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Dean Foods (DF) Q4 Loss Wider Than Expected, Sales Down Y/Y

Zacks Equity Research

Dean Foods Company DF reported disappointing fourth-quarter 2018 results. The company incurred a loss, which is wider than the Zacks Consensus Estimate. The top and bottom-line deteriorated year over year due to higher transitionary expenses. Further, escalated fuel, freight, resin costs as well as volatility surrounding fluid milk volumes marred the quarterly performance. Additionally, management recently revealed intentions to undertake strategic review of the business.  

Such downturns have marred investors’optimism, as the company’s shares declined 13.8% on Feb 27, following its fourth-quarter results. In fact, we note that this Zacks Rank #4 (Sell) company’s shares have declined 23.8% in the past three months.

Q4 in Detail

Adjusted loss from continuing operations came in at 50 cents per share, wider than the Zacks Consensus Estimate of a loss of 27 cents. Also, the bottom line compares unfavorably with the year-ago quarter’s earnings of 25 cents. Performance in the reported quarter was hurt by a number of industry challenges.

Persistent decline in fluid milk consumption, inflationary trends in fuel and resin as well as higher transitory and freight costs were some of the deterrents that affected quarterly results. Higher transitory costs were mainly related with plat closures.Tight labor market also had a negative impact on performance. In fact, raw milk costs ticked up 6% on a sequential basis but declined 6% year over year.

Net sales inched down 0.2% to $1,929.5 million but surpassed the Zacks Consensus Estimate of $1,905 million. Volumes in the quarter continued to decline year over year, due to loss of customers and category declines. Per the USDA results, fluid milk category dropped 2.1% through December on a quarter-to-date basis.

Adjusted gross profit declined almost 14.2% to $384 million, due to higher transitory costs and lower volumes. Adjusted gross margin contracted 330 basis points to roughly 19.9%.

Further, adjusted operating loss was $46 million in the quarter, against adjusted operating income of $52 million in the year-ago quarter.

Financial Position

Dean Foods, which is part of the Food-Dairy Products industry, ended the quarter with cash and cash equivalents of $24.2 million, long-term debt (including current portion) of approximately $906.3 million and shareholders’ equity of $303 million. Total debt outstanding (net of cash in hand) was nearly $887 million as of Dec 31, 2018.

In 2018, the company generated nearly $153 million of net cash from operating activities and $38 million of free cash flow from continuing operations. Capital expenditures for the year amounted to nearly $115 million.

Other Developments

Recently, the company unveiled intentions to initiate strategic review of its business to enhance shareholders’ value. These include options such as focusing on a few standalone objectives, sale of certain assets, join venture formation or a strategic transaction that might result in the divestiture of the company. Given that the company is considering to bring abut radical changes to its business, management deferred from providing guidance.

Further, management stated that it is on track with efforts to improve financial strength, which include measures such as suspending the payment of quarterly dividend as well as refinancing of the debt structure.   

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