LWAY | Sitting on a Gold Mine with no Tools

Lifeway Foods (LWAY) is on the Hedgeye Consumer Staples LONG bench.

 

LWAY has been on our “to do” list for some time.  We have had it on our LONG bench. Following WWAV’s acquisition of the Wallaby Yogurt Company, which sells Kefir beverages there might be some increased interest in LWAY. 

The probiotic segment is at the early stages of growth and looks to be the next major growth category within the $275 billion “fortified/functional foods” segment (according to Euromonitor.)  In a recent survey by NPD Group, 31% of Americans said they wanted to ingest more probiotics.  Therefore, it’s not surprising to know that three companies (Nestle, General Mills and Danone) are aware of this opportunity and spending significant R&D dollars aimed at this segment. Danone is the world’s largest yogurt producer and none of its products sells better than Activia, the probiotic-enhanced yogurt launched in 1987.  In 2014, sales of Activia were $2.4 billion.    

Lifeway, a market leader in the Kefir segment, is dealing with an onslaught of competition from smaller players within the natural channel. Brands such as Siggi’s, Wallaby, Goodbelly, and a few other regional brands. The fact is, competition comes where there is a good idea and prospect for growth. Lifeway and their competition are early in the growing market of probiotics, but the race is on to see who will dominate the category.

It does not take long to realize that Lifeway’s current management team does not have the skill set capable of keeping them in the leadership position.  Significant changes are needed to take full advantage of the market opportunity.     

The LONG thesis on LWAY is predicated on the company being acquired, given the families control, it is unlikely they would give up control to an externally hired CEO. Current founders, the Smolyansky family, own 49.7% of the company, with co-founder Ludmila (mother) owning 44.7% of that, working in an advisory role. Daughter, Julie is the President, CEO & Director and the son, Edward, is the COO, CFO, Secretary, Treasurer & CAO. They are clearly in way over their head, and will have trouble taking this company to the next level on their own. Their father (deceased in 2002) has led them to a gold mine, but they don’t have any tools to get the gold.

The x-factor is that Danone owns 21.1% of the company currently (acquired the stake in 1999), and although they shrugged off the idea of acquiring this business in the past, they have to be thinking about it more seriously now. When thinking about other possible acquirers, General Mills (GIS) comes to mind, given their strong presence across the yogurt category, they don’t yet have a Kefir product. They could make one themselves utilizing the Liberte or the Yoplait brand, but Lifeway would afford them immediate expertise and distribution.

LWAY hasn’t reported numbers for 1Q15 or 2Q15 and are still working through it with the SEC. We have received word from their IR representative that this issue is as close as a month from being resolved and they will soon be in compliance with the SEC. Although we have no picture on how the business is doing over roughly the last 6 months, we are confident in the growth trajectory in the category they participate in as a leader.

We would tread with caution on this one. Although this is the top brand in the category, it is not possible for us to endorse the management team as it stands today.  The market place is getting more competitive so we are waiting and watching to see how things unfold.  Additionally, LWAY needs to be in compliance with its filings and we need to get a better handle on the numbers before going all in on this one.