Shares in Dean Foods ended their run of outperformance after the dairy group marred better-than-expected profits by revealing the loss of part of a major supply deal, prompting it to accelerate a programme of cost cuts.

The group, America's biggest dairy company, said its underlying earnings rose to $0.40 a share in the October-to-December period, from $0.28 a share the year before, and above Wall Street forecasts of a $0.30-a-share result.

The improvement, on underlying revenues up 8.4% at $3.42bn, reflected cost control and "strong pricing discipline" in the face of milk costs which - at $20.32 per hundredweight, as measured by the benchmark Class 1 mover segment – were 8% higher than a year before.

However, Dean's shares plunged nonetheless after the group revealed it had lost "a portion of" a major supply contract - a miss which will  accelerate to "low single digits" its decline in fluid milk volumes this year, from a rate of 0.9% in the latest quarter.

The contract,for private label supplies, was with an unnamed customer which had switched some of its volumes from a national to regional basis. 

'Volumes to underperform'

The loss of business meant that "we expect our volumes to underperform the industry in 2013", a Dean spokesman told investors.

However, the impact of the loss on operating profits would be "relatively modest" thanks a decision to accelerate a cost-cutting drive which, along with a company restructuring, has helped rescue Dean from a period of poor performance crystallised in a $2.14bn loss for 2011.

"Our primary focus for the balance of 2013 is on the elimination of costs, particularly fixed costs," Gregg Tanner, the Dean Foods chief executive, said.

"We anticipate expediting our ongoing cost reduction efforts, including the closing of 10-15% of our plants to remove fixed costs and eliminating a significant number of distribution routes."

Shares lose traction

Indeed, the group said that its overall operating income for 2013 looked set to see a "low-to-mid single digit increase" despite the drop in volumes.

However, its shares plunged more than 12% in early deals in New York, wiping more than $300m from its stockmarket value, before recovering some ground to close at $16.70, down 9.2% on the day.

The decline all but wipes out continued gains made by Dean shares this year, following a 2012 rally which saw them soar by nearly 50%, far outpacing a 13% rise in the S&P 500 index, as investors applauded its efforts to hive off its WhiteWave and Morningstar businesses, slashing its debt burden.