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Dean Foods' Savings Plans Bode Well, Soft Volumes a Worry

Zacks Equity Research

Dean Foods Company DF is gaining from well-chalked efforts to broaden portfolio and enhance savings through cost-productivity programs. Moreover, the company is exploring growth prospects in other beverages amid sluggish fluid milk volumes. Notably, this Zacks Rank #3 (Hold) company’s shares have gained 15.1% in the past three months against the industry’s decline of 3%.

Let’s take a closer look.

Productivity Program to Boost Savings

Dean Foods is on track with its enterprise-wide cost productivity program to boost savings. Such moves are part of the company’s target to achieve the lowest cost position in the industry.

This productivity program encompasses three major areas — enhancement of supply-chain network, optimization spending across all key categories and integration of operating model along with minimizing general and administrative expenses. Benefits from such endeavors are being re-invested in the business, which is contributing to brand growth. The cost productivity program is likely to deliver an incremental annual run rate savings of approximately $150 million by 2020.



 

Other Initiatives

Dean Foods has been taking strategic steps to optimize capital allocation, concentrate on core business activities and diversify portfolio by shifting focus from pure milk products. The company is on track with growth of its core dairy-related products like ice cream, flavored milk and sour cream. Moreover, it is seeking opportunities in foodservice and other beverages.

Further, the company focuses on strengthening existing brands through product innovations and improved marketing. Apart from this, we applaud the company’s efforts to grow in the organic space, as evident from its stake in Good Karma, acquisition of Uncle Matt's Organic juices and a joint venture with Organic Valley Fresh milk brand.

Can Efforts Pare Headwinds?

Dean Foods grapples with lower volumes and loss of share in U.S. fluid milk. This is exerting pressure on the company’s top line, as witnessed in the second quarter of 2019. We note that volumes in the fluid milk category have been declining at a high rate due to consumers’ shift to other food and beverage options. The dairy category is also troubled due to unfavorable pricing on private-label milk. Apart from this, the company is battling input cost inflation in class I raw milk. It anticipates inflationary trends for raw milk to persist throughout 2019.

Nevertheless, we expect the company’s productivity and cost-reduction initiatives to mitigate the aforementioned headwinds. It is also undertaking pricing actions to address cost hurdles. These efforts along with constant product innovation, focus on improving customer relationships and strategic partnerships will likely drive the company’s performance in the long run.

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