Will Low Volumes Weigh on Dean Foods (DF) in Q2 Earnings?

Dean Foods Company DF is scheduled to release second-quarter 2018 results on Aug 7. Though the company delivered a positive earnings surprise of 16.7% in the last reported quarter, it has a mixed earnings surprise record and has rather underperformed the Zacks Consensus Estimate by an average of 4.3% over the trailing four quarters.

Let’s delve deep and see what’s in store for the company this time around.

Soft Volumes & Commodity Cost Volatility Pose Threats

Dean Foods has long been grappling with lower product volumes and loss of share in U.S. fluid milk volumes, which has been largely impacting its top line. Although volume and mix results were in-line with the company’s expectations in first-quarter 2018, adjusted gross profit declined 4% year over year, mainly due to soft volumes and greater mix of private-label products. Further, adjusted operating income decreased 11.1% in the first quarter. For the second quarter, management anticipates reduction in volumes from two large customers, which may hurt Dean Foods’ performance.

Also, commodity cost volatility remains a headwind for Dean Foods. The company’s business is heavily dependent on commodities such as raw milk, soybeans, diesel fuel and others, the prices of which often fluctuate. Hence, any rise in their prices will hurt the company’s margins. The company earlier projected Class 1 raw milk costs to rise as it progresses in 2018. These adverse fluctuations in raw-material prices pose threats to Dean Foods’ operating results.

Can Cost-Cut Plans & Product Diversification Help?

To overcome cost-related hurdles and enhance performance, Dean Foods is on track with its cost-productivity program aimed at generating additional savings in 2018 and beyond. 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. The company has completed the initial phase of reducing the general and administrative expenses and is on track with the next phase that focuses on rightsizing the company’s network to match volumes. Moreover, management targets to remove fixed costs from its system, this year.

Dean Foods is also implementing plans to alleviate headwinds in non-dairy input costs, while continuing to boost its brands and private-label business. Talking of boosting brands, Dean Foods remains focused on strengthening its core business as well as moving beyond the pure milk products. While the company is on track with the growth of its core dairy-related business with products like ice cream, flavored milk and sour cream; it is also vouching for opportunities in foodservice and other beverages. Evidently, the company explored the ice cream business with the acquisition of Friendly’s Ice Cream manufacturing and retail operations in 2016, which is driving results. Moreover, we applaud the company’s efforts to grow in the organic space, evident from its deals with Good Karma and Organic Valley Fresh milk brand, as well as the acquisition of Uncle Matt's Organic juices.

Though these initiatives are expected to offset some negative impacts from volume declines, higher non-dairy input costs and volatile raw milk costs, the company may take time to fully negate these hurdles.

What to Expect?

The Zacks Consensus Estimate for Dean Foods’ earnings has remained stable over the past 30 days at 14 cents per share, which reflects a 33.3% plunge from the year-ago period figure. However, the Zacks Consensus Estimate for sales of $1,940 million indicates year-over-year growth of nearly 0.7%.

What Does the Zacks Model Unveil?

Further, our proven model shows thatDean Foods is likely to beat bottom-line estimates this quarter. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Dean Foods’ Zacks Rank #2 and Earnings ESP of +11.63% make us reasonably confident of an earnings beat.

Other Stocks Poised to Beat Earnings Estimates

Here are some companies you may want to consider, as our model shows that these have the right combination of elements to post earnings beat:

Church & Dwight CHD, a Zacks #3 Ranked company, has an Earnings ESP of +0.06%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Estee Lauder EL has an Earnings ESP of +1.31% and a Zacks Rank of 3.

Kellogg K has an Earnings ESP of +0.29% and a Zacks Rank of 3.

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