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What: Shares of Dean Foods (NYSE:DF), the nation's largest processor and distributor of dairy products, slumped on Tuesday after the company reported disappointing fourth-quarter earnings. By noon, the stock was down nearly 13%, falling below $16 per share.
So what: Dean Foods fell short of analyst estimates for both earnings and revenue, even with extremely low expectations. The situation at Dean Foods has been deteriorating for a few years, with both revenue and margins falling well below historical levels. The fourth quarter only continued that trend.
While revenue rose slightly year-over-year, gross margin fell by about one percentage point to 18.4%. This compares to a gross margin of 25.3% in 2012. Operating expenses rose faster than revenue, leading to an operating loss of $8 million. This is better than the $49 million operating loss reported during the fourth quarter of 2013, but adjusting for a charge related to the retirement of debt taken last year, operating income deteriorated year-over-year. Dean Foods only managed to post positive EPS thanks to a $13.8 million tax benefit.
One silver lining was a reduction in interest expense. Dean Foods paid about 25% less in interest payments during the fourth quarter, and nearly 70% less during the full year. Full-year interest expense was reduced from $200 million in 2013 to just $61 million in 2014 thanks to a big reduction in the company's debt load.
Now what: Dean Foods does expect 2015 to be significantly better than 2014, due to both costs that the company has removed and the prospect of cheaper raw milk. However, the company made a point to explain that the dairy market will continue to be both volatile and unpredictable. For the first quarter, Dean Foods expects volumes to decline, and for adjusted EPS to fall between to $0.12 and $0.22. This would be an improvement compared to the first quarter of 2014, when adjusted EPS came in at a loss of $0.05.