Dairy and non-dairy health food products manufacturer
Lifeway Foods Inc.
) second-quarter 2013 earnings of 9 cents per share declined
30.8% year over year. Earnings per share also missed the Zacks
Consensus Estimate by a nickel. Lower gross margin primarily due
to higher cost of milk resulted in the earnings shortfall.
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Gross sales in the quarter rose 14.0% year over year to $25.8
million driven by increased demand for its flagship product
'Kefir'. Gross sales however lagged the Zacks Consensus Estimate
of $28.0 million.
Including discounts and allowances, net sales grew 12.0% to $23.1
million. The total allowance for promotions and discounts in the
second quarter of 2013 was about 10.7% of gross sales compared
with about 9.5% of gross sales in the same period last year.
During the quarter, gross profit was flat at $7.6 million. Gross
margin fell 400 basis points (bps) to 33%, hurt mainly by a 20%
increase in the cost of milk, which is Lifeway's key input. The
increase was in stark contrast to management's expectation of
Total operating expenses increased 14% to $5.1 million on account
of higher general, administrative and selling expenses. This
coupled with lower gross margin led to a contraction (439 bps) in
operating margin to 10.8%.
Lifeway strives hard to gain market share within its expanding
health and wellness products. It continues to achieve new
distribution contracts in the US with new and existing retailers.
It also intends to take kefir probiotic beyond the dairy aisles
to other segments of a store. The company presently dominates the
kefir market in the U.S., accounting for at least 95% of the
In May 2013, Lifeway acquired the Golden Guernsey dairy plant in
Wisconsin. This acquisition will provide the company with
additional manufacturing capacity for its booming kefir-based
business and result in incremental sales from 2014 onwards.
Going forward, in order to capitalize on the existing
opportunities, Lifeway is trying to spread its presence
internationally. It seeks to grow in new markets like UK as
Europe boasts the biggest market for organic food and beverages
in the world and accounts for almost 50% of organic product sales
globally. The market is expected to grow at an estimated compound
annual growth rate (CAGR) of 7.5% from 2012 to 2016.
Although management sounded hopeful about lower input costs for
the upcoming quarters, it refrained from guiding on the expected
cost of milk. This factor slightly limits near term visibility on
the stock. However, the company's long-term prospects remain
intact bolstered by increasing health consciousness among
Lifeway currently retains a Zacks Rank #3 (Hold). However, some
players in the restaurant industry look attractive at current
levels. These include The
The Cheesecake Factory Inc.
) and B
urger King Worldwide Inc.
) all carrying a Zacks Rank #2 (Buy).