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Morton Grove, Illinois-based Lifeway Foods Inc. (LWAY - Snapshot Report) posted earnings of 6 cents per share in the third quarter of 2011, ahead of the Zacks Consensus Estimate of break-even result and the year-ago quarter earnings of 5 cents per share. The better-than-expected results were attributable to double-digit top-line growth.

Lifeway Foods primarily engages in manufacturing dairy and non-dairy health food products. The company reported gross sales of $19.4 million in the quarter, up 22.0% 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 attaining immense popularity among kids given their health benefits.

During the quarter, gross profit increased 19% year over year to $6.2 million, but gross margin contracted 100 basis points (bps) to 35% attributed to a rise in transportation cost arising from higher fuel prices and 30%–40% surge in the cost of milk, the most crucial ingredient for the company.

Operating expense spiked 300 bps year over year to 26% during the quarter due to higher selling, general and administrative expenses particularly related to increased investment in marketing and advertising for brand awareness.

Operating income of the company fell 15.8% to $1.6 million due to an upside in operating expenses.

Financial Position

As of September 30, 2011, Lifeway Foods had cash and cash equivalents of $0.9 million versus $0.8 million in the year-ago quarter. As of September 30, 2011, net cash provided by operating activities was $2.6 million, down $1.4 million from the prior-year period. 

Our Take

Lifeway reported better-than-expected results and continues to focus on distribution of its product Frozen Kefir, which has been a huge success since its launch in April, 2011. The company plans to introduce a variety of new offerings in the frozen Kefir line in 2012 and also believe that the product has strong growth potential in the international market over the long term. Going forward, the company also continues to expand in both domestic and international markets and expects to overcome cost headwinds. Hence, we expect estimates to go up in the coming days. The Zacks Consensus Estimates for 2011 and 2012 are pegged at 30 cents and 36 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 - Analyst Report) reported adjusted earnings of 18 cents per share for the third quarter fiscal 2011, above the Zacks Consensus Estimate of 15 cents a share.

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