* Q1 EPS 23 cents ex-items vs Street view 28 cents
* Q2 view below Street, scraps full-year earnings forecast
* May refinance debt sooner, will cut 350 to 400 more jobs
* Shares down more than 28 percent (Updates share activity to market close)
By Brad Dorfman
CHICAGO, May 10 (Reuters) - Dean Foods Co (DF.N) posted an unexpectedly sharp drop in quarterly profit and withdrew its full-year forecast as its milk prices come under pressure from private-label brands, sending its shares down more than 28 percent to a 10-year low.
The largest U.S. dairy company also said it would not meet its goals for cutting debt, so it is considering refinancing its debt sooner than previously planned.
The results were the second-straight disappointing quarter for Dean, which was surprised by a sharp increase in the cost of butterfat in the fourth quarter.
“The fact that they are the leading player in the market and they are having such a hard time managing these competitive pressures is a concern,” said Morningstar analyst Erin Swanson.
Dean said it expects earnings of 23 cents to 28 cents a share in the current second quarter, while analysts were looking for 41 cents per share, according to Thomson Reuters I/B/E/S. It suspended its full-year forecast, citing uncertainty over when business conditions will improve.
The price war among retailers’ private-label products has forced Dean to choose between two undesirable alternatives -- cutting its own prices, which hurts margins, or losing market share, Chief Executive Gregg Engles said on a conference call with analysts.
Dean milk costs an average of around $2.25 a gallon, while store brands are running at about $1.75 a gallon, the company said.
“Price gaps are at levels that our brands cannot support,” he said.
Retailers will often cut prices on staples like milk, making little or no profit in hopes of making their money on other items shoppers buy.
Dean, meanwhile, sees only the hit to its milk business, not the benefit of other sales.
Dean said it would eliminate 350 to 400 jobs -- in addition to 150 announced previously -- to speed up cost-cutting.
First-quarter profit fell to $43.2 million, or 24 cents a share, from $76.2 million, or 48 cents, a share a year ago.
Excluding one-time items, earnings were 23 cents a share. On that basis, analysts on average had forecast 28 cents, according to Thomson Reuters I/B/E/S.
Sales rose to $2.97 billion from $2.70 billion amid rising milk costs, which are typically passed on to consumers. Analysts had forecast $2.93 billion.
In the fresh dairy business, “the road ahead appears rocky, with a retail price environment that appears unsustainable, but has not yet abated,” Engles said in a news release.
The issues in the main dairy business offset a 54 percent jump in profit in the company’s WhiteWave-Alpro business, which sells branded products like Horizon Organic milk and Land O‘Lakes creamers.
In February the company forecast 2010 earnings of $1.54 to $1.64 per share, excluding one-time items. At the time, analysts were expecting $1.69.
Dean said free-cash flow fell to $28 million in the quarter from $146 million a year earlier. The company had about $4.16 billion in debt at the end of the quarter.
Dean shares closed down $4.16 at $10.47 on Monday on the New York Stock Exchange and traded as low as $10.35 during the day. (Reporting by Brad Dorfman; Editing by John Wallace, Dave Zimmerman, Tim Dobbyn and Richard Chang)