Dean Foods Earnings: A Turnaround That Cannot Turn Around

Dean Foods spun off its packaged food and beverage division into WhiteWave Foods Co. (NYSE: WWAV) and sold off its Morningstar dairy business, which resulted in GAAP EPS for 2013 of $8.58. Adjusting for one-time items however, EPS for the year came in at $0.86, compared with a consensus estimate of $0.87. For the quarter, EPS totaled $0.18, compared with an estimate of $0.19.

The company’s CEO said:

We continue to feel confident in our long-term trajectory. In 2013, Dean Foods successfully transformed itself, generating more than $2 billion in shareholder value, substantially deleveraging the company, and focusing the company on its core dairy business. At the same time, we faced significant challenges in the inflationary commodity environment and through competitive pressures on our business. This very challenging environment will persist for Dean Foods, particularly during the first half of 2014 …

Dean Foods lost a major customer last year, and another customer decided to vertically integrate its dairy operations, reducing Dean’s milk volumes for the second consecutive quarter. For the year, volumes were down 8%. The company responded by announcing that it will close eight to 12 of its processing plants. But cost saving measures alone will not turn the company around.

In its outlook comments, the company said it expects commodity prices to rise near or beyond all-time highs in the first half of 2014, before declining somewhat in the second half of the year. A reduction in the federal Supplemental Nutrition Assistance Program (SNAP, more commonly called food stamps) also is expected to hurt revenues. Here is what the company says:

We are hopeful that our new volume wins, and increasing share gains, will partially offset the asset deleverage soft category volumes create; however soft volumes, coupled with inflation, can negate some of the impact of our cost reduction efforts, and makes it harder to take those savings to the bottom line.

The bottom line is that Dean expects full-year 2014 EPS in the range of $0.73 to $0.86, well below the consensus estimate of $1.12. The turnaround is not only stalled, but may be heading in the wrong direction.

Dean Foods stock was trading down more than 11% in Tuesday’s premarket, at $13.50, which would be a new 52-week low if it holds. The current 52-week range is $14.71 to $42.12, and the consensus price target on the stock is around $20.00.