Dean Wrestles With Pickles

• Email
• Share
• Print

Dean Foods (NYSE: DF) continued to struggle in the third quarter as rising commodity prices, especially in raw milk, sapped earnings. Inflation in a variety of other areas, including resin, soybean oil, and energy, will also continue to buffet the business, although the company will probably benefit as these trends moderate. One vexing problem, though, remains -- slackening demand for pickles.

The Dallas-based firm reported that its net income came in at $0.46 a share after backing out certain items, down from last year's third quarter, in which its per-share earnings were $0.52. At the same time, sales grew 20% to $2.8 billion, thanks in part to higher selling prices that were designed to offset the very same high raw milk costs that depressed earnings.

In working to keep its earnings stable, Dean has wrung out costs in its manufacturing and distribution systems and has pledged to continue this process. The results of this effort may show up as soon as next year. The company is expecting lower volatility in dairy commodity prices in the U.S. and Spain in 2005 and, with continued strong performance from branded products, sees earnings growth returning to historic levels.

Outside of inflation in raw milk prices, though, another significant drag on Dean has been its Specialty Foods unit. The company took one step toward resolving the division's woes by selling off nutritional drinks. But the segment's chief business, pickles, remains a problem. Pickle volumes declined in 2003, and demand for pickles remained weak in this year's third quarter, traditionally the best time for them, what with all the backyard barbecues.

Dean appears to recognize the seriousness of the problem, even taking the unusual step of bringing a former president of the Specialty Food area out of retirement to turn it around. Only time will tell whether he can solve Dean's pickle pickle.

Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.