Dean Slogs On

Dean Foods (NYSE: DF  ) continued to slog through its restructuring in the second quarter, but its biggest moves are now behind it. Looking ahead, the company's challenges will be dealing with nagging costs and protecting the integrity of its brand.

Revenue for the quarter slipped 1% year over year to $2.17 billion, but the drop stemmed from Dean passing on its savings to customers, not from slackening demand. Both raw milk costs and butterfat prices, key inputs for the company, declined 23% versus last year's second quarter. Fluid milk volumes, on the other hand, were up 2.1% for the quarter.

As for the bottom line, earnings sank nearly 60% to $0.21 per share, from $0.52 in the same period. However, EPS was affected by a hefty $0.34 charge related to the company's decision to jettison its Iberian operations. Earnings from continuing operations showed a healthy 13% increase to $0.53 a share.

Dean has been reconfiguring its business for several quarters by, among other things, spinning off TreeHouseFoods (NYSE: THS  ) . This effort is winding down; the company indicated that the Iberian divestiture is the last major step in focusing on the best opportunities.

What Dean is left with is a large traditional dairy business and WhiteWave foods, a smaller but faster-growing unit with products like Silk brand soymilk, International Delight flavored coffee creamer, and organic milk. In the high-volume dairy side, Dean made good progress in squeezing out more efficiency -- operating margins increased year over year to 8.3%, up from 7.7%.

WhiteWave, though, is still a work in progress. Margins were down 0.2% in the quarter, in part because of a short-term increase in information technology spending. Unfortunately, other factors probably will tamp down on results. Fuel and packaging costs, for example, seem likely to remain high.

A potentially more serious issue, though, is a pro-organics consumer group's challenge to the company's use of the label "organic," a development recently discussed by The Motley Fool's Adrian Rush. Organic milk has been a fast-growing business for the company and negative publicity could derail that growth. For its part, Dean claims to support family farms, as well as best practices in organic farming and animal and land stewardship.

Dean is not without its challenges, but it has taken some large strides. With the majority of its restructuring behind it, the company seems well-positioned to deliver steady growth.

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Fool contributor Brian Gorman does not own shares in any the companies mentioned. The Motley Fool is Fools writing for Fools.

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Related Tickers

10/20/2016 4:01 PM
DF $16.58 Down -0.15 -0.90%
Dean Foods CAPS Rating: **
THS $86.70 Down -1.70 -1.92%
TreeHouse Foods CAPS Rating: *****