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Lifeway Tops, Revenue and Margin Up

DF LWAY

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The Morton Grove, Illinois-based Lifeway Foods Inc. (LWAY - Snapshot Report) posted earnings of 13 cents per share in the second quarter of 2012, which surpassed the Zacks Consensus Estimate of 6 cents per share. Besides, the results were also significantly ahead of the year-ago quarter earnings of 2 cents per share. The better-than-expected results were attributable to double-digit top-line growth and margin expansion.

Lifeway Foods is primarily engaged in manufacturing dairy and non-dairy health food products. The company reported gross sales of $22.7 million in the quarter, up 14.0% year over year. 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 and ProBugs organic Kefir for kids.

During the quarter, gross profit expanded 46% to $8.0 million and gross margin enhanced 900 basis points (bps) to 39%, attributed to a 20% dip in conventional costs, the largest ingredient for the company, partially offset by a 5% hike in the cost of milk.

Operating expense jumped 2% year over year to $4.9 million during the quarter, due to higher general and administrative expenses particularly related to increased investments in marketing and advertising for brand awareness. The upside was partially offset by a dip in selling and amortization expenses.

Operating income rose to $3.1 million as compared to $0.7 million in the year-ago quarter, due to an upside in gross margin.

Financial Position

As of June 30, 2012, Lifeway Foods had cash and cash equivalents of $2.0 million versus $1.4 million at June 30, 2011. During the quarter, net cash provided by operating activities was up $3.3 million to $4.1 million and shareholders’ equity increased $2.5 million to $37.1 million.

Our Take

Although, Lifeway reported better-than-expected results, it still continues to focus on the distribution of its Kefir line, which is Lifeway's flagship product in both the domestic and international markets. Management remains optimistic for 2012 and is committed to expand and enhance business as well as shareholders’ value. Additionally, margin expansion in the reported quarter was encouraging; however, the price of milk is expected to be a headwind through the rest of 2012. Hence, we expect estimates to go up in the coming days. The Zacks Consensus Estimates for 2012 and 2013 are pegged at 25 cents and 31 cents a share, respectively.

Lifeway, which competes with Dean Foods Co. (DF - Analyst Report), currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We are also maintaining our long-term Neutral recommendation on the stock.

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