Lifeway Foods Reports Loss

Morton Grove, Illinois-based Lifeway Foods,Inc. (LWAY - Snapshot Report) posted a loss of 1 cent in the fourth quarter of fiscal 2010, below the Zacks Consensus Estimate of a profit of 6 cents and  the year-ago earnings of 1 cent per share. The lower-than-expected results were due to higher commodity costs.

Lifeway Foods engages in manufacturing dairy and non-dairy health food products.The company reported total revenue of $16.1 million in the quarter, up 11.0% year over year. The upside in revenue was attributable to higher sales and increased demand for its key product, Kefir.  

The company’s full-year earnings per share were 22 cents versus 33 cents in fiscal 2009. Revenues were $63.5 million in fiscal 2010, representing a year-over-year growth of 9.3%.

During the quarter, gross profit contracted 5% year over year to $3.0 million while gross margin dropped 301 basis points (bps) to 18.3% primarily due to a surge of 30% in the cost of milk, the most crucial ingredient of the company. 

Operating expense inched up 10 bps to 22% during the quarter credited to a rise in advertising expense. The company will continue to make investment in marketing initiatives to increase brand awareness.

Financial Position

Lifeway Foods ended the year with cash and cash equivalents of $3.2 million versus $0.4 million in 2009. At the end of 2010, company’s net cash provided by operating activities was $5.6 million, down $2.0 million from the prior-year period. 

Outlook

Lifeway expects sales to jump 25% to $20 million in the first quarter of 2011, driven by marketing initiatives and new product introduction.

Our Take

The company reported results below expectations due to hike in milk prices, but with the new United State Department of Agriculture (USDA) classification of Kefir drink, the cost of milk is expected to plunge 10 to 15%. The USDA has exempted the Kefir beverage from class 1 to class 2 milk effective January 1, 2011. The estimates have not budged in the last 30 days. The Zacks Consensus Estimate for 2011 is pegged at 37 cents and for 2012 at 47 cents.

One of Lifeway Foods’ primary competitors, General Mills (GIS - Analyst Report) reported third quarter 2011 adjusted earnings of 56 cents, up 14% year over year and in line with the Zacks Consensus Estimate.

Read the full analyst report on GIS

Read the full analyst report on LWAY