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Dean Foods Down 56% in 3 Months: Can Efforts Aid Revival?

Zacks Equity Research

Dean Foods Company DF has been navigating through rough waters for a while now, owing to cost inflation and soft volumes. These hurdles also impacted results in first-quarter 2019, causing shares of this Dallas, TX-based company to lose approximately 56% in the past three months compared with the industry’s decline of 42.3%.

Nevertheless, the company is focused on cost-productivity plans. Its OPEX 2020 plan, which targets reducing SG&A expenses and manufacturing and logistics costs, is on track. Further, Dean Foods’ product diversification efforts remain commendable. Let’s take a closer look at both sides of the story.

Hurdles in Dean Foods’ Path

Dean Foods is witnessing significant input cost inflation. Evidently, raw milk costs rose 8% year over year during the first quarter. 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.

The company 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% to $ 1,795.4 million and missed the Zacks Consensus Estimate of $1,896 million. Volumes in the quarter continued to decrease 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.

Additionally, soft volumes and escalated costs dented Dean Foods’ adjusted gross profit and the bottom line. The company has posted 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. The bottom line also 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. Moreover, it anticipates dairy commodity inflation to persist throughout 2019.

Can Efforts Aid a Turnaround?

Dean Foods is focused on reducing unnecessary costs and improving efficiency throughout the organization. It 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 against input inflation and volume deleverage throughout its operational phase.

Dean Foods is also on track with its enterprise-wide cost productivity program. This productivity program mainly revolves around three major areas, including 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.

Notably, the cost productivity program is likely to deliver an incremental annual run rate savings of $150 million by 2020. The company is taking several pricing actions to overcome cost hurdles. These initiatives should help Dean Foods offset some negative impacts from volume declines and higher non-dairy input costs.

Apart from these, the company is taking steps to focus 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 innovation and improved marketing. The buyout of Friendly’s Ice Cream manufacturing and retail operations is also 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.

We believe the aforementioned tailwinds have the potential to bring this Zacks Rank #3 (Hold) stock back on the growth trajectory in the future.

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