Dean Foods earnings disappoint amid plant closures and private label competition
- Dairy distributor Dean Foods reported that gross profits and net income are way down compared with a year ago, according to the company’s latest earnings report. Gross profits were reported at $391 million — about a 12% drop from this time a year ago — and net income fell $26.6 million.
- CEO Ralph Scozzafava said in the report that closing and consolidating seven plants, significant inflation in fuel and freight costs, and competition from private label led the company to lower its full-year guidance.
- "The third quarter marked an unprecedented level of activity as we closed and consolidated seven plants, redistributing the volume into 23 other locations within six weeks. This work contributed to a very challenging quarter,” he said. Still, going forward, "...Our overall strategy remains our roadmap and through our enterprise-wide cost productivity plan, we are transforming the company to more effectively compete and win. The heavy lifting of the seven plant closures in the third quarter is now behind us."
Dean Foods continues to struggle as consumer interest in plant-based milks and other dairy alternatives continues to grow. Especially in light of several quarters of lackluster earnings, the current oversupply of milk, declining prices, and tariffs on U.S. dairy products, the future looks a little grim for the country’s largest milk producer.
This perfect storm of problems in the dairy industry has put Dean Foods in a tough spot that will be hard to maneuver out of. For now, the company's solution is to continue to cut costs where it can, which means within its network of suppliers and employees. Last quarter, Scozzafava noted that the benefits of these cost-cutting measures will begin to make an appearance in Q4.
In the quarter leading up to these anticipated benefits, however, sales continued to slip. The company reported a 0.03% drop in net sales and an increase in its debt-to-earnings ratio of 3.6 from 2.56 last quarter. Much of this strain comes from continued pressure from costs "associated with our plant consolidation efforts, retailers continued investment in private label and higher than expected transportation-related inflation," the report states.
Still, Dean Foods is orienting itself to fight back. Last quarter the company increased its investment in non-dairy producer Good Karma by $15 million. However, this earnings report indicated no profit yet from their non-controlling interest in the Colorado-based company.
Nevertheless, Dean Foods is heading in the right direction by buying into the non-dairy sector. Although it sold off its stakes in WhiteWave Foods — the producer of Silk and So Delicious products made from plants — and its Morningstar division, the dairy producer is clearly reconsidering the benefits of getting back into the space.
At the same time, their stake in the milk industry seems to be shrinking. This fall, Dean Foods shuttered two milk facilities after closing down two other dairies this spring. According to their earnings report, the company closed and consolidated a total of seven manufacturing plants this year. Dean also notified more than 100 milk producers in eight states this spring that their contracts are canceled.
Scozzafava remains confident.
"The actions we implemented are critically important as we are in the process of reducing our fixed cost base and removing excess capacity to make our business leaner and more agile as we prepare ourselves for 2019," he said in the report.
A leaner business does not necessarily mean profit. When the company initiated this "right-sizing" initiative in 2017 after its shares fell by close to 50%, they expected to realize $150 million in annualized savings by 2020. As it stands, they are still paying out to get themselves on the right foot. This quarter it cost $2.67 million to close and reorganize their dairy plants.
Perhaps Dean Foods should instead look outside the milk carton. While Good Karma is a good start, it may prove a winning strategy if the company invests in innovative new products — dairy related or not — that aren't yet copied by private label brands and could bring them a competitive advantage.