Shares of Dean Foods Company (DF - Free Report) touched a 52-week low of $3.89, before closing the session a tad higher at $3.93 on Dec 21. Notably, the company has long been grappling with escalated fuel, freight and resin costs, which along with volatility surrounding fluid milk volumes has been hurting its performance.
In third-quarter 2018, the company reported disappointing results, wherein both top and bottom line deteriorated year over year due to soft volumes stemming from plant closures and associated transitionary costs. These cost hurdles are expected to persist, which compelled management to slash its earnings outlook for 2018. (Read: Dean Foods Posts Q3 Loss, Sales Down Y/Y, View Lowered)
Consequently, the Zacks Consensus Estimate has been witnessing a downtrend. We note that estimates for current and next year have moved south by 18 cents and 17 cents to a loss of 24 cents and a loss of 5 cents, respectively, over the past 30 days.
Clearly, these downsides have hurt investors’ confidence in the stock that has crashed 34.5% since the announcement of the results on Nov 7. In the past three months, shares of this Texas-based company have plunged around 47%, wider than the industry’s decline of 41.5%. Currently, this Zacks Rank #4 (Sell) stock carries a VGM Score of D. That said, let’s take a closer look at the aspects impacting the company’s performance.
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Input Cost and Soft Volumes: A Concern
Dean Foods is battling significant input cost inflation. Evidently, increased resin, freight and fuel expenses have been hurting the company’s margins for a while and also remained a worry in the third quarter of 2018. Companies like Conagra Brands (CAG - Free Report) , TreeHouse Foods (THS - Free Report) and Campbell Soup (CPB - Free Report) among others are also bearing the brunt of rising input costs. Coming back to Dean Foods, a tight labor market due to limited driver availability dented margins.
These factors along with higher transitory costs related to plant closures and increased advertising expenses weighed on Dean Foods’ third-quarter results. While adjusted gross margin contracted 250 basis points, the company posted an adjusted operating loss of $20 million. Management stated that fuel rates flared up 25% year to date and is expected to remain high through the final quarter.
Moreover, the company has been witnessing 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. Soft volumes and escalated transitory costs too affected Dean Foods’ adjusted gross profit and the bottom line. These volume losses are expected to linger in the fourth quarter, which remains a concern.
Will Cost-Cutting Plans Provide Respite to Stock?
Dean Foods is focused on reducing unnecessary costs throughout the organization and improving efficiency. It is particularly paying attention toward the improvement of 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. These savings are likely to provide some cushion against input cost inflation and volume deleverage throughout its operational phase.
Further, the company 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. Meanwhile, the enhancement of supply chain focuses on consolidating plant network and maintaining quality, value and service.
Moreover, Dean Foods is 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.
However, the company does not expect the cost woes to be completely countered by the end of this year. This is also reflected in management’s lowered outlook for 2018. That said, the current hurdles keep us apprehensive about the stock.
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