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Weak milk sales, high costs eat into Dean Foods’ results

Dean Foods Products Ahead Of Earnings ReleaseDean Foods Products Ahead Of Earnings Release
Cartons of WhiteWave Foods Horizon Organic milk, one of Dean Foods, are displayed for sale at a supermarket.Photo by Bloomberg—Getty Images

A slowdown in the cereal aisle and record high raw milk costs have eaten into Dean Foods’ second-quarter results, leading the milk producer to issue a wider-than-expected loss.

Dean Foods (DF) said a key measure of raw milk costs jumped 31% in the second quarter from a year ago, an average that was the highest level “in the history of the U.S. dairy industry.” As a result of those high milk costs, the company’s gross profit margin shrunk to 16.7% from 21.2%.

“We are clearly disappointed with our second quarter results,” Chief Executive Gregg Tanner told analysts during a conference call. “This is the most difficult operating environment we have ever experienced as a company.”

Executives listed several challenges in the quarter: industry-wide fluid milk sales slowed, raw milk costs remained at or near all-time highs, and butterfat prices also jumped sharply, pressuring margins for ice cream. Dean Foods’ fluid milk volume slid 4% in the second quarter, although Dean Foods slightly expanded market share domestically. Dean Foods executives said they couldn’t even begin to predict when milk costs would improve, saying this pricing environment has never been experienced before.

Dean Foods is the nation’s largest processor and direct-to-store distributor of fluid milk, with more than 50 local and regional dairy brands. It also sells ice cream, juices, teas and bottled water, though fluid milk makes up the bulk of the products Dean Foods sells.

Milk sales are dented by a slowdown in the cereal aisle. General Mills (GIS) and Kellogg (K) have reported weaker cereal sales in recent years, with some speculating the industry is facing a greater competitive challenge from quick-serve restaurants and as more people shift to prefer more protein in their diets.

Overall, Dean Foods reported an adjusted second-quarter loss of 14 cents a share, worse than the loss range of two cents to eight cents that Dean Foods had estimated earlier this year. Due to the volatility of dairy commodity costs, the company withdrew its full-year guidance.

On a somewhat positive note, Dean Foods says efforts to cut costs put it in a better position to face such high milk costs. The company in early 2013 announced a plan to close up to a dozen manufacturing facilities by the middle of this year and has made good on that promise, including the closure of four of the 12 facilities occurring in June and July of this year.