Sara Lee net income declines in fiscal '06; guarded on guidance

by Josh Sosland
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CHICAGO — Net income of Sara Lee Corp. in the fiscal year ended July 1 was $555 million, equal to 72c per share on the common stock, down 23% from $719 million, or 91c per share, in fiscal 2005. Net sales were $15,944 million, down 0.5%.

In addition to special charges, results were adversely affected by higher taxes, lower operating segment income and higher interest expense.

"Even as we faced challenges in our businesses this year, we saw important early success," said Brenda C. Barnes, chairman and chief executive officer. "Our Food & Beverage business in North America contributed greatly with increased sales and base business results in meats and bakery segments."

With the financial results, Sara Lee issued guidance for fiscal 2007 and was more cautious in its longer-term guidance.

In the fourth quarter of fiscal 2006, ended July 1, Sara Lee net income was $8 million, or 1c per share, versus a loss of $148 million in the fourth quarter of fiscal 2005. Sales were $4,100 million, up 1.8%.

From an operating income perspective both the fourth quarter and the entire fiscal year was a difficult one for the food businesses of Sara Lee.

North American Retail Meats operating income in fiscal 2006 was $149 million on sales of $2,534 million, versus $179 million and $2,440 million, respectively.

In the fourth quarter, operating income was $32 million on sales of $640 million, versus $38 million and $619 million, respectively.

Accounting for the year-to-year change in operating income were special charges of $48 million in fiscal 2006 and a gain of $35 million in fiscal 2005. Excluding these items, the segment achieved a $53 million improvement, driven by higher unit volumes, favorable sales mix, lower meat costs and improved process efficiency, partly offset by higher energy, packaging and labor costs.

Sales in the fourth quarter were boosted by double-digit volume growth in Jimmy Dean breakfast sandwiches, Jimmy Dean Skillets and Hillshire Farm Ultra Thin deli meats.

An operating loss of $197 million was sustained by the North American Retail Bakery unit of Sara Lee Corp. in the year ended July 1, compared with a $4 million loss in fiscal 2005. Divisional sales were $1,871 million, up 3.2%.

In the fourth quarter ended July 1, an operating loss of $170 million was sustained, versus operating income of $14 million in the fourth quarter last year. Sales were $499 million, up 7%.

The operating loss reflected an impairment charge of $179 million following a review of regional bakery trademarks. The review was conducted as part of a Sara Lee restructuring plan.

Smaller restructuring charges netting $7 million also were included in the fourth quarter financial results, including $3 million for exit activities and business dispositions, $4 million for transformation charges and $1 million in accelerated depreciations, partly offset by a $1 million gain associated with an acquisition. In the fourth quarter of fiscal 2005, restructuring charges totaled $4 million.

"The remaining operating segment income decline of $2 million is attributable to improved performance in U.S. fresh bakery and Senseo (single-serve coffee, folded in the bakery results), offset by higher energy, packaging and labor costs," the company said.

Elaborating on the "improved performance," the company said its Sara Lee brand bread gained 2.1 share points in the fourth quarter versus the fourth quarter of fiscal 2005, based on Information Resources, Inc. data.

"Sara Lee Soft & Smooth made with whole grain remains the top-selling fresh bread stock-keeping unit in the nation, helping Sara Lee strengthen its position as the leading fresh bread brand in America," the company said.

Excluding acquisitions, the retail bakery business enjoyed a 1% unit volume gain in the fourth quarter, boosted by increases in branded fresh bakery, frozen bakery and Senseo, partially offset by planned volume rationalization of non-branded bakery products.

The 7% increase in quarterly sales was attributed to higher unit volumes, favorable pricing and sales mix and the addition of the Butter-Krust baking business, acquired in February 2006.

Sara Lee Foodservice operating income in fiscal 2006 was $120 million on sales of $1,871 million, versus $182 million and $1,812 million, respectively, in fiscal 2005. In the fourth quarter, the segment had operating income of $20 million on sales of $528 million, versus $35 million and $525 million, respectively, in fiscal 2005.

For the year, the decline in Foodservice operating income was due to unfavorable sales mix; competitive pressure in roast and ground coffee; higher selling, general and administrative costs; higher labor, commodity and energy costs; and transformation and exit activity costs, Sara Lee said.

Sara Lee revised its near-term and long-term guidance.

For fiscal 2007, the company forecast earnings per share in the 80c to 88c per share range. Prospective results include a 15c per share gain in connection with the fiscal 1999 sale of the company’s tobacco business.

Sales in fiscal 2007 were projected to increase 2% to 3% from fiscal 2006.

The company said earnings improvements would reflect better sales and continuous improvement from "cost reduction actions, continuous improvement and centralization efforts." Other income boosters include share repurchases, lower interest expense and a lower effective tax rate.

"Operating profit should be down slightly in the first quarter as the company makes significant marketing investments primarily in household and body care and international beverage to support new product introductions," Sara Lee said.

Long-term forecasts were less optimistic than in the past.

"The management of Sara Lee still views the company as having the capability to achieve a 12% operating margin and $14 billion in sales," the company said. "However, due to weaker-than-anticipated performance in the core business in fiscal 2005 and 2006, the company no longer expects to achieve those targets in fiscal 2010. Management’s current outlook is for sales growth of 2% to 4% per year, somewhat in excess of anticipated market growth, with margins increasing annually over the next several years."

Sara Lee declared a new, lower dividend, "reflecting the smaller, tightly focused company that will be in place after the planned spin-off of Hanesbrands Inc.," the company said. The company’s board declared a dividend of 10c per share on the common stock, payable Oct. 6 to shareholders of record Sept. 13. The previous dividend rate was 19.8c per share.

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