Do you like a good fairy tale?
Lifeway Foods Inc. (LWAY-Nasdaq), a company that makes probiotic products, started off like one. Ludmila and Michael Smolyansky, immigrants from Kyiv, arrived in the United States in 1986 and started producing kefir – a fermented milk drink popular in Eastern Europe – in the basement of their Illinois home. Only a couple of years later, they took the company public at US$1 a share. Later, when Michael died, the business was passed on to their children, Julie and Edward, to operate; Julie is president and chief executive, Edward is chief operating officer.
Under their stewardship, the corporation grew handsomely, with the stock price exceeding US$21 in 2015, implying a market capitalization of about US$350-million. Alas, at that point the fantasy encountered the evils of reality and the price has since collapsed to around US$2; the market cap is now around US$31-million. Black ink turned red.
In addition, revenue is decreasing. It topped US$124-million in 2016 but skidded to US$103-million last year and something under US$100-million is expected for fiscal 2019. There is about US$3-million in the till, a bit skinny, but historically normal for this company. Fortunately, there is less than US$6-million in debt, with none of it short-term. The wolves should not be pawing on the door demanding their meat.
Insiders are very well vested, owning more than 73 per cent, with the Smolyansky family owning over half. That is the cause of some of the difficulty with this enterprise. Critics suggest that the business is run like an ATM for the family. Julie and Edward are paid US$1.26-million a year. Their mother, Ludmila, the chairwoman, draws US$1-million, plus US$50,000 a month for royalty payments. Those numbers eat into profit. Having so much owned by insiders also reduces the size of the public float and means daily volumes are nominal. This makes it hard for investors get in and out of the stock.
In 2015, Julie Smolyansky said she wanted Lifeway to be to kefir what “Hershey’s is to chocolate or Tropicana is to orange juice.” She has also suggested that US$500-million in annual revenue is the goal. That does seem rather magical given that the sales number is going in the wrong direction.
One reason for the revenue decline is that the company eliminated its television advertising. Perhaps this and the marketing in general will need to be reassessed and revamped. Homing in on a better plan should lead to vending more product. Given the success that the company previously had in more than doubling transactions between 2010 and 2014, this does seem reasonable.
The corporation is attempting to increase the top line by expanding their offerings. Kefir in beverage form is the mainstay of the organization with about 75 per cent of sales. There are various flavours and sizes. Along with those, there are yogurts, juices, Popsicles, bars, cheese and plant-based products.
This past summer, plans were announced to launch Kefir Minis, 3.5-ounce bottles that will work in lunches and for snacks, with kids naturally being the target market. For those longer in the tooth, there are plans to introduce a beverage through their Plantiful line of drinks, infused with cannabidiol (CBD). On several places on the website, it states the health benefit that their products “may include supporting immunity and a healthy digestive system,” Add in CBD and how could it be anything but a winner?
In 2015, there were rumours that management was exploring a sale. The most likely candidate was Danone SA, which owns more than 20 per cent of the company. Danone insisted that it was not interested, but it does have an agreement in place whereby the French giant can match any bid for Lifeway. Given how the price has swooned, perhaps a takeover might be more compelling. If not Danone, one of the other industry heavyweights might step up. Or course, whoever wants to acquire this company will have to go through the Smolyansky family, given their majority position.
Benj bought in less than a year ago at US$2.26, which is just below the current book value. He felt confident that there could be a fairy-tale ending when the price swiftly jumped like a beanstalk to US$4.75, but the uptrend toppled. He remains convinced that there could still be a happy ending.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter