Shares of Dean Foods Company (DF - Free Report) touched a 52-week low of $8.15 on Apr 16, closing the session at $8.16. The company has long been grappling with lower product volumes, higher raw milk costs and loss of share in U.S. fluid milk volumes, which has been largely weighing on its performance.
Per analysts, softening demand for milk has also been taking a toll on Dean Foods for quite some time now, sending its shares to six year low. Non-dairy substitutes such as almond and oat milk along with other beverages have been marring demand for milk.
Meanwhile, the retail grocery industry experienced significant consolidation in recent years, due to which competition has intensified among dairy product suppliers.
These factors have hurt investors’ sentiments. Consequently, shares of this Zacks Rank #4 (Sell) have lost 58.1%, wider than the industry’s decline of 52.9% in the past year.
In fourth-quarter 2017, the company reverted to negative earnings surprise trend after reporting in-line earnings in the previous quarter, alongside posting third straight sales miss. Both the top and the bottom line also declined year over year. Results were hurt by soft volumes and higher raw milk costs. Total volumes across all products dropped 6% from the prior-year quarter.
As a result, management issued a soft outlook for 2018. Adjusted earnings per share are now envisioned in the range of 55-80 cents versus 80 cents in 2017. Also, first-quarter earnings are anticipated to be disproportionately lower than fourth-quarter 2017. The Zacks Consensus Estimate is pegged at 13 cents for first quarter and 64 cents for 2018.
Moreover, Dean Foods’ business is heavily dependent on commodities such as raw milk, soybeans, diesel fuel and others, the prices of which often fluctuate. Therefore, any rise in prices of these commodities might hurt margins. In fourth-quarter 2017, adjusted gross profit declined 9.9% while the adjusted operating income was down by 39.2%.
Is There Any Silver Lining?
Dean Foods has been adhering to various measures to boost operational excellence via execution of the enterprise-wide cost productivity program 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.
Additionally, the ongoing cost productivity efforts are expected to generate savings in 2018. These savings, in turn, are likely to offset some negative impacts from volume declines and higher non-dairy input costs. While some savings are expected to reflect in 2018, the company anticipates comparatively better savings in 2019 and beyond.
Under the OPEX 2020 cost productivity plan introduced in 2017, the company targets annual savings of $80-$100 million. Going ahead, this plan should be extended to the company’s manufacturing and logistics footprint alongside targeting reduction in SG&A expenses. This multi-year plan, which is expected to span across 2018 and 2019, is likely to deliver incremental annual run rate savings of $150 million by 2020.
We believe these efforts will take time to bear fruit and aid a turnaround for Dean Foods. However, the recent dismal performance suggests trouble down the road.
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