buy).
Pinnacle Foods has long-term earnings per share growth rate of 8% and a Zacks Rank #2.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>