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Can Dean Foods' (DF) Efforts Pare Dairy Related Headwinds?

Zacks Equity Research

Dean Foods Company DF isn’t in investors’ good books, thanks to headwinds in the dairy industry including receding fluid milk volumes and inflationary trends in raw milk. However, the Zacks Rank #3 (Hold) company is striving to keep the business afloat on the back of cost-productivity programs and other efforts to strengthen brand portfolio. Let’s delve deeper.

Growth Efforts are on Track

Dean Foods focuses on effective execution of its enterprise-wide cost-productivity program, targeted toward generating additional savings. This productivity program mainly revolves around three major areas that include enhancement of supply-chain network, optimizing spending across all key categories as well as minimizing general and administrative expenses. Gains from such endeavors are being re-invested in the business, which is contributing toward brand growth. Notably, management had informed that the cost productivity program is likely to deliver an incremental annual run rate savings of approximately $150 million by 2020.

Speaking of brand growth, the company is committed toward diversifying offerings. It is on track to achieve growth in the core dairy-related business with products like ice cream, flavored milk and sour cream. Dean Foods is also vouching for opportunities in foodservice and other beverages. Apart from this, we applaud the company’s efforts to grow in the organic space, evident from its stake in Good Karma, the acquisition of Uncle Matt's Organic juices and joint venture with Organic Valley Fresh milk brand. Further, the company focuses on strengthening existing brands through innovations and improved marketing.

Headwinds in the Path

Dean Foods is battling significant input cost inflation. During the second quarter of 2019, class I raw milk costs rose 12% year over year and 6% sequentially. Prior to this, raw milk costs rose 8% year over year during the first quarter. 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 affect its brands.

Moreover, Dean Foods has been grappling with lower volumes and loss of share in U.S. fluid milk for some time, thanks to consumers’ inclination toward other food and beverage options. This is a drag on the company’s top line. During the second quarter, net sales declined 5.5% 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 higher costs have been exerting pressure on Dean Foods’ adjusted gross profit.


 

Such headwinds have marred investors’ optimism in the stock, which plunged 71.2% in the past six months compared with the industry’s decline of 59.9%.

Wrapping Up

Persistence of the aforementioned adversities is likely to keep the stock under pressure in the upcoming periods. Nevertheless, we expect the company’s well-chalked productivity program to provide some cushion. Moreover, management is undertaking pricing actions to address cost hurdles. In fact, the company is carrying out a strategic review of its overall business to maximize returns. All said, let’s see if such efforts can help bringing back the company’s lost sheen.

Check These Solid Food Stocks

General Mills, Inc GIS currently has long-term earnings per share (EPS) growth rate of 7% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Hershey HSY presently has a Zacks Rank #2 and long-term EPS growth rate of 8%.

Conagra Brands CAG currently has a long-term EPS growth rate of 7% and a Zacks Rank of 2.

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