Dean Foods (DF, Financial) continues to struggle even as it reported its fiscal fourth quarter result. Although sequentially the company turned to profit, its performance was quite dismal on a year-over-year basis. It was driven by high raw milk prices, which continually weighed on its bottom line throughout the quarter. Led by these headwinds the stock has declined considerably in the past few days. However, if we observe closely raw milk prices have declined since December 2014; perhaps one of the reasons it turned to profit from loss in the third quarter. Let’s see in detail whether this improvement help Dean to reach its former glory in the days ahead.
A closer look at the performance
During the quarter its revenue increased 4.3% to $2.39 billion compared to last year, while adjusted earnings declined to 8 cents a share from a year ago period of 18 cents per share. The numbers were better than those in the third quarter where it had a loss of 3 cents a share. As already mentioned raw milk prices started to decline on account of strong production growth, which is expected to get even better in 2015. Also, the U.S. exports have declined on account of a strong dollar, and countries such as China and Russia have reduced their imports, which will further bolster the raw milk supply.
Better times ahead
Albeit slowly, eventually we could see some relief in the long run. For now, the company is focused on three things namely; price realization, cost productivity and volume at margins, which will yield good return. Along with this, the company has a strong portfolio of brands among its peers, which complements its customer set and leverages the national scale of its network.
Going forward, the company will focus on its efforts to reduce cost and work toward operational excellence. In fact, the gigantic size of its business better positions Dean to reduce costs in ways that are difficult for its competitors to match. It took some bold steps in this direction including shutting down 12 of its plants over a span of 18 months. This indeed reduced excess capacity in its network and led to higher efficiencies.
As a result of these plant closures it will put excess load on its distribution capability. But the management is counting on the several years of opportunity it has ahead, to drive meaningful savings within logistics. However, in spite of all the efforts taken by management there could be various factors that could have a material impact on its full year 2015 results, and these factors are quite difficult to predict. It will be a matter of time to see how things go.
Conclusion
In addition, the company will invest more than $60 million in advertising and promotions spanning across TV, print and digital platforms. It will remind consumers of the importance of milk as one of the most naturally occurring protein dense foods available. This in turn will help to boost demand, which was earlier hampered because of high prices. With these initiatives in place we could expect a turnaround in the near future. Moreover, a forward P/E of 14.98 compared to losses in the past year convinces us even more of a better performance in the days to come.
