Dean Foods Co. fell the most since August as plans by Wal-Mart Stores Inc., its largest customer, to build a milk-processing plant in Indiana crimped the outlook for sales.
Wal-Mart will start building the plant, expected to be one of the largest in the industry, this summer and begin processing in 2017 to supply white and chocolate milk to its stores in Indiana, Illinois, Michigan, Ohio and Northern Kentucky, the Bentonville, Arkansas-based retailer said in a statement on March 18. The "decision to in-source milk processing is clearly an unfavorable development" for Dean, given that the retailer made up 16 per cent of 2015 sales, Matthew Grainger, a New York-based analyst for Morgan Stanley, said in a report Monday.
"Over the next few months we’ll continue to evaluate our network and put plans together to optimize accordingly, including taking into account Wal-Mart’s decision," Dean spokesman Jamaison Schuler said in an e-mailed statement on Tuesday. "Because of our size and scale, over the next 18 months our network will be able to adapt and execute our plan to minimize the impact on our business."
Dean shares dropped 9.5 per cent to $17.42 at 11:20 am in New York. The stock slumped as much as 11 per cent, the biggest intraday loss since August 10, and is down for a fourth straight session.
The more than 600 Wal-Mart stores and Sam’s Club locations that are expected to be supplied by the plant "represent a meaningful portion" of total volume for Dallas-based Dean, the largest US dairy processor, Grainger said. The impacted gallons are mostly skewed toward "lower margin" so-called private label milk, which represents most of Wal-Mart’s milk sales, Grainger said. Thirteen of Dean’s 67 plants are located in the affected states, he said.
Dean has a "a solid strategy" for growth through its brands, marketing and logistical excellence as well as a focus on growing retail and food service business, Schuler said.
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