The last year was pretty difficult for Dean Foods (DF, Financial), a food and beverage company. Its share price declined 5.7%, over the same period owing to a host of problems. Its performance too was dull, wherein it failed to meet the earnings estimate significantly in the last three quarters, out of the last four reported quarters.
However, the last month was a relief for the company. This is also reflected in its share price, which has risen by 17.5%, during the period. Dean Foods' third quarter results too were impressive, indicating that the company's strategic efforts have been fruitful. Both the top line and the bottom line were ahead of the Street's estimates, enabling its shares to move north. Moreover, the company revised its earnings outlook upward for the fourth quarter.
Reasons for improvement
Revenue for the quarter increased, over last year, due to an increase in overall demand for its products. Apart from dairy related products, Dean Foods also offer tea and juices. Thus, it is able to attract the health conscious people, who prefer to have juices over sodas.
Higher demand in the fluid milk segment resulted in an increase of 0.7% in the market share of the company. Thus, Dean Foods’ market share in this category stands at 35.6%. The food company also witnessed an increase in the TruMoo brand, the flavored milk business. TruMoo brand registered an increase of 11% over the previous year. Moreover, the company plans to expand this category to include protein and ice-cream.
Although volumes have been flat, prices of branded white milk were up by $0.31 over last year's quarter, clocking in at $4.08 per gallon. This helped in boosting the top line.
The problem
One of the primary problems faced by the dairy product retailer is lower volumes, which stood at 673 million gallons, a decline of 2%. This decline was not only because of the sell-off of the private label business last year, but also because of lower consumption of milk in breakfast. Because of a large number of new breakfast options, customers have shifted away from having cereals and milk. They now prefer to have items like yogurt, smoothies and eggs. However, the company's efforts to expand into other products should help offset the decline.
Further, Dean Foods was suffering from higher prices of raw milk, which was affecting its bottom line as well as its margins. However, through various cost cutting efforts, the retailer managed to improve its bottom line. This resulted in a better than expected earnings during the quarter. Moreover, lower prices of butterfat, which is important for manufacturing cottage cheese and ice cream, resulted in higher earnings.
Positive cues
Dean Foods also spun off its natural and organic food business, which is called White Wave Foods, in January 2013. This spin off was made so that the retailer can focus more on its core business. Hence, this helped the company to expand its product portfolio at Dean Foods.
The food company not only expects a better fourth quarter this year but also estimates to have a healthy bottom line in 2015 since raw milk prices are expected to decrease by next year. This should help the earnings grow further, resulting in higher margins too.
Final words
Dean Foods is making a number of moves to recover from its previous quarters. Its efforts to expand its products, manage and reduce costs should enable it to improve its performance. Further, lower raw milk prices will enhance its margins and profitability. Although it incurred a loss in its third quarter, it is expected to grow by a CAGR of 15.70% in the next five years. This growth rate is better than the industry average of 13.42%. Thus, this dairy product retailer is likely to attain growth in the future. Investors should give this company a serious thought.
