Second quarter of 2011 gross sales increased 28% to $19.9 million compared to $15.5 million for the second quarter of 2010. This increase is primarily attributable to increased sales and growing awareness of benefits of Lifeway's flagship line, Kefir, as well as ProBugs® Organic Kefir for kids, and the successful introduction of new product lines such as Bio Kefir(TM). In addition, Lifeway Frozen Kefir contributed approximately $0.2 million in sales during the second quarter of 2011. The frozen kefir line was launched in April 2011.
Second quarter total consolidated net sales increased $3.9 million, or approximately 27%, to $18.2 million from $14.3 million in the second quarter of 2010. Net sales are recorded as gross sales less promotional activities such as slotting fees paid, couponing, spoilage and promotional allowances as well as early payment terms given to customers.
Gross profit for the second quarter of 2011 decreased 3% to $5.3 million, compared to $5.5 million in the second quarter of the prior year. The company's gross profit margin decreased to 29% in the second quarter versus 39% in the second quarter of 2010. Gross profit was negatively impacted primarily by increased transportation and other petroleum based production supply costs, as well as the increased price of conventional milk, the company's largest raw material. The cost of milk was approximately 35 to 45% higher in the second quarter of 2011 compared to the same period in 2010.
Operating expenses as a percentage of net sales were approximately 25% during the second quarter of 2011 compared to approximately 24% during the same period in 2010. The increase was primarily due to a $1.0 million increase in selling expenses to $2.8 million, of which $0.7 million was directly attributable to the company's 25th Anniversary Cross Country Mobile Tour in the second quarter of 2011. The company views this as a non-recurring advertising expense.
Operating income decreased to $0.7 million in the second quarter of 2011 compared to $2.2 million in the same period last year. The decrease in operating income is due to the lower gross profit and increased operating expenses in the second quarter of 2010 as compared to the second quarter of 2011.
Provision for income taxes was $0.4 million, or a 59% effective tax rate, for the second quarter of 2011 compared to $1.0 million, or a 47% tax rate, during the same period in 2010. In addition to the higher tax rate, the company's tax expense was higher due to a Minnesota State Department of Revenue audit from tax years 2006 to 2009, which resulted in approximately $0.1 million in additional taxes being paid in the second quarter of 2011.
The company reported net income of $0.3 million or earnings of $0.02 per diluted share compared to net income of $1.2 million or earnings of $0.07 per diluted share in the second quarter of 2010.
Julie Smolyansky, CEO of Lifeway Foods, Inc. commented, "We are extremely pleased with our ability to continue to realize record sales results as we capitalized on the opportunity to increase customer awareness and further increase our retail distribution with our 25th anniversary mobile tour and the launch of our frozen kefir."
Smolyansky continued, "Going forward, we expect to achieve record sales and believe the cost and expense headwinds experienced in the second quarter are behind us. We will continue to manage the controllable aspects of our business as we take advantage of the tremendous opportunity to expand distribution in the U.S. and internationally with Lifeway's leading market position which should lead to strong sales, profitability and cash flow generation long-term."
From the August 16, 2011, Prepared Foods' Daily News.