Dean Foods Co. posted an unexpectedly low, 24-percent drop in fourth-quarter profit, squeezed in part by consumers’ ongoing shift toward cheaper, private-label milk, butter and cheese.
Net income fell to $50.3 million for the three months ended Dec. 31 from $66.4 million in the same period a year earlier, Dallas-based Dean Foods said in a statement Feb. 10. Sales declined 2.6 percent, to $3 billion. Dean Foods’ shares plunged 14 percent.
While Dean Foods’ fluid milk sales volume rose 4.6 percent in the fourth quarter, that was offset as the company passed through lower prices. A sharp increase in butterfat prices hurt profit, and increasing demand for less-profitable private-label products crimped sales.
“Customers are aggressively shopping for private labels on their milk,” Dean Foods Chief Executive Officer Gregg Engles and Chief Financial Officer Jack Callahan said during a conference call with analysts last week.
Dean Foods’ shortfall reflects the broader struggles of the economy, as fears of job losses prompt consumers to trade down in the grocery aisles, analysts say. Major food retailers are heavily promoting private-label products and squeezing vendors for deals.
“The move to private label… is all about squeezing out a few more pennies on margins,” said Andrew Novakovic, Director of Cornell University’s Dairy Markets and Policy program.
“Retailers are really working hard to get people in stores,” Novakovic said. “Whatever kind of market power we think a company like Dean Foods has, they’re just one of hundreds of suppliers for retailers.”
While Dean Foods sells private label products through its WhiteWave-Morningstar unit, that business accounted for only about a fourth of overall sales of $11.2 billion in 2009.
On a per-share basis, Dean Foods net income was 31 cents a share, excluding one-time items. Analysts were expecting profit of about 38 cents a share.
The company forecast earnings of $1.54 to $1.64 a share for 2010, below the average analyst estimate of about $1.69.
Dean Foods said it expects profit to improve later in the year, though it still faces a “challenging” market.
The dairy industry is “still adjusting to oversupply,” Engles and Callahan said during the call. “We’re going to continue to see pressure on the supply side in 2010.”
During the fourth quarter, Dean Foods said its “Class I Mover” milk averaged $13.07 per hundred pounds during the quarter, down 19 percent from a year earlier.
For this year, Dean Foods expects milk prices in “a modest range up or down from current levels,” company executives said, adding that it doesn’t expect milk price volatility to be a factor.