Sara Lee operating income slips in third quarter

by Josh Sosland
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DOWNERS GROVE, ILL. — Operating income of Sara Lee Corp. slipped in the third quarter versus the same period last year, and the company has lowered full-year guidance because of concerns about volume in the company’s main U.S. businesses and weakness in its International Bakery segment.

Sara Lee net income in the quarter ended April 2 was $153 million, equal to 23c per share on the common stock, compared with a second quarter loss last year of $336 million.

The results a year ago included a $357 million loss, net of tax expense from discontinued operations.
Net sales in the third quarter were $2,220 million, up 6.8%.

Operating income in the third quarter was $213 million, down 5% from $225 million in the third quarter last year.

“On the operational side, our strategy is to cover commodity inflation through price increases and cost savings, and meanwhile continue to build our brands with superior marketing and innovation,” said Marcel Smits, chief executive officer. “We remain committed to this approach despite some short-term volume risk. Mainly due to this volume risk in our core businesses, as well as intense competition in our International Bakery segment, we are reducing our guidance by six cents. That said, we are optimistic about the long-term prospects of our businesses.

“In North America, for the first time in four quarters, we were able to offset commodity costs increases through pricing actions and productivity gains. In International Beverage, we are still lagging the rapid increases in commodity cost, but we saw price increases accelerate as the third quarter progressed. In total, on a year-to-date basis, MAP spending is significantly higher, S.G.&A. (selling, general and administrative) costs are significantly lower and we are confident in our ability to manage commodity cost inflation over time. In addition, as work on our spin-off progresses, we expect to gain further visibility on additional cost reduction opportunities.”

The company said it expected its North American Fresh Bakery business divestiture to be completed by the end of June.

Operating income of the North American Retail business was $85 million in the third quarter, down 16% from $101 million during the third quarter last year.

Sara Lee said the company is trying to improve its gross margins through pricing initiatives and productivity gains.

“Despite higher prices, the Jimmy Dean and Hillshire Farm brands grew volumes in key strategic categories of breakfast sandwiches and lunch meats,” the company said. “In other categories, volumes were negatively impacted by pricing actions, the rationalization of low-margin promotional programs and the timing of Easter.”

Operating income for North American Foodservice was $33 million, up 32% from $26 million in the third quarter last year. Sales were $448 million, up 5%.

Sara lee noted it was the first time in several quarters the business achieved a sales gain.

Operating margins improved by 130 basis points to 7.8%.

The International beverage business had third-quarter operating income of $134 million, down 23% from $173 million last year. Sales were $925 million, up 16%.

The company attributed the lower operating income to a lag in price increases behind the pace of commodity price hikes.

The company’s International Bakery business had quarterly operating income of $3 million, versus a $1 million loss in the third quarter last year. Sales were $173 million, down 7%.

“Reported and adjusted net sales declined 7% mainly due to weak performance in the Spanish fresh bakery business, which continues to be impacted by difficult macro-economic and competitive conditions,” Sara Lee said. “Adjusted operating segment income was $6 million lower than the prior year while reported operating segment income increased $4 million, resulting from $11 million of business disposition costs in the prior year.

As the quarter progressed, the Spanish business adjusted prices downward and saw volumes rebound. Negotiations with the Spanish unions on transforming the company’s sales force to independent operators are progressing.

“For the full year, the segment expects sales and operating segment income to be meaningfully below last year.”
Sara Lee discontinued businesses, including the North American fresh baking operations and almost all of its household and body care businesses, had a $12 million loss, versus $88 million in operating income in the quarter last year. Net sales were $688 million, down from $1,026 million.

Sara Lee net income for the nine months ended April 2 was $1,176 million, equal to $1.86 per share, up from $335 million, or 46c per share.

Sara Lee lowered its earnings guidance to 79c to 83c per share for fiscal 2011, down from 85c to 89c.

The company said it was “on track form the creation of two pure-play companies.”

“We are focused on preparing both the Coffee company and the Meat company for strong and vibrant futures,” said Jan Bennink, executive chairman.

Still, Sara Lee identified a number of positives for its outlook next year.

“Sara Lee expects to benefit from a number of tailwinds in fiscal 2012 with an anticipated total e.p.s. impact of approximately 17c, of which 2c relates to the North American refrigerated dough and International Bakery businesses,” the company said. “These tailwinds include a reduced share count as a result of fiscal 2011 repurchases, declines in pension expense of approximately $25 million and in amortization expense of approximately $30 million (of which $20 million relates to the North American refrigerated dough and International Bakery businesses), the elimination of more than half of fiscal 2011 stranded overhead from the Household & Body Care and North American Fresh Bakery divestitures and a currency benefit of approximately $40 million. “

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