Dean Foods (DF, Financial) has had a roller coaster ride in the last few months, wherein its results have changed and recovered over time. Its shares have also surged 13% in the last one year, despite an increase in raw milk prices last year.
The company reported its fourth quarter results which were mixed. Although the numbers couldn’t beat the Street’s estimates, it was better than that of last year. However, its share price plunged after the announcement as the company provided a dull outlook, which failed to please the investors.
The mixed bag of results
Revenue for the quarter surged 4.3% to $2.4 billion, over last year. This was slightly below the analysts’ estimate of $2.43 billion. During the period, total volumes declined to 683 million gallons from 699 million gallons last year. Volumes were mainly affected by higher milk prices and due to RFP-driven volume loss of a major customer.
Moreover, there has been a decrease in industry wide fluid milk volume of 4.5%, according to USDA data, which resulted in lower volumes for Dean Foods also. However, the company’s share of U.S. fluid milk sales grew to 35.6% from 35.4% in the previous year.
Further insights
The cost of raw milk had surged last year due to an increase in global dairy demand, especially in Asia and other international markets. Also, there was a decline in dairy output. But the higher prices were not completely passed on to the customers. Therefore, gross margin fell to 18.4% from 19.4% in the previous year.
However, the raw milk prices have started declining, which should help the retailer witness a better bottom line. Class I Mover price has dropped $3.95 per hundred weights to $18.58 per hundred weights in January 2015. Further, it decreased $2.34 per hundred weights to $16.24 per hundred weights in February 2015. Thus, the company should now witness higher margins and earnings.
The earnings of the company came in at $0.06 per share, a recovery from a loss of $0.40 per share last year. One of the reasons for this improvement was higher sales and a decline in raw milk prices since December 2014. Further, if the lower costs are not passed on to the customers, it will result in higher margins.
The road ahead
The key reason why investors were unhappy with the numbers was the outlook of the company. The retailer expects earnings to be in the range of $0.12 per share and $0.22 per share, whereas analysts were expecting it to be at $0.22 per share. Also, Dean Foods expects lower volumes and is struggling with low demand and highly volatile milk prices.
The retailer has closed 12 production plants between 2012 and November 2014 due to declining fluid milk sales. Thus, higher costs related to the closures have been affecting its earnings. However, lower milk prices should help the company win back lost customers and boost its sales.
In addition, the company plans to remain focused on providing quality service, as it works on the principle of direct store delivery. It provides its products to the customers directly mainly because of the perishable nature of its products. Focusing on these areas should help the company grow.
Furthermore, it has expanded its presence in the beverage market by adding juices and teas to its product portfolio. Since customers have become health conscious, such items do attract attention.
My take
Overall, Dean Foods’ future is unpredictable. Its dependence on the sales of milk and the volatile nature of raw milk prices has made its results uncertain. However, the recent decline in the prices should attract more customers and boost the company’s top line as well as the bottom line. Nonetheless, I would prefer to stay away from this company.
