Dean Foods Company (DF - Free Report) is focusing on core business and making solid efforts to enhance portfolio. Further, the company’s cost-saving endeavors are on track. We expect these factors to help uplift this Zacks Rank #3 (Hold) company’s performance, which has long been troubled by cost inflation and soft volumes.
These hurdles, which lingered in first-quarter 2019 results, have caused shares of the company to plunge 65.7% in the past three months compared with the industry’s decline of 57.2%. Nevertheless, its strategic growth endeavors should offer some respite.
Factors Weighing on the Stock
Dean Foods is battling significant input cost inflation. Evidently, raw milk costs rose 8% year over year during the first quarter of 2019. Also, transitory costs impacted results. During the quarter, adjusted gross margin contracted almost 180 basis points to roughly 20.8%. Further, adjusted operating loss was $36 million in the quarter against adjusted operating income of $32 million in the year-ago quarter.
Apart from this, Dean Foods has been grappling with lower volumes and loss of share in U.S. fluid milk volumes for a while now. This remains a drag on the top line. During the first quarter of 2019, net sales declined nearly 9.3% year over year to $1,795.4 million and missed the Zacks Consensus Estimate of $1,896 million. Volumes in the quarter continued to decline year over year due to customer exits and category declines. Per the USDA results, fluid milk category dropped 1.2% through February on a quarter-to-date basis.
Owing to soft volumes and escalated costs, Dean Foods has been posting year-over-year decline in the bottom line for four straight quarters. In the first quarter of 2019, adjusted loss from continuing operations amounted to 41 cents per share, wider than the Zacks Consensus Estimate of a loss of 22 cents. Also, the bottom line compares unfavorably with the year-ago quarter’s earnings of 14 cents. Management expects Class I raw milk costs to witness an inflation of nearly 12% in the second quarter. Also, the company anticipates dairy commodity inflation to persist throughout 2019.
Cost Savings & Product Diversification to Aid
Dean Foods is focused on reducing unnecessary costs throughout the organization and improving efficiency. The company is particularly paying attention to improve 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 from input cost inflation and volume deleverage throughout the operational phase.
Further, Dean Foods is progressing well with its enterprise-wide cost productivity program. This program revolves around three major areas, including enhancement of supply-chain network, optimization of spending across all key categories to ensure greater efficiency and integration of operating model along with minimizing general and administrative expenses. Notably, the cost productivity program is likely to deliver an incremental annual run rate savings of $150 million by 2020. Additionally, the company is taking several pricing actions to address cost hurdles.
This apart, we commend the company’s robust steps to concentrate on core business activities and diversify portfolio by moving beyond pure milk products. To this end, Dean Foods is focused on strengthening its DairyPure and TruMoo brands through innovations and improved marketing. Also, the buyout of Friendly’s Ice Cream manufacturing and retail operations is delivering results. Further, deals with Good Karma and Organic Valley Fresh milk brand, and the acquisition of Uncle Matt's Organic juices are helping Dean Foods expand in the organic space.
These efforts should help the company see better days in the forthcoming periods.
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Flowers Foods (FLO - Free Report) , also with a Zacks Rank #2, delivered back-to-back surprises in the last two quarters.
J&J Snack Foods (JJSF - Free Report) , with a Zacks Rank #2, also delivered back-to-back surprises in the last two quarters.
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