www.globeandmail.com

The Globe and Mail
leaftheglobeandmail

 

Happily ever after could still be possible for Lifeway Foods

BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR


Wednesday, November 6, 2019

Do you like a good fairy tale?

Lifeway Foods, 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 years later, they took the company public at $1.00 a share (all figures USD). 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 $21.00 in 2015, implying a market capitalization of about $350 million. Alas, at that point the fantasy encountered the evils of reality, and the price has since collapsed to around $2.00; the market cap is now around $31 million. Black ink turned red.

Sales are decreasing. They topped $124 million in 2016 but skidded to $103 million last year, and the projection for fiscal 2019 is somewhere below $100 million.

There is about $3 million in the till — a bit skinny, but historically normal for this company. Fortunately, there is less than $6 million in debt, 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 percent, with the Smolyansky family owning over half — which is at the root of some of the trouble with this enterprise. Critics suggest the business is run like an ATM for the family.

Julie and Edward are paid $1.26 million a year. Their mother, Ludmila, the chairwoman, draws $1 million, plus $50,000 a month in royalty payments. Those numbers eat into profit. Having so much owned by insiders also reduces the size of the public float and means daily trading 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 $500 million in annual revenue is the goal. That does seem rather magical, with the sales number going in the wrong direction.

One reason for the drop in sales is that the company eliminated its television advertising. Perhaps this decision, and the marketing effort in general, will need to be reassessed and revamped. Homing in on a better plan should lead to vending more product. Given the company's success in more than doubling transactions between 2010 and 2014, this does seem reasonable.

The corporation is trying to increase the top line by expanding its offerings. Kefir in beverage form is the mainstay, accounting for about 75 percent 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).

In several places, the company's website touts the health benefits of its products, which “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, which owns more than 20 percent of the company. Danone insisted it was not interested, but there is an agreement in place allowing the French giant to match any bid for Lifeway.

Given the way the price has swooned, perhaps a takeover might be more compelling. If not Danone, perhaps another 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 $2.26, which is just below the current book value. He felt confident that there could be a fairy-tale ending when the price sprung up like a beanstalk to $4.75, but the uptrend toppled. He remains convinced that there could still be a happy ending.

back