Lifeway Reports Loss in 4Q

Lifeway Foods Inc. ( LWAY - Snapshot Report ) posted a loss of 2 cents per share in the fourth quarter of 2011, substantially lagging the Zacks Consensus Estimate of earnings of 5 cents per share. The fourth quarter results were also wider than the prior-year loss of one cent per share. In 2011, earnings came in at 17 cents per share versus 22 cents per share in the prior year.

Gross sales in the reported quarter jumped 16.0% year over year to $18.7 million. In fiscal 2011, gross sale increased 21.0% year over year to $13.6 million. The upside in revenue was attributable to higher sales and increased customer acceptance for its flagship product Kefir as well as other product lines including Bio Kefir, ProBugs organic Kefir for kids and Frozen Kefir.

Inside the Headline Numbers

During the quarter, net sales leaped 14% to $16.8 million. Gross profit rose 27% year over year to $4.1 million while gross margin expanded 300 basis points (bps) to 23%, attributed to a decline in transportation cost and other fuel based inputs, partially offset by a 20% surge in the cost of milk, the most crucial ingredient for the company.

Operating expense, as a percentage of net sales, spiked 100 bps year over year to 25% during the quarter, due to higher expenses particularly related to increased investment in marketing and advertising for brand awareness.

The loss from operations was $0.5 million, flat year over year.

Financial Position

As of December 31, 2011, Lifeway Foods had cash and cash equivalents of $1.1 million versus $3.2 million in the year-ago period. Shareholders’ equity at the end of 2011 was $35.4 million as compared with $33.6 million in 2010.

The Morton Grove, Illinois-based company also remains focused on boosting shareholder value. Lifeway plans to initiate a dividend payout in the third quarter of 2012 and also approved a share repurchase program to buy back up to 200,000 shares in February.

Outlook

In the first quarter of 2012, the company expects net sales to rise 14% year over year to $21.0 million. The primary producer of dairy products anticipates gross sales of $100 million in 2012.

Our Take

Lifeway continues to focus on distribution of its product Frozen Kefir, which has been a huge success since its launch in April last year. 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. The dividend introduction in 2012 is also very encouraging.

However, the analysts’ estimates have not budged in the last 30 days, implying the absence of any near-term catalysts. The Zacks Consensus Estimates for 2012 is pegged at 29 cents a share.

Lifeway, which competes with Dean Foods Co. ( DF - Analyst Report ) , currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.