Lifeway Hits a Speed Bump

Mr. Market's been feeling sprightly this week, with the S&P 500 up over 3% in the last five days. Meanwhile, one stock in particular is lighting up the board. Lifeway Foods (Nasdaq: LWAY  ) , the little kefir maker that could (convince people to pay $3 for a quart of yogurt), has gained 10% in the last five trading days.

Lifeway's had a busy week so far, reporting Q4 2007 earnings on Monday, holding its conference call soon thereafter, and then immediately rolling into the new year with its Q1 2008 sales report on Tuesday. The news, however, looks more heterogeneous than homogenized to this Fool.

The year that was
Last year, Lifeway sold 40% more kefir, milk, and related dairy goods than it had in 2006 -- $38.7 million in all. New customers like Starwood Hotels' (NYSE: HOT  ) "W" chain are beginning to clamber aboard the kefir train, while existing customers such as Harris Teeter expand the number of kefir-related SKUs they pack onto their shelves. However, fourth-quarter sales were unmatched to full-year trends, although their 30% gain was still impressive. And the first quarter slowed sales once again, this time to 23%.

The year that will be
Management put a brave face on things, with CEO Julie Smolyansky observing that "sales picked up tremendously as the [first] quarter progressed and we are getting close to the $1 million dollar a week revenue threshold" that Lifeway said it is targeting. Investors should hope she's right, and that sales continue to rise going forward -- because the last six months sure look to me like a longish-term downtrend.

Profits, not sales
While the firms' sales growth indicates success, profits taste better to me than plain-vanilla sales. Earnings for the year were rose $0.02 per share to $0.19 -- 12% growth year over year, trailing sales' growth pace. Meanwhile, fourth-quarter earnings per share dropped by a penny; as for this year, well, we'll have to wait for Lifeway to elaborate on its sales report with actual profit numbers.

Milk mustache
We do know that early indications look good. Much of Lifeway's profit-eating problems last year can be laid at the barn door of the milk industry. On the earnings conference call, CFO Edward Smolyansky confirmed that the cost of milk last year was 60% above 2006 levels. Furthermore, milk reached record highs in the fourth quarter, spiking 110% year over year, which attributed to the disastrous fourth-quarter decline in profits.

Of course, all of this is old news. Lifeway reminded investors that the rise in milk prices should come as "no surprise to anyone" because it's "been in the news" for quite a while. Indeed, everyone who's anyone associated with dairy -- from Kraft (NYSE: KFT  ) to Dean Foods (NYSE: DF  ) to General Mills (NYSE: GIS  ) and even Starbucks (Nasdaq: SBUX  ) -- has complained about the phenomenon in recent quarters.

However, since February of this year, milk prices have been trending downward, and Smolyansky advised that we could reach May 2007 levels again -- a time when Lifeway was earning strong double-digit profit margins.

Potholes on the Lifeway
Doing a lot of reading between the lines, I get the impression that Lifeway is suffering from a form of corporate attention-deficit disorder. Hardly a quarter goes by without Lifeway announcing some new product invention: "La Fruta" yogurt targeted at Hispanic consumers one moment, "Lassi" Indian dairy drinks the next, and most recently, a kefir energy bar and a new "Starfruit" kefir cafe opening in Chicago, which sounds like a cross between Jamba Juice (Nasdaq: JMBA  ) and Starbucks.

Management talks a lot about the new initiatives when they're introduced, but they seem to fall off the radar a few months thereafter. Neither La Fruta or Lassi has received much public love from management. Given the size of these products' potential markets (Hispanic and Indian consumers in the U.S.), I think that's a mistake.

Meanwhile, by its own admission, Lifeway is putting the bulk of its advertising efforts behind its namesake kefir product, to the detriment of its other brands. Case in point, the 2006 acquisition of Helios secured Lifeway's dominance in the kefir market, but now that it's part of Lifeway, the Helios brand of kefir is booking only mid-single-digit sales gains for itself, since management isn't heavily marketing the brand.

Foolish takeaway
So can Lifeway find the gas in '08? If the declining milk-price trend holds true, it could provide the ignition for stronger profits this year. But I'm starting to doubt that management knows precisely where it's headed.


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