Lifeway Foods Inc. - LWAY

Continued weakness since announcing Q1 results

Shares of Lifeway Foods (LWAY) are currently down over 15%, marking a 40% decline since I first pointed out the name to subscribers on April 9th, and that decline expands to greater than 50% since announcing Q1 2024 results back on May 14th. While I am not privy to everyone out there making comments on the name, there has been no additional news to account for the decline, with analysts maintaining their ratings and even increasing price targets since their earnings release.

LWAY announced revenues had increased close to 18% year over year, driven by continued expansion of their Kefir-based products. Gross margins likewise expanded year over year by 400bps, and net income more than doubled. So what went wrong with the report?

While revenues did expand by 18% overall, all of the growth came from their Kefir product, which increased revenues by 23%. Sales of their other dairy products including cheese, drinkable yogurt, and children’s products +declined in aggregate on a year over year basis.

Likewise gross margins did expand by 400bps year over year, but they declined by 220bps sequentially and 300bps since peaking during Q2 2023. To anyone out there buying milk on a regular basis the decline in margins as milk prices increase shouldn’t be too much of a surprise.

Operating expenses increased in-line with revenues, which was fine, but increased almost $2M sequentially after being relatively flat for a couple of quarters. The company partly blames the increase on the continuing intra-insider feud happening over the direction and control of the company.

Lower gross margins and higher operating expenses led to a decline in expected profitability, with the company announcing net income of 16 cents a share vs. the estimate by analysts closer to 24 cents a share.

It’s also tough to say that short interest is a factor, since the increase over the past couple of months has been fairly modest, rising from 106k to 340k shares.

The CEO did sell a slug of stock post-earnings at $18.02, while mother Ludmila appears to have momentarily halted her sales which she mildly pressed as the stock ran higher into the $20’s.

So what’s with the large decline? Were first quarter results really that big of a disappointment?

Second quarter results just may prove enlightening.