Sara Lee reports higher 1Q earnings, raises guidance

Nov 05, 2009 (Chicago Tribune - McClatchy-Tribune Information Services via COMTEX) -- SLE | Quote | Chart | News | PowerRating -- Sara Lee Corp. on Thursday posted quarterly profits that beat Wall Street forecasts, and the Downers Grove-based packaged food maker upped its earnings guidance for the rest of its fiscal year.

Wall Street cheered, sending Sara Lee's stock closed up more than 3.6 percent, at $11.82.

Still, the news was not entirely good: Sara Lee's sales as measured by volume fell a bit during the quarter. And competitive pressure in Sara Lee's domestic bakery business is leading it to cut prices there, which could potentially put pressure on its bread-related profit margins.

Sara Lee, maker of Ball Park hot dogs and its namesake dessert cakes, recorded fiscal first-quarter net income of $284 million, or 41 cents per share, up 28 percent on a per-share basis from the same time last year.

Stripping out various one-time items and accounting for pending asset divestitures, Sara Lee's per share profit was 18 to 19 cents, according to analysts reports. That topped Wall Street forecasts by 2 to 4 cents, depending on the interpretation of Sara Lee's complicated results.

Sara Lee said Thursday that it's raising its earnings per share guidance for the remainder of its fiscal year by 6 cents, making for a range of 90 cents to 96 cents. Sara Lee's "increased optimism for the year" likely played a key role in pushing its stock up Thursday, said Erin Swanson, an analyst at Morningstar Inc.

Another bit of good news: a nice increase in Sara Lee's profit margins, according to stock analysts' reports. "Margin improvement for continuing operations . . . was very strong for the quarter," according to a report by Alexia Howard, an analyst at Sanford C. Bernstein & Co.

Cost-cutting by Sara Lee helped boost margins, as did falling commodity prices. In a conference call with analysts, Sara Lee Chief Executive Brenda Barnes said, "We have seen falling input costs, but we have held firm," referring to adjusting the company's own prices.

But falling commodity costs appear to be a double-edged sword for Sara Lee. In an ideal world for a corporation, falling input costs wouldn't be passed down to consumers; they'd be absorbed into higher profits.

In reality, falling commodity prices lead some food manufacturers to cut prices, as they want to put pressure on their rivals and are pressured themselves by food retailers. And retailers are in turn pressured by consumers, who are ultimately in the drivers' seat during the current recession.

Sara Lee's declining sales volume indicates that it has not been adjusting its prices downward as fast as some competitors, said Morningstar's Swanson.

The company's sales, adjusted for unfavorable foreign currency swings and one-time factors, were down 3.3 percent during the quarter, and the bulk of the decline came from declining sales volume.

"They're straddling a tougher consumer environment," Swanson said. "So you saw weak results on an adjusted sales basis."

Sara Lee's North American bakery business, which makes up about 20 percent of its sales on a continuing basis, is ground zero for the pricing squeeze. While a decline in wheat prices alone would pressure Sara Lee to reduce bread prices, its biggest problem is aggressive price-cutting by its branded competitors

To make matters more difficult, private label bread, which tends to be cheaper than branded bread like Sara Lee's, has become more popular during the recession. And Barnes said retailers are putting pressure on bread makers to lower prices. "They need to attract customers with value," she said in an interview with the Tribune.

Barnes told analysts Sara Lee plans to "recalibrate our pricing" in bread, though the company's earnings report indicates that process has already started. Barnes emphasized to analysts that any price reductions would not be across the board, but market by market.

"You only want to take down prices where it's needed, and slowly," she said in an interview.

mhughlett@tribune.com

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