Dean Foods Company isn’t among investors’ preferred picks, as it continues to reel under adversities in the dairy industry such as input cost inflation and lower milk volumes. This Zacks Rank #4 (Sell) company has tumbled 62.2% in the past six months compared with the industry’s plunge of 54.2%. Let’s take a closer look at the factors that are exerting pressure on the company.
Inflationary Trend is a Deterrent
Dean Foods is battling against significant input cost inflation. During the second quarter, class I raw milk costs rose 12% year over year and 6% sequentially. Prior to this, raw milk costs rose 8% year over year in the first quarter. Persistent rise in milk costs are denting the company’s gross margin. In the second quarter, adjusted gross profit declined 12.7% year on year. Adjusted gross margin contracted almost 170 basis points (bps) to roughly 20.5%. During the first quarter, adjusted gross profit declined almost 17%, while adjusted gross margin contracted nearly 180 bps.
For the third quarter, management expects Class I raw milk costs to inflate 19% from the year-ago quarter’s levels. Also, the company anticipates dairy commodity inflation to persist throughout 2019. Since raw milk is a vital input in the company’s manufacturing process, inflationary trends in the same might severely affect its brands. Moreover, the company is considering strategic alternatives for its business.
Headwinds in the Diary Industry
Dean Foods has been grappling with lower volumes and loss of share in U.S. fluid milk volumes for a while. This is a persistent drag on the top line. During the second quarter, net sales declined 5.5% to $1,843.5 million and missed the Zacks Consensus Estimate. Volumes in the quarter were affected by customer exits and declines in the white milk category. Also, soft volumes and escalated costs dented Dean Foods’ adjusted gross profit and bottom line. Persistence of such trends is a concern.
The fluid milk category is declining at a high rate due to intense competition. Consumers have access to more food and beverage options, which has made the retail environment dynamic and intensified competition. The dairy category is troubled due to unfavorable pricing on private-label milk. Markedly, the fluid milk category dropped nearly 2% annually in the current year, with the trend deteriorating in the second quarter.
Persistence of the aforementioned adversities is likely to keep the stock under pressure in the upcoming periods. We note that the company recently completed the strategic review of its business. Accordingly, it has determined to execute a standalone operating plan. It is also on track with cost-saving plans and efforts to enhance efficiency in supply chain. Let’s see if such efforts can bring back the company’s lost sheen.
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