"What price growth?"
It's the question every small company needs to ask itself if it wants to ultimately become big. At the small dairy concern LifewayFoods
Value investors like yours truly were dismayed to see that Lifeway's recently released first-quarter earnings report showed a huge jump in sales. but a small decline in profits. We like our profits up front, thank you very much, and leave the hope of owning a market-dominator-of-tomorrow to the folks over at Motley Fool Rule Breakers.
For better or worse, however, that doesn't appear to be the thinking at Lifeway Foods. Although it's already the largest kefir maker in the country, Lifeway aims to utterly dominate the market by expanding sales at an ever-accelerating clip. In quarter one, for instance, Lifeway boosted its sales 18% over the year-ago results, with almost the entire increase coming in the form of greater volumes sold rather than price increases. If you net out a one-time sale made to Supervalu's
But such growth comes at a cost. In Lifeway's case, it was a 31% increase in operational costs, primarily in the form of a stepped-up marketing blitz to advertise its product. ("Kefir" still isn't quite a household name in the United States.) Another increased cost, albeit one outside Lifeway's control, was the continued high price of the raw milk that is fermented to create Lifeway's kefir. Raw milk prices were roughly 25% higher in Q1 2005 than one year ago, contributing to a 23% rise in raw-materials costs for the company.
Combine the higher costs of both making stuff and advertising it, and you're left with this sour result: Lifeway earned just $725,000 last quarter, $40,000 less than one year ago.
Overall, Lifeway's story sounds a lot like what larger rival Dean Foods
If only free cash flow and profits growth could again match that performance, Lifeway would rise to become the cream of the dairy industry's crop.
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