Dean Foods Company (DF - Free Report) is in troubled waters, with its stock having crashed 56.3% in a year compared with the industry’s decline of 59.1%. This Zacks Rank #5 (Strong Sell) company has been battling input cost inflation and soft volumes, keeping investors on the sidelines for a while.
Dean Foods is making solid efforts to enhance productivity and curtail costs. Let’s see if the huge boulders can be offset in the near term.
Will Dean Foods Remain Under Pressure?
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. Also, 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 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.
Further, Dean Foods has been grappling with lower volumes and loss of shares in U.S. fluid milk volumes for a while now. During the third quarter, volumes declined significantly year over year, mainly 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.
These factors, among others, have been weighing on the company’s performance. Incidentally, Dean Foods has been posting year-over-year decline in the bottom line 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 due to volume loss stemming from the closure of seven plants in the quarter and the associated transition costs. Continued decline in fluid milk consumption and inflationary trends across fuel, resin and freight costs were also deterrents. Moreover, a tight labor market affected performance.
Nevertheless, Dean Foods is on track 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 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. 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. Also, the company is focused on reducing unnecessary costs throughout the organization and improving 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 from input cost inflation and volume deleverage throughout its operational phase.
Although management is committed toward productivity initiatives and cost reductions, these efforts are likely to take time to completely offset the hurdles. This is also reflected in the company’s lowered outlook for 2018. Unfortunately, management curtailed its 2018 earnings outlook, when it reported third-quarter results. 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.
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McCormick & Company, Incorporated (MKC - Free Report) has long-term earnings per share growth rate of 9% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Nomad Foods (NOMD - Free Report) , with long-term earnings per share growth rate of 11%, also carries a Zacks Rank #1.
Lamb Weston (LW - Free Report) , with a Zacks Rank #2 (Buy), has long-term earnings per share growth rate of 12%.
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