Higher commodity costs drag down Sara Lee net

by Eric Schroeder
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DOWNERS GROVE, ILL. — Higher commodity costs and increased marketing spending bogged down first-quarter earnings at Sara Lee Corp. Net income in the quarter ended Oct. 2 totaled $192 million, equal to 29c per share on the common stock, down 32% from $284 million, or 41c per share, in the same period a year ago.
Net sales were narrowly lower, easing to $2,575 million from $2,588 million in the first quarter of fiscal 2010.
Financial results were issued coincident with the announcement that Grupo Bimbo S.A.B. de C.V. would be acquiring the North American baking business from Sara Lee.

“The sale of the North American Fresh Bakery business will allow us to aggressively invest in our core protein and coffee businesses,” said Marcel Smits, interim chief executive officer. “In both categories, we are a leading player, with healthy margins and a strong track record of innovation. We are actively pursuing growth here, organically and through acquisitions.

“As anticipated, our first-quarter operating income came in below the prior-year period. We see our price increases coming through across the board, but in the first quarter they still lagged sharply increasing commodity prices. We are confident that the additional price increases we have announced will mitigate commodity inflation for the full year.”

The North American Fresh Bakery Division of Sara Lee Corp. sustained an operating loss of $1 million in the first quarter ended Oct. 2, compared with operating income of $14 million during the same period in 2009. Net sales were $516 million, down 4.6% from $541 million a year earlier.

Sara Lee said lower prices and decreased unit volumes accounted for the depressed quarterly results. Improved sales mix was a mitigating factor.

Overall, unit volume was down 2.4% in the first quarter versus the year before, but Sara Lee said the majority of the volume decline was attributed to the timing of the July 4 holiday relative to the company’s fiscal year end.
“The ‘sell in’ week for the holiday fell in the fourth quarter of fiscal 2010,” the company said.

Sara Lee branded fresh bakery unit volume was up in the quarter. While volume of private label was down in the first quarter, Sara Lee said an improvement was expected in the months ahead “on the back of new business bids won.”

The North American Retail business posted operating income of $63 million in the first quarter, down 21% from $80 million in the same period a year ago. Net sales in the division rose 7% to $707 million from $659 million.
Sara Lee attributed the income decline to higher commodity costs, marketing and other investments, partially offset by a favorable sales mix shift into higher-margin products. Sales benefited from the successful launch of several new products, including a line of child-focused Jimmy Dean breakfast products under the Jimmy D’s sub-brand, lower sodium Hillshire Farm and Sara Lee lunch and deli meats and Hillshire Farm lunch meat variety packs.

Operating income within North American Foodservice eased 23% to $29 million from $38 million in the first quarter of fiscal 2009. Net sales, meanwhile, fell 3% to $445 million from $457 million.
International Beverage operating income also finished lower, falling 27% to $90 million from $123 million a year ago. Net sales in the unit were narrowly lower, at $728 million compared with $734 million in the same period of fiscal 2010.

International Bakery operating income totaled $8 million, down 27% from $12 million a year ago. Net sales were down 3% to $186 million.

Sara Lee offered an update on its board’s process of selecting a new chief executive officer to replace Brenda C. Barnes, who stepped down for health reasons in August. The company said both internal and external candidates for the c.e.o. position were under consideration. The company noted that until a permanent c.e.o. is named, Mr. Smits was acting as interim c.e.o. and Mark Garvey was serving as interim chief financial officer. James S. Crown, an independent director, is chairman of the board.

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