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Dean Foods Caught In The Crossfire Of Walmart, Kroger's 'Price War'

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Dean Foods Caught In The Crossfire Of Walmart, Kroger's 'Price War'
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Bernstein said in a note on Thursday structural shifts in the retail environment could weigh on Dean Foods Co (NYSE: DF)'s stock, as emerging threat from hard discounters have led retailers such as Kroger Co (NYSE: KR) and Wal-Mart Stores Inc (NYSE: WMT) to compete more aggressively on price.

Accordingly, the firm downgraded the shares of Dean Foods.

Analyst Alexia Howard noted that the milk category is at the forefront of the price war, with companies increasing promotional spending on milk and have driven traffic into the stores using milk as a loss leader. This, according to the analyst, was reflected in Dean Foods' 13-percent year-over-year decline in margin over raw milk, as of July 2017.

Bernstein indicated that the last time when retailers used private label milk as a loss leader in 2010, seen as a result of a commodity cycle, Dean Foods' stock fell to a low of $7. However, the firm noted that the stock rebounded, as industry capacity was shuttered.

Meanwhile, the firm views the current aggressive milk pricing as a structural shift, as Walmart plans to open a new state-of-the-art facility later this year or early next.

See also: Retail Job Losses: Does This Point Toward Protracted Sectoral Weakness?

Specifically, the firm noted that the price differential between Dean Foods' branded milk and private label milk has widened, with the former's price premium over the latter increasing to more than 40 percent in July 2017.

"As the private label price is kept artificially low given competition among retailers, we expect Dean Foods to see its more profitable branded products lose share to private label," the firm said.

To prove its case, Bernstein pointed out that Dean Foods' branded milk market share dipped 40 basis point year-over-year as of July 2017, with volume down 7.5 percent.

Despite valuation remaining cheap, Bernstein believes the structural shifts in the retail environment would weigh on Dean Foods' earnings.

As such, Bernstein downgraded shares of Dean Foods from Market Perform to Underperform and lowered its price target from $18 to $13.

At Time Of Writing

  • Dean Foods shares were sliding 4.23 percent to $14.73.
  • Kroger was up 1.29 percent at $24.02.
  • Walmart was adding a more muted 0.76 percent to $79.50.

Latest Ratings for DF

DateFirmActionFromTo
Aug 2017BMO CapitalMaintainsMarket Perform
Aug 2017BMO CapitalMaintainsMarket Perform
Aug 2017Wells FargoDowngradesOutperformMarket Perform

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View the Latest Analyst Ratings

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