Sara Lee tops profit estimate, raises earnings guidance: But pricing pressures, especially in bread unit, a black cloud for future

Nov 06, 2009 (Chicago Tribune - McClatchy-Tribune Information Services via COMTEX) -- SLE | Quote | Chart | News | PowerRating -- Sara Lee Corp. on Thursday posted quarterly profit that beat Wall Street forecasts, and the Downers Grove-based packaged-food company increased its earnings guidance for the rest of its fiscal year.

Wall Street cheered: Sara Lee's stock gained 42 cents, or 3.7 percent, to $11.82. It hit a 52-week high of $11.91 during trading.

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

Sara Lee, maker of such products as Ball Park hot dogs and its namesake dessert cakes, said fiscal first-quarter net income rose 23 percent, to $284 million, or 41 cents per share.

Stripping out 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.

Sara Lee said it is 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, said Erin Swanson, an analyst at Morningstar Inc.

Another bit of good news: Analysts said Sara Lee posted a nice increase in its profit margins.

"Margin improvement for continuing operations ... was very strong for the quarter," said a report by Alexia Howard, an analyst at Sanford C. Bernstein & Co.

Cost-cutting helped boost Sara Lee's 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 (our prices) firm."

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, lower commodity prices lead some food manufacturers to cut prices, as they seek to pressure rivals and are pressured themselves by retailers. And retailers are pressured by consumers, who ultimately are in the driver's seat during the recession.

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

Adjusted for unfavorable foreign currency swings and one-time factors, sales were down 3.3 percent in the quarter, and the bulk of the decline came from declining 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 continuing-basis sales, is ground zero for the pricing squeeze. While a decline in wheat prices 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, has become more popular in the recession. Barnes said retailers are putting pressure on manufacturers to lower prices.

Barnes told analysts that Sara Lee plans to "recalibrate our pricing" in bread, though the company's fiscal first-quarter report indicates that process has started. She emphasized to analysts that any price reductions would not be across the board, but "only ... where it's needed, and slowly."

mhughlett@tribune.com

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