Lousy news from Lifeway Foods (NASDAQ:LWAY): It seems yogurt drinkers are not immune to the global recession.
As is its wont, Lifeway announced its Q3 sales separately from its Q3 earnings last week, and the news wasn't good. Q3 sales rose just 15%. And while many companies would be ecstatic over such a number, it falls way below the 20%-plus growth rate we've all become accustomed to seeing from the little kefir maker (at least, up until last quarter).
Not that Lifeway didn't spin hard to make things look good. Here are a few factoids skimmed from the press release:
- At $11.3 million, the company remains within spitting distance of its announced goal of selling $1 million worth of tasty, drinkable, probiotic yogurt per week.
- The company's expanded tie-up with Costco (NASDAQ:COST) is helping to keep those sales pumping.
- And Lifeway has begun rolling out its new line of wellness bars (solid food -- what a concept!) through retailers such as Kroger (NYSE:KR).
- Furthermore, Lifeway stole a page from Amazon.com's (NASDAQ:AMZN) playbook, and has begun selling the bars direct to consumers via its website. I've seen this method of retailing work wonders for retailers in the past (Jos. A. Bank (NASDAQ:JOSB) being one famous example), and it could help reflate Lifeway's margins as well.
- Last but not least, a deflationary recession is starting to do what it does best -- reduce commodity costs. Lifeway says raw milk prices are down fully 25% year over year, and still falling.
The big question
But here's the key question: Will a reduction in milk costs, by reducing the pressure on gross margins, help to revive Lifeway's bottom-line profits growth?
Not necessarily. You see, Lifeway has promised to pass on raw materials savings in the form of "marketing and promotional activities." A pledge supported by CFO Edward Smolyansky saying that Lifeway: "aggressively promote[d] our products in the second half of the quarter." To me, this sounds like Lifeway is trading profit margin improvements for sales growth.
Unfortunately, this strategy appears to be having limited success, as 15% sales growth falls far short of the 20% growth Wall Street had been expecting. Will it be enough to garner the more-than-doubling in per-share profits that analysts expect? We won't know for sure til the earnings come out, but I'm not optimistic.
For more on the little dairy biz that could (at least until recently), read:
