Dean Foods: Crying Over Spilled Milk

Shares of Dean Foods (NYSE: DF  ) are falling today after the company reported quarterly results that CEO Gregg Tanner said the company was "clearly disappointed" with. The CEO blamed raw milk prices that increased 31% on a year-over-year basis. The company has instituted many moves to turn itself around, but continues to face significant headwinds.

Shares were down about 3.5% around 3:45 p.m.

If one looked at the results in a vacuum, it appears the company is doing better on a year-over-year basis by reporting an EPS loss of $0.01 versus a $0.61 loss in last year's corresponding quarter, but appearances can be deceiving.

WhiteWave divestiture
Dean Foods was a much different company last year as it still had an ownership position in the WhiteWave (NYSE: WWAV  ) brand. The divestiture in the summer of 2013 was a way to unlock value through separating the high-growth WhiteWave subsidiary from the low-growth, value play that Dean Foods presents. In addition, Dean Foods was able to sew up its balance sheet by a tax-free transaction that raised nearly $600 million.  Dean then instituted a series of shareholder-friendly measures: paying off debt, initiating a quarterly dividend, and authorizing a share buyback program of nearly $300 million.

The results of these programs vary: In the past quarter as compared to the previous year, interest expense dropped from $90 million to $15 million, the quarterly dividend still stands, but the company's outstanding shares are roughly equal to their post-split divestiture total. Although it is prudent to mention that as of March 31, the company still had $275 million left of the $300 million share repurchase authorization.

What went wrong this quarter
The post-divestiture Dean Foods is a much different company than the one before. It faces a host of competition. On the low end, it faces competition from cheaper brands as it continues to lower its operational costs by both closing factories and paying down debt. In addition, it no longer has the ability to pass prices along to consumers with the higher-end organic brands that were in its subsidiary WhiteWave brand. The end result is a company that really has no competitive moat.

This can clearly be seen from the rather large increase of cost of goods sold (read: price of raw milk, among other things) as a percentage of revenues. As this continues to increase, less money is able to fall down the balance sheet to investor earnings. In the last year, the cost of goods sold has jumped 450 basis points, from 78.8% to 83.3%.

Source: Dean Food's 10Qs. Figures in millions.

As you can see, raw milk inflation is really hurting this company and it cannot pass along the costs to price-sensitive shoppers. After all, milk is considered a commodity-type product in which many shoppers choose cost over brand.

Final thoughts
Probably the most shocking part of today's press release is the company has decided to no longer continue its practice of providing full-year guidance.

"The balance of the year appears rocky, with a continued unpredictable and volatile dairy commodity environment," Tanner was quoted as saying. "That makes it difficult to provide guidance beyond the immediate quarter."

The company did estimate third-quarter results as coming in around a loss of $0.05-$0.15 per share. Last week, the spun-off WhiteWave reported strong results (diluted EPS of $0.19 per share) on the back of strong almond milk sales. Hopefully investors kept their shares of WhiteWave; that's where the growth appears to be going forward.   

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