Dean Foods (DF) Misses On Q1 Earnings, Reiterates Outlook

Dean Foods Company (NYSE:DF) posted first-quarter 2017 results, wherein earnings marked its second consecutive miss and plunged year over year. However, the top line exceeded our estimate and management reiterated its outlook for 2017 as its growth and productivity plans remain on schedule.

Shares of this Dallas-based food and beverage company rose 2.4% yesterday. Also, thanks to its focus on growth strategies, Dean Foods’ shares gained 9.7% in the past one year, outperforming the Zacks categorized Consumer Staples sector’s gain of 5.6%.

Battered by increased raw milk expenses, the company’s quarterly adjusted earnings of 13 cents per share lagged the Zacks Consensus Estimate of 17 cents and declined 71.1% year over year. Further, earnings for the quarter were at the lower end of the company’s guidance range 12–20 cents per share.

Dean Foods Company Price, Consensus and EPS Surprise

On GAAP basis, the company posted a loss of 11 cents per share, against earnings of 45 cents reported in the year-ago quarter.

Deeper Insight

Net sales advanced 6.2% year over year to $1,995.7 million, and surpassed the Zacks Consensus Estimate of $1,964 million. However, total volumes of 633 million gallons dipped 1.3% from 641 million gallons in the prior-year quarter.

For the first quarter, raw milk costs escalated both sequentially, as well as on a year-over-year basis. Raw milk costs rose about 6% from fourth-quarter 2016 and jumped 18% from first-quarter 2016. Also, the Class I Mover, which is a measure of raw milk expenses, has displayed a sequential improvement in the second quarter, while the same has increased year over year.

Further, the milk category remained soft as the USDA data through Feb 2017 revealed that fluid milk volumes dipped 1.8% year over year, on adjusting for the additional Leap day last year. However, Dean Foods' share of U.S. fluid milk volumes increased 10 basis points year over year.

In the non-fluid milk product space, ice cream volumes gained 19%, mainly backed by contributions from the recently acquired Friendly's business.

Adjusted gross profit declined 7.9% to $465 million, while the adjusted operating income collapsed by 573.8% to $35 million in the first quarter.

Financial Position

Dean Foods ended the quarter with cash and cash equivalents of $31.6 million, long-term debt including current maturities of about $891.7 million, and shareholders’ equity of $595 million.

During the quarter, the company generated nearly $27.6 million of net cash from operating activities and $19 million of free cash flow. This reflects Dean Foods’ tenth straight positive free cash flow. The company deployed roughly $8 million as capital expenditure in the first quarter.

At the end of first-quarter 2017, the company's total leverage was 2.09 times, as compared with 1.89 times as of the end of 2016. This stemmed from lower net debt and bank EBITDA (on a sequential basis).

Other Developments & Outlook

The company remains on track with its “OpEx 2020” cost productivity plan, which is aimed at generating annual savings in a range of $80–$100 million, by reducing waste in the organization. In this regard, Dean Foods enhanced its safety scores, improved the percentage of fluid shrink and completed designing its supply-chain network, in the first quarter.

Further, Dean Foods introduced DairyPure sour cream in March, thus enhancing DairyPure’s product line. This is likely to raise consumer demand and draw more customers. The goal behind this deal is similar to Dean Foods’ other contracts including its joint venture with Organic Valley dairy brand owner – CROPP.

Further, the company inked a distribution deal with flax-based milk and yogurt products manufacturer – Good Karma, last week. This investment will help Dean Foods to expand operations into plant-based dairy choices and boost growth. Moreover, to strengthen its sales and market capacities, the company entered into an alliance with Acosta – which is the top sales agency in the country.

We believe that these efforts, along with Dean Foods’ constant product innovations and strategic partnerships should attract more consumers and boost its top line. All said, the company remains on schedule with its growth and cost productivity plans, and expects it to ramp up throughout 2017.

With these actions underway, the company reiterated its 2017 outlook wherein it expects to deliver adjusted earnings per share in the range of $1.35–$1.55.

Zacks Rank & Key Picks

Dean Foods currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the consumer staples sector include ConAgra Foods Inc. (NYSE:CAG) , Medifast, Inc. (NYSE:MED) and Darling Ingredients Inc. (NYSE:DAR) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ConAgra Foods’ earnings have outperformed the Zacks Consensus Estimate by an average of 10.7% in the trailing four quarters. Moreover, it has long-term EPS growth rate of 8%.

Medifast has a solid earnings surprise history, with an average surprise of 12.4% in the trailing four quarters.

Darling Ingredients has seen its stock price gain 7.5% in the last one year.

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