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Milk Slump Creams Dean Foods -- WSJ

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05/06/2019 | 02:48am EDT

By Heather Haddon

America's biggest milk maker is running out of options as milk consumption continues to decline in the U.S.

Dean Foods Co.'s sinking sales also have been hurt by big customers such as Walmart Inc. opening their own dairy plants to help guarantee their own supply. The dairy company's sales last year of $7.8 billion were down 38% from a decade ago.

Shares in Dean Foods have lost around 60% of their value this year, and the Dallas-based company's $141 million market value is about 5% of what it was worth a decade ago.

Dean's problems come at a rough time in the dairy industry overall. Milk prices have been falling for around five years as U.S. consumption wanes and production expands. Dairy cows have become more efficient in the U.S., and subsidies have helped keep some farmers producing.

Still, licensed dairy farms have shrunk to record lows, with more than 2,700 operations closing last year, according to the U.S. Department of Agriculture.

Dean has hired bankers to review options including a sale of the company, privatization or divestiture of some assets. Chief Executive Ralph Scozzafava told investors in February that he wasn't rushing those deliberations and is focused on improving operations and building the company's brands this year.

"We remain laser-focused on our strategic plan and its key initiatives to drive improved business performance," he said then.

Dean Foods representatives declined to comment for this article.

But investors say they are looking for more concrete updates when Dean reports first-quarter earnings on Tuesday. So far, the company hasn't accepted offers for parts of its network of 58 manufacturing facilities across 29 states, and instead is trying to fix itself or find an outright buyer, according to people who have recently discussed deals with Dean.

In a February debt restructuring, Dean added some of its real property as collateral against its debt, giving its lenders the right to some proceeds if those plants or other assets are sold, according to a filing. That gives Dean less flexibility to sell off its facilities as part of a potential deal, one of the people said.

Dean has received at least a half-dozen offers to buy some of its plants or an ice-cream business that includes the Friendly's brand, named for the Massachusetts-based chain of family restaurants, according to people familiar with the matter. Executives have rejected those bids, one of those people said.

The uncertainty is unnerving Dean's customers. Some grocery executives said they saw supply disruptions last year after Dean closed seven milk plants and transferred millions of gallons of production to other facilities within weeks.

One national retailer threatened to switch its supplier in the Boston area because of the disruptions, a dairy manager with the grocer said. Grocers have created contingency lists of other suppliers in case Dean is sold piecemeal or has production disruptions this year, the retailer said.

Mr. Scozzafava has said that the company has beefed up resources to help improve the transition to new plants, though that has contributed to higher than anticipated costs.

Dean's problems are hurting farmers, too. Dozens of dairy farmers received letters from Dean last year saying the company would buy less milk from them because Walmart was building a competing plant in Indiana. Dean also lost sales last year to Dutch retailer Koninklijke Ahold Delhaize NV after its Food Lion grocery chain in the U.S. switched to better-priced suppliers, a spokeswoman said.

Dean has said the Walmart plant in Indiana will cost its sales to the nation's top food seller the equivalent of about 125 million gallons of milk a year. Dean made about 15% of its sales to Walmart last year, down from 18% in 2017, before the plant opened.

"Farmers who ship to Dean Foods are wary," said Julie Walker, a dairy cow owner from eastern Tennessee, where some farmers lost Dean contracts last year.

"There are many rural communities who could be at risk," she said.

Some Tennessee farmers that lost Dean's business have retired or closed their dairies, said Lee Maddox of the Tennessee Farm Bureau Federation.

"There was one that wanted to continue milking but had no other options to sell the milk," he said.

Milk producers beyond Dean are struggling given the consumption declines and growing interest in plant-based beverages such as almond and oat. Fluid milk consumption has fallen annually for more than three decades, USDA figures show. Given the trends, last year Dean took a majority stake in the Good Karma Foods company, which makes dairy-free products from flax seeds.

HP Hood LLC, a Massachusetts-based dairy company, has started selling oat-based beverages and beefed up advertising of its fluid milk. The spending is helping to drive sales, but the company still expects milk market-share to erode further, said Chris Ross, marketing vice president.

"Over the next five years, we still think we will see declines," Mr. Ross said. "The market is really changing."

Cara Lombardo contributed to this article.

Write to Heather Haddon at heather.haddon@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
CLASS III MILK FUTURES (DC) - CMG (ELECTRONIC)/C1 0.11% 17.59 End-of-day quote.27.04%
CLASS IV MILK?FUTURES (GDK) - CMG (ELECTRONIC)/C1 0.24% 16.7 End-of-day quote.10.06%
DEAN FOODS CO 12.26% 1.19 Delayed Quote.-68.77%
DRY WHEY?FUTURES (DY) - CMG (ELECTRONIC)/C1 0.00% 36.85 End-of-day quote.-21.91%
MILK (CLASS III) (DA) - CMR (FLOOR)/C1 -0.23% 17.57 End-of-day quote.0.00%
NONFAT DRY MILK FUTURES (GNF) - CMG (ELECTRONIC)/C1 0.00% 102.9 End-of-day quote.13.09%
VALUE8 N.V. 0.36% 5.58 Delayed Quote.17.30%
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Financials (USD)
Sales 2019 7 475 M
EBIT 2019 -81,1 M
Net income 2019 -176 M
Debt 2019 946 M
Yield 2019 2,53%
P/E ratio 2019 -0,62x
P/E ratio 2020 -1,01x
EV / Sales2019 0,14x
EV / Sales2020 0,14x
Capitalization 109 M
Duration : Period :
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Technical analysis trends DEAN FOODS CO
Short TermMid-TermLong Term
Income Statement Evolution
Mean consensus HOLD
Number of Analysts 9
Average target price 1,47  $
Last Close Price 1,19  $
Spread / Highest target 68,1%
Spread / Average Target 23,4%
Spread / Lowest Target -16,0%
EPS Revisions
Ralph P. Scozzafava Chief Executive Officer & Director
Jim L. Turner Non-Executive Chairman
Jody L. Macedonio Chief Financial Officer & Executive Vice President
John R. Muse Independent Director
V. Janet Hill Independent Director
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