Morton Grove, Illinois-based Lifeway Foods Inc. (LWAY) posted earnings of 2 cents per share in the second quarter of 2011, missing the Zacks Consensus Estimate of 6 cents per share and the year-ago quarter earnings of 7 cents per share. The lower-than-expected results were due to higher commodity costs.
Lifeway Foods primarily engages in manufacturing dairy and non-dairy health food products. The company reported gross sales of $19.9 million in the quarter, up 28.0% year over year. The upside in revenue was attributable to higher sales and increased awareness for its key product Kefir and other new product lines including Bio Kefir and Frozen Kefir. The company’s products are also becoming increasingly popular among kids given their health benefits.
During the quarter, gross profit declined 3% year over year to $5.3 million and gross margin contracted 100 basis points (bps) to 29% attributed to a rise in transportation cost arising from higher fuel prices and 35%–45% surge in the cost of milk, the most crucial ingredient for the company.
Operating expense spiked 100 bps year over year to 25% during the quarter due to higher selling, general and administrative expenses particularly related to the company’s 25th anniversary celebration with a nationwide market tour. The company intends to further invest in marketing initiatives to increase brand awareness.
Operating income of the company fell 68.2% to $0.7 million due to lower gross profit and upside in operating expenses.
Financial Position
Lifeway Foods ended the quarter with cash and cash equivalents of $1.4 million versus $0.9 million in the year-ago quarter. As of June 30, 2011, net cash provided by operating activities was $0.8 million, down $1.4 million from the prior-year period.
Our Take
Lifeway expects a strong 2011 with robust sales benefiting from the launch of the new product Frozen Kefir and increased awareness. Going forward, the company continues to expand in both domestic and international markets and expects to overcome cost headwinds.
However, the company reported lower-than-expected results in the quarter and hence, we expect estimates to go down in the coming days. The Zacks Consensus Estimates for 2011 and 2012 are pegged at 37 cents and 38 cents a share, respectively.
Lifeway currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. We are also maintaining our long-term Neutral recommendation on the stock.
One of Lifeway Foods’ primary competitors, Dean Foods Co. (DF) reported adjusted earnings of 18 cents per share for the second quarter fiscal 2011, above the Zacks Consensus Estimate of 17 cents a share.
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