Dean Foods Loses 25% YTD: Will Cost Savings Aid A Turnaround?

Dean Foods Company DF has been grappling with lower volumes, higher raw milk expenses and unimpressive surprise history. Also, the company posted lower-than-expected earnings and revenues in fourth-quarter 2017. Consequently, management issued a soft outlook for 2018.

Shares of this Zacks Rank #4 (Sell) company were down 14.1%, after it reported fourth-quarter earnings on Feb 26. The stock has lost 25.4% year to date compared with the Consumer Staples sector’s decline of 5.9%. Moreover, the stock’s dismal run in the market is evident from its Momentum Score of F.

Dean Foods has been struggling against challenges such as soft product volumes, higher raw milk costs and loss of share in U.S. fluid milk volumes, which has been largely impacting its top line. Apparently, the company has lagged sales estimates in four of the trailing five quarters, including the last quarter. Also, sales were down 4.1% year over year in fourth-quarter 2017, with total volumes across all products declining 6%.

Moreover, the company’s business is heavily dependent on commodities such as raw milk, soybeans, diesel fuel and others, the prices of which often fluctuate. Therefore, any rise in the prices of these commodities might hurt margins. In the reported quarter, adjusted gross profit declined 9.9% while the adjusted operating income was down by 39.2%.

For 2018, adjusted earnings per share are envisioned in the range of 55-80 cents versus 80 cents in 2017. Also, first-quarter 2018 earnings are expected to come disproportionately lower than fourth-quarter 2017. The Zacks Consensus Estimate of 13 cents for the impending quarter and 64 cents for 2018 declined by 2 cents and 5 cents, respectively, in the last 30 days.

Adding to the woes, the retail grocery industry experienced significant consolidation in recent years due to which competition has further intensified among dairy product suppliers. Dean Foods also faces stiff competition, both geographically and particularly at the processor level, in all major product lines that might weigh upon its overall profitability.

Will Cost-Productivity Program Offset Hurdles?

Dean Foods has been taking strategic measures to boost operational excellence via execution of the enterprise-wide cost productivity program to generate additional savings in 2018 and beyond. This program mainly focuses on three major areas – 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 company concluded the assessment phase and is in the advanced stages of designing and implementing its savings plans. Further, it has completed the initial phase of cutting down general and administrative expenses in fourth-quarter 2017 and first-quarter 2018. These initiatives together with the ongoing cost productivity efforts, are expected to generate savings in 2018, which are likely to offset some negative impacts from volume declines and higher non-dairy input costs. While some savings are expected to reflect in 2018, the company anticipates larger savings in 2019 and beyond.

Under the OPEX 2020 cost productivity plan introduced in 2017, the company targets annual savings of $80-$100 million. These savings are likely to offset input inflation and volume deleverage throughout its operational phase. Going forward, this plan will be extended to the company’s manufacturing and logistics footprint alongside targeting reduction in SG&A expenses. This multi-year plan, which is expected to span across 2018 and 2019, is likely to deliver incremental annual run rate savings of $150 million by 2020.

All said, cost-saving efforts along with Dean Foods’ constant product innovations should place the company well for the long run. However, the recent dismal performance cannot be ignored.

Want Top-Ranked Food Stocks? Count on These

Investors might consider some better-ranked stocks like The J. M. Smucker Company SJM, US Foods Holding Corp. USFD and Post Holdings, Inc. POST, all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

J. M. Smucker pulled off a positive earnings surprise of 15.7% in the previous quarter. The company has a long-term earnings growth rate of 7.9%.

US Foods Holding has an impressive long-term earnings growth rate of 17%. Further, the company’s earnings have outpaced the Zacks Consensus Estimate, with an average of 2.7% in the last four quarters.

Post Holdings has a long-term earnings growth rate of 14%.

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