Shares of Dean Foods Company DF reached a 52-week low of $7.42 before closing the session a tad higher at $7.57 on Aug 29. The company has long been battling against hurdles related to input cost inflation, soft volumes in U.S. fluid milk and increased retailer investments in the private label space, which is weighing on its performance. In fact, such concerns affected the company’s second-quarter 2018 results and also compelled management to slash its 2018 earnings view.
These headwinds were more than enough to mar investors’ sentiments. Shares of this Texas based company have lost 20.9% compared with the industry’s decline of 21.2% over the past three months. This Zacks Rank #4 (Sell) stock currently carries an unimpressive Momentum Score of F.
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That said, let’s take a closer look at the factors impacting the company’s performance.
Soft Volumes and Input Cost a Major Barrier
The company has been grappling with lower volumes in U.S. fluid milk for a while now. In fact, adjusted gross profit declined 6% year over year in the second quarter of 2018 with the adjusted gross margin having contracted 170 basis points. Further, management expects weak volumes and a greater mix of private label to persist through 2018, another major reason behind the view cut. Although the company is aggressively working on enhancing its product volumes via a smart volumes initiative and a cost-productivity plan, this might take time to realize.
Further, input cost inflation, especially in resin, freight and fuel hurt the company’s margins as well as its bottom line in the last reported quarter. Significantly, freight cost inflation can be attributable to industry-wide constraints associated with limited trucking capacity. Further, fuel rates surged 31% during the second quarter and are expected to remain high throughout the rest of the year. Additionally, non-dairy inflation along with constant retailer investments in the private label space is also ailing Dean Foods’ branded product mix. Although management is committed toward alleviating these negative factors through productivity efforts and lower usages, the cost woes can’t be fully offset.
Estimates Look Bearish
Sad but true, the aforementioned hindrances compelled management to curtail its earnings outlook. The company now envisions 2018 earnings to range between 32 cents and 52 cents, significantly down from the previous range of 55-80 cents.
Moreover, a downward estimate revision trend for the current and next year buoys pessimism. Over the past 30 days, the stock has seen the Zacks Consensus Estimate move 18 cents and 11 cents south to 47 cents and 69 cents, respectively.
Can Efforts Aid a Turnaround?
Dean Foods is aggressively working toward expanding volumes and curbing costs through smart volumes initiative and its cost-productivity scheme. Notably, the latter helped reduce G&A costs by about $13 million during the reviewed quarter. In fact, the cost productivity program is likely to deliver an incremental annual run rate savings of $150 million by 2020. We also recommend Dean Foods’ intensified focus on diversifying its portfolio, moving beyond its core dairy-related businesses and vouching for opportunities in foodservice and other beverages. This is evident from the company’s raised stake in Good Karma and the acquisition of Uncle Matt's Organic juices.
However, we believe that such efforts will take time to yield encouraging results and win back investors’ confidence in the stock. Having said that, the current dismal performance remains a spoiler for the company.
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