Dean Foods EPS Tops, View Tepid - Analyst Blog

Dean Foods Co.’s (DF) second-quarter 2010 GAAP earnings slipped 30.2% to $44.8 million from $64.1 million in the year-ago period. Excluding special items, adjusted earnings per share came in at 29 cents, well behind 43 cents recorded in the year-ago quarter, but topped the Zacks Consensus Estimate of 25 cents per share.

However, Dean Foods offered disappointing guidance for the third quarter of 2010 amid continued headwinds in the form of intense competition from private label milk offered by retailers and increasing commodity costs. The company stated that it expects earnings of 17 to 22 cents per share during the third quarter, well below the Zacks Consensus Estimate of 26 cents, which dipped 2 cents over the past month as 2 of 14 covering analysts lowered expectations. Shares of Dean Foods slipped more than 9% in morning trade on the New York Stock Exchange.

Meanwhile, Dean Foods’ quarterly net sales grew 10.7% year-over-year to $2.95 billion, narrowly missing the Zacks Consensus Estimate of $2.99 billion. The growth was primarily driven by acquisitions and pass-through of higher commodity costs to consumers in the form of higher prices. In terms of segments, Fresh Dairy Direct–Morningstar segment’s sales grew 8% year-over-year to $2.5 billion, while WhiteWave–Alpro division sales surged 31% to $459 million.

Quarterly gross profit declined 1.3% year-over-year to $751.4 million, while gross margin contracted 310 basis points (bps) to 25.4%. The margin reduction was primarily caused by insufficient pass-through of higher commodity costs coupled with the adverse impact of customers trading down to lower-margin private label products from branded ones.

Dean Foods’ operating expenses rose 3.6% to $626.4 million from $604.6 million in the year-ago period. Accordingly, operating income during the quarter slipped 20.4% year-over-year to $125.0 million, while operating margin contracted 170 bps to 4.2%.

Dean Foods ended the quarter with cash and cash equivalents of $61.2 million with a long-term debt-to-capitalization ratio of 74.2%, compared to a cash balance of $53.1 million and a long-term debt-to-capitalization ratio of 76.1% in the year-ago quarter. During the first half of 2010, the company generated $244.3 million of cash from operations and utilized $112.9 million towards capital expenditure and $88.7 million towards debt repayment.
 
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