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Dean Foods (DF) Tumbles 15% Despite Q2 Earnings & Sales Beat

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Despite reporting better-than-expected earnings and sales in second-quarter 2018, Dean Foods Company (DF - Free Report) saw its shares plunge 15.1% yesterday. Clearly, management’s lowered outlook for 2018 was a dark spot in the otherwise impressive results. In fact, yesterday’s slump took the company’s three-month stock performance to a decline of 20.4%, narrower than the industry’s fall of 21.2%.

During the quarter, both top and bottom lines beat the Zacks Consensus Estimate for the second consecutive period, and the former also increased year over year. However, intense non-dairy inflation and stiff competition compelled the company to curtail its earnings forecast.

Q2 in Detail

Dean Foods’ quarterly adjusted earnings of 16 cents per share surpassed the Zacks Consensus Estimate of 14 cents, though it declined 23.8% from 21 cents in the year-ago quarter. On a GAAP basis, the company posted a loss per share of 46 cents, comparing unfavorably with earnings of 19 cents recorded in the year-ago period.

Dean Foods Company Price, Consensus and EPS Surprise


Dean Foods Company Price, Consensus and EPS Surprise | Dean Foods Company Quote

Increased private label mix, greater-than-expected fuel and resin costs, and freight cost inflation were the hurdles faced by Dean Foods during the second quarter. Further, raw milk costs came in at $14.60 per hundred-weight during the second quarter, which escalated 2% on a sequential basis but declined 6% year over year.

Net sales climbed 1.3% to $1,951.2 million, surpassing the Zacks Consensus Estimate of $1,940 million. Volumes in the quarter were in line with the company’s expectations. However, year to date, fluid milk category witnessed a dip of 1.4% through May in USDA results.
Adjusted gross profit declined almost 6% to $433 million, with adjusted gross margin contracting 170 basis points to roughly 22.2%. This was mainly attributable to soft volumes and greater mix of private label products. Adjusted operating income decreased 27.1% to $35 million in the quarter.

Lower volumes, volatile raw milk costs and loss of share in U.S. fluid milk volumes have long been concerns for Dean Foods.

Financial Position

Dean Foods ended the quarter with cash and cash equivalents of $25.4 million, long-term debt (including current portion) of approximately $857 million and shareholders’ equity of $617.5 million. Total debt outstanding, excluding cash in hand, was nearly $837 million as of Jun 30, 2018.

In first-half 2018, the company generated nearly $120.8 million of net cash from operating activities and $83 million of free cash flow from continuing operations. Capital expenditures during the same period amounted to nearly $37 million.

At the end of the second quarter, Dean Foods’ net debt to bank EBITDA total leverage ratio on an all cash-netted basis came in at 2.67 times, which remained flat with first-quarter 2018.


Management remains impressed with its performance, which continues to be driven by the company’s focus on executing commercial strategies and cost-productivity initiatives.

In fact, the cost productivity plan helped Dean Foods to generate strong cash flow and reduce its adjusted general and administrative expenses by $13 million. Going ahead, the company remains focused on its strategic plan, which is likely to help it generate its targeted incremental annual run-rate savings of $150 million.

Dean Foods remains on track with its growth initiatives, though it expects to start witnessing gains from the fourth quarter of 2018. Also, the company is battling considerably greater-than-expected non-dairy inflation. Moreover, increased retailer investment in private label space is hurting Dean Foods’ branded product mix, which remains a threat to margins.

That said, Dean Foods lowered its adjusted earnings per share guidance. The company now envisions 2018 bottom line to range between 32 cents and 52 cents, significantly down from the previous range of 55-80 cents. Also, the guidance stands lower than the Zacks Consensus Estimate of 65 cents for the year. Well, Dean Foods currently carries a Zacks Rank #2 (Buy), which is subject to change following the earnings announcement.

Nonetheless, the company raised its free cash flow outlook for 2018 to a range of $40-$60 million compared with the previously projected range of $30-$50 million. Capital spending is now expected in a band of $125-$150 million compared with $135-$160 million guided earlier.

Looking for More? Check These Solid Picks

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.

Pinnacle Foods has long-term earnings per share growth rate of 8% and a Zacks Rank #2.

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