Dean Foods (DF) Stock Down on Wider-Than-Expected Q2 Loss

Shares of Dean Foods Company DF crashed 35.5% yesterday, as it posted dismal second-quarter 2019 results. It reported a wider-than-expected loss for the fourth straight time and sales missed the Zacks Consensus Estimate. Moreover, both top and bottom line declined year over year.

Results were hurt by weak volumes and greater dairy commodity inflation and the latter is expected to rise considerably throughout 2019. All these factors further dented investors’ confidence in this Zacks Rank #4 (Sell) stock that has plummeted almost 87% in a year compared with the industry’s decline of 74.3%.

Dean Foods Company Price, Consensus and EPS Surprise

Dean Foods Company Price, Consensus and EPS Surprise

Dean Foods Company price-consensus-eps-surprise-chart | Dean Foods Company Quote

Quarter in Detail

Adjusted loss from continuing operations amounted to 36 cents per share, significantly wider than the Zacks Consensus Estimate of a loss of 9 cents. Also, the bottom line compares unfavorably with the year-ago quarter’s earnings of 16 cents.

A persistent decline in fluid milk consumption and high raw milk costs were the main deterrents in the reported quarter. Class I raw milk costs rose 12% year over year and 6% sequentially. Management now expects Class I raw milk costs to inflate 19% from the year-ago period in the third quarter, which is considerably higher than the previous anticipation.

Net sales declined 5.5% to $ 1,843.5 million and missed the Zacks Consensus Estimate of $1,887 million. Volumes in the quarter were negatively impacted by customer exits and declines in the white milk category. The fluid milk category has been declining at a high rate due to intense competition. Consumers have increased food and beverage options, which in turn has led to a dynamic retail environment and stiff competition. The dairy category also remains troubled due to unfavorable pricing on private-label milk. Markedly, the fluid milk category dropped about 2% annually in the recent year, with the trend deteriorating in the second quarter of 2019.

Adjusted gross profit declined 12.7% to $378 million due to lower volumes and higher dairy commodity inflation. Adjusted gross margin contracted almost 170 basis points to roughly 20.5%.

Further, adjusted operating loss was $27 million in the quarter against adjusted operating income of $35 million in the year-ago quarter.

Financial Position

Dean Foods ended the quarter with cash and cash equivalents of $20.9 million, long-term debt (including current portion) of approximately $984.9 million and shareholders’ equity of $195.8 million. Total debt outstanding (net of cash in hand) was nearly $968 million as of Jun 30, 2019.

In the first six months of 2019, the company used nearly $29 million of net cash for operating activities. Capital expenditures in the first half of the year amounted to nearly $45 million. The company used free cash flow of about $74 million in the same time frame.

Efforts on Track

Dean Foods’ second-quarter results reflect progress in its business transformation and an improvement on a sequential basis. The company is on track with its enterprise-wide cost productivity plan to battle soft volumes and increased dairy commodity inflation. Management intends to speed up such initiatives in the second half of the year and focus on reorganizing its cost structure and fueling supply-chain efficiencies.

Check These Solid Food Stocks

General Mills GIS, with a Zacks Rank #2 (Buy), has a long-term EPS growth rate of 7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

McCormick MKC, also with a Zacks Rank #2, has a long-term EPS growth rate of 8%.

Mondelez International MDLZ, with a Zacks Rank #2, has a long-term EPS growth rate of 7.7%.

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