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Dean Foods (DF) Recovers on Strategic Actions: Time to Hold?

Zacks

Dean Foods Company DF seems to be gaining momentum driven by its smart volume initiative; efforts to strengthen brands and diversify portfolio as well as progress on the comprehensive productivity program. The cumulative effect of these initiatives is clearly visible in the company’s stock performance, which has picked up significantly in recent months compared with a 45.6% decline recorded in the past year.

Notably, the stock has gained 6.1% in the last three months, outperforming the industry’s growth of 3.6%. Moreover, this Zacks Rank #3 (Hold) company has recorded superb 24.5% growth since reporting earnings on Nov 7, 2017. Further, the company’s Momentum Score of B indicates that it is poised to sustain this momentum in the future.



However, we cannot fully ignore the dismal top-line trends, which have been a major setback for the company as soft volumes, higher raw milk costs, and loss of share in U.S. fluid milk volumes remain headwinds. That said, let’s analyze the initiatives taken by the company to counter these hurdles and emerge strong.

Smart Volume Initiative to Improve Revenue Score

Dean Foods expects to gain from the smart volume initiative through the rest of 2017, aimed at improving top-line, building margins and creating operating efficiencies. These initiatives relate to managing private label products, while also analyzing new volume opportunities or evaluating existing volume profitability. This will ensure that volumes are produced and sold at appropriate margins.

In third-quarter 2017, the company’s results gained from overall solid sales execution and stringent progress on smart volumes initiative, which helped in wining some new business for 2018. Under these contracts, the company is likely produce to roughly 40 million gallons on an annualized basis for numerous key customers. The company had anticipated to start shipping this volume by end of 2017 and into early 2018. Going forward, the company expects to bring more smart volumes into its system to aid top-line growth.

Core Business Focus and Product Diversification — A Two-point Agenda for Growth

Dean Foods has always been keen on optimizing capital allocation and at the same time concentrating on core business activities. This means that the company is looking to diversify its portfolio of brands moving beyond the pure milk products. While the company is on track with growth of its core dairy-related business, with products like ice cream, flavored milk and sour cream; it is also vouching for opportunities in juices, teas and other beverages.

In recent years, the company’s pace of boosting growth at the core dairy business has been anchored by the introduction of the DairyPure milk brand in 2015 and the TruMoo flavored milk in 2012. Going into 2018, the company expects to build brand equity on DairyPure through new product innovation and improved marketing.

Additionally, the company explored the ice cream business with the acquisition of Friendly’s Ice Cream manufacturing and retail operations in 2016, which is delivering results. Moreover, we applaud the company’s efforts to grow in the organic space, evident from its recent deals with Good Karma and Organic Valley milk brand, as well as the acquisition of Uncle Matt's Organic juices.

Cost-Savings — A Mantra for Improved Productivity

Dean Foods continues to make headway in efforts to achieve the lowest cost position in the industry. The company remains focused on reducing unnecessary costs throughout the organization and improving efficiency. It is particularly paying attention to improve waste management and operating efficiency. As a result, the company has lowered milk waste percentage by 10 basis points and improved operating efficiency by 2% year to date. This along with frequency reduction within the company’s logistics function keeps it on track with overall productivity target of $80-$100 million in 2017.

This target is in sync with the company’s “OpEx 2020” cost productivity plan, aimed at generating annual savings in a range of $80-$100 million by reducing waste in the organization. These efforts, along with Dean Foods’ constant product innovations and strategic partnerships should place the company well for the long-run.

What’s Hindering Growth Then?

Though these efforts are likely to place the company for growth in the long term, soft top-line trends in recent quarters concerns investors. The company reported second straight quarter of sales miss in third-quarter 2017 mainly hurt by soft volumes, higher raw milk costs, and loss of share in U.S. fluid milk volumes. Moreover, lost sales volumes and incremental costs related to the recent hurricanes in both Texas and Florida were hindrances.

Additionally, we believe the persistence of adverse raw material price trends, such as high raw milk costs, as well as lower fluid milk volumes in the United States, pose threats to Dean Foods’ operating results. Notably, the company slashed earnings view for 2017.

Still Interested in Consumer Staples Sector? Check These

Better-ranked stocks in the sector include Ollie's Bargain Outlet Holdings, Inc. OLLI, Nu Skin Enterprises, Inc. NUS and Brown-Forman Corporation BF.B, each carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ollie's Bargain has advanced 18.1% in the last three months. The stock has a long-term growth rate of 20.6%.

Nu Skin, with long-term earnings per share growth rate of 8.5%, has surged 10.3% in the last three months.

Brown-Forman has improved 24.9% in the last three months. Moreover, the company has delivered an average positive earnings surprise of nearly 7% in the trailing four quarters while estimates for the current fiscal have improved in the last 30 days.

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