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Morton Grove, Illinois-based Lifeway Foods Inc. (LWAY - Snapshot Report) posted earnings of 12 cents per share in the first quarter of 2011, handily beating the Zacks Consensus Estimate of 7 cents and the year-ago quarter earnings of 11 cent per share. The better-than-expected results were due to double-digit growth in the top line and operating margin expansion.

Lifeway Foods engages in manufacturing dairy and non-dairy health food products. The company reported total revenue of $19.0 million in the quarter, up 19.0% year over year. The upside in revenue was attributable to higher sales and increased demand for its key product Kefir and new product lines such as Bio Kefir.

During the quarter, gross profit climbed 14% year over year to $7.3 million driven by a 5 % drop in cost of milk, the most crucial ingredient of the company. The cost of milk plunged due to the reclassification of Kefir drink from class 1 to class 2 by the United State Department of Agriculture (USDA), effective January 1, 2011.

However, gross margin dropped 100 basis points (bps) to 42% attributed to a rise in transportation cost arising from higher fuel prices. 

Operating expense plunged 140 bps year over year to 23.2% while advertising costs spiked 29% to $4.0 million during the quarter. The company will continue to invest in marketing initiatives to increase brand awareness.

Operating income of the company leaped 19% to $3.3 million and operating margin expanded 40 bps to 18.9% on the back of lower operating expense.

Financial Position

Lifeway Foods ended the quarter with cash and cash equivalents of $2.1 million versus $0.7 million in the year-ago quarter. As of March 31, 2011, net cash provided by operating activities was $1.2 million, up $0.5 million from the prior-year period. 

Outlook

Lifeway expects 2011 to be a strong year and remains optimistic regarding the launch of the new product Frozen Kefir, which will shipped in mid-April.

Our Take

The company reported better-than-expected results in the quarter and we expect estimates to go up in the coming days. The Zacks Consensus Estimate for 2011 and 2012 is pegged at 30 cents and 38 cents, respectively.

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

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