Dean Foods filed for bankruptcy November 12, 2019 with an FHR of 17, Very High Risk. They were once America’s largest dairy producer, but their FHR has been deteriorating for the past 3+ years. What happened? They’ve struggled as more consumers have turned to nondairy milk alternatives or bought private label products. Making matters worse, large retailers such as Walmart began producing their own milk at a cheaper cost. According to the U.S. Department of Agriculture, America’s consumption of milk has decreased by 26% over the past two decades. This resulted in Dean Foods canceling several hundred contracts and losing business with large chains such as Food Lion.
FHR at time of default: 17, Very High Risk
What the ratings tell you.
Dean Foods FHR has declined significantly from a 56 (Medium Risk) to a 17 (Very High Risk) in less than 3 years, putting their Estimated Probability of Default at 18.11%. This steady and heavy decline signals the need for investigation and risk mitigation.
To provide some context, we can see the Sector – Global Food, Beverage, and Tobacco has remained steady with an FHR of approximately 51.
Where our analysis tells the story.
The performance scores provide more granularity as to where Dean Foods struggled.
The scores clearly outline that Dean Foods struggled to generate profitability after 2016 and couldn’t recover. The rapid deterioration is also presented through their Earning Measures. Below we see a sharp decline in both Operating Profit and Net Profit Margins. With these figures in the negatives for multiple quarters, they were operating at a loss for quite some time.
Operating at a loss causes significant downstream impact. One of the things operating profit is used for is covering non-operating expenses such as debt and interest.
Our Financial Dialogue recommends companies be able to cover their interest with operating profit at least once. Dean Foods’ can’t even do so once, while the sector can do so at least 4 times. This caused them to dip into capital; therefore, increasing debt and decreasing assets. We can see that the leverage performance score changed from adequate to weak in 2018 and is also a priority item for financial review. All these factors contributed to their inevitable bankruptcy.