Dean Foods Company (DF - Free Report) has been off investors’ radar for a while, evident from its dismal run on the bourses. This Zacks Rank #5 (Strong Sell) stock has plummeted 48.1% this year compared with the industry’s slump of almost 50%. Dean Foods has been struggling with cost inflation and soft volumes, which also weighed on its third-quarter 2018 results and outlook, adding to investors’ woes.
Let’s delve deeper.
Input Cost Inflation a Major Hurdle
Dean Foods is battling significant input cost inflation. Evidently, increased resin, freight, and fuel expenses have been hurting company’s margins for a while and also remained a worry in the third quarter of 2018. Additionally, a tight labor market due to limited driver availability impacted margins. These factors along with higher transitory costs related to plant closures and increased advertising expenses weighed on results. Markedly, adjusted gross margin contracted 250 basis points and the adjusted operating loss amounted to $20 million. Management stated that fuel rates flared up 25% year to date, and are expected to remain high through the final quarter. Although management is committed toward productivity initiatives and cost reductions, the prevailing cost headwinds cannot be ignored.
Weak Volumes Pose Concerns
Dean Foods has been grappling with lower volumes and loss of share in U.S. fluid milk volumes for a while now. During the third quarter, volumes declined significantly year over year, largely due to the closure of seven plants. Further, per USDA results, fluid milk category dropped 2% through August on a quarter-to-date basis. In fact, soft volumes and escalated transitory costs also dented Dean Foods’ adjusted gross profit and bottom line. We expect the impact of these volume losses to linger in the fourth quarter, which is a concern.
Drab Earnings Trend Lingers, Outlook Dents Estimates
The company has been posting year-over-year bottom line decline for two straight quarters, including the third quarter of 2018, wherein adjusted loss of 28 cents per share was wider than the Zacks Consensus Estimate of a loss of 6 cents. Also, the bottom line compared unfavorably with earnings of 20 cents in the year-ago quarter. This was mainly driven by volume loss stemming from closure of seven plants in the quarter and the associated transition costs. Continued decline in fluid milk consumption and significant cost inflation (discussed above) were also deterrents. Moreover, a tight labor market affected performance. Considering these hurdles, management curtailed its 2018 earnings outlook. The company now envisions 2018 bottom line to range between a loss of 10 cents and 30 cents per share compared with the previous view of earnings of 32-52 cents.
In fact, this seems to have made analysts less confident of the stock’s performance. Incidentally, the Zacks Consensus Estimate for the fourth quarter and 2018 have deteriorated considerably over the past 30 days. The consensus mark for the fourth quarter stands at a loss of 4 cents now compared with the prior estimate of earnings of 14 cents. For 2018, the Zacks Consensus Estimate has worsened from earnings of 40 cents to a loss of 60 cents.
All said, we are apprehensive about Dean Foods’ performance in the forthcoming quarters.
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