Dark Clouds Loom Over Dean Foods: Stock Loses 20% In 9 Days

Without even getting a chance to see the light of day, Dean Foods Company’s (NYSE:DF) investors got another reason to punish the stock. The company, which has been bearing the brunt of high raw milk prices, marked its third straight earnings miss, in second-quarter 2017. This also compelled management to cut its bottom-line view for the full year. Well, it has been only nine days since the company released its results and its shares are down almost 20%. With this, the Dallas-based food and beverage company has slumped 45% year to date, wider than the industry’s loss of 43.2%.

While management announced plans to expand its cost productivity program with the quarterly results, its lowered earnings view for 2017 hints at a bumpy road ahead. So, let’s get an insight into the factors that caused this Zacks Rank #5 (Strong Sell) stock to derail.

What Went Wrong in Q2?

In the second quarter of 2017, both the top and bottom lines fell short of the Zacks Consensus Estimate, while the latter also declined year over year. Results were hampered by a tough retail scenario, which has been witnessing fast-evolving trends. Further, volumes remained pressured owing to both macro factors, as well as stiff competition.

Evidently, the USDA data through May 2017 revealed that fluid milk volumes dipped 2.9% year over year, on a quarter-to-date basis. Likewise, Dean Foods' share of U.S. fluid milk volumes contracted 30 basis points in the quarter under review. While volumes hampered sales, earnings were hurt by a rise in raw milk costs that escalated 15% year over year. Notably, Dean Foods’ murky surprise history can be attributed to high raw milk prices. Moreover, these obstacles are expected to linger throughout the rest of 2017.

Focus on OpEx to Offset the Worries? Not Really

Management revealed that it remains on schedule with its growth and cost productivity plans and expects it to ramp up throughout 2017. Evidently, the company is progressing well on its OpEx 2020 cost productivity plan, which is aimed at generating annual savings in a range of $80-$100 million. In fact, as mentioned above, management also announced plans to expand this program, expecting additional savings in its general and administrative operations. The company targets to complete this by the end of 2017.

While the aggressive cost-structure is expected to address the hurdles associated with unfavorable volumes and mix, these challenges are likely to be more intense during the second half of 2017. Consequently, management lowered its 2017 earnings outlook, as it expects the volume pressure to dent the company’s financial performance. Moreover, raw milk costs are expected to inflate 8% sequentially and 11% year over year in the third quarter. All said, the company now envisions adjusted earnings per share in a range of 80-95 cents, much lower than the earlier forecast of $1.35-$1.55.

Estimates Hit Hard

The drab outcome and guidance didn’t take time to shake estimates. Evidently, the current Zacks Consensus Estimate for the third quarter has reduced by half to 23 cents. Also, the consensus for full-year 2017 has tanked 37% to 85 cents, since the second-quarter earnings release.

Still Interested in Consumer Staples? 3 Picks You Must Notice

Clearly, tough times for Dean Foods are expected to persist. However, the space is not devoid of promising bets. So for the time being you can count upon some better-ranked stocks such as Post Holdings, Inc. (NYSE:POST) , Ingredion Incorporated (NYSE:INGR) and The Chefs' Warehouse, Inc. (NASDAQ:CHEF) .

Post Holdings, with long-term EPS growth rate of 25%, sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ingredion Incorporated currently has a Zacks Rank #2 (Buy). The company has long-term growth rate of 11%.

Chefs' Warehouse, with long-term growth rate of 19 % carries a Zacks Rank #2.

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