Sara Lee: Are Its Strategies Paying Off?

Sara Lee has swung to a quarterly profit as its North American Retail and Beverage units saw their net sales increase; are its strategies paying off?
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(Sara Lee earnings story updated with insight from industry analyst.)
NEW YORK (TheStreet) -- Sara Lee (SLE) has swung to a quarterly profit as its North American Retail and Beverage units saw their net sales increase.

Sara Lee is providing guidance for full-year adjusted EPS from continuing operations of 88 cents to 95 cents a share vs. the consensus estimate of 94 cents a share.

For the fourth quarter, the company posted net income attributable to Sara Lee of $187 million vs. a $14 million loss in the year-ago period. Fourth-quarter adjusted earnings per share was 19 cents vs. 26 cents a year ago.

Sara Lee said it had made a $200 million cash contribution to the company's pension plans and experienced "currency headwinds" in the fourth quarter. Meanwhile, marketing investment was up 75% in the quarter.

The company reported fourth-quarter net sales of $2.8 billion, up 4.2%, as the impact of a 53rd week and "favorable" sales mix offset lower unit volumes, lower prices and unfavorable foreign currency exchange rates. Meanwhile, IBISWorld's senior industry analyst George Van Horn said Sara Lee's strategy of sharpening its focus on specific brands are "paying dividends in terms of cash flows and earnings."

This, combined with the company's increased emphasis on branding and marketing will likely prove to be a "successful roadmap at least for the next couple of years when conditions will still be reasonably challenging," he contends.

Van Horn noted that Sara Lee, helped by the divestment of various businesses, has seen its stock perform as well, if not better than, some of the more established names like

Kraft

(KFT)

. Van Horn said although Sara Lee is not in the position to make a move like Kraft's acquisition of Cadbury, the company has reorganized its business sufficiently so that "somewhere down the road" it can make further adjustments to its portfolio and add more brand components.

Net sales for Sara Lee increased at most of its businesses, but the International Bakery unit saw net sales decrease 2.4% to $184 million.

On average, analysts were expecting earnings of 16 cents a share on revenue of $2.86 billion.

According to IBISWorld figures, recent respective segment revenue contributions for Sara Lee are about 30% from International Beverage, 7% from International Bakery, 19% from North American Fresh Bakery, 26% from North American Retail and 17% from North American Foodservice.

Sara Lee announced Monday morning that the company's chairman and CEO

Brenda Barnes will step down

from her positions to focus on improving her health; Barnes had been on medical leave since May 14 after suffering a stroke. "In terms of management transition -- given Sara Lee is now narrowly focused -- that bodes well for them ... to find and attract someone with a strong global food and beverage global background," Van Horn said.

Since Barnes took over, Sara Lee has sold its skin-care and deodorants business to

Unilever

(UL) - Get Report

and its air-freshener unit to

P&G

(PG) - Get Report

, all for about $2.1 billion, as the company sharpened its focus on its European coffee business and channeled resources into the Jimmy D's breakfast foods division.

"The growth profile of coffee certainly is putting emphasis where it is deemed to be most beneficial," Van Horn said. Meanwhile Sara Lee's North American retail division is still focused on delicatessen meats. "Those two targets do tie with our industry outlooks ... their growth rates will be stronger."

Still, Sara Lee's total exposure to the bread market -- combining both North America and the international markets -- according to IBISWorld, has been 27%, while the company's total exposure to the bread and food service market has been 44%. IBISWorld said these are two industry sectors which are among those with the slowest growth profiles during the next two to three years and will be difficult markets for Sara Lee to navigate.

Van Horn said Sara Lee's biggest challenge in the next 12 months will be higher commodity prices. Van Horn said that the company has indicated that its input costs could be up 15% during fiscal year 2011, yet indicated that it is prepared to manage the increase. Van Horn pointed out that Sara Lee has managed through worse price increases in the past.

Shares of Sara Lee stock have sllipped 1.4% to $14.27 in Thursday afternoon trading, while Kraft stock has inched 0.4% lower to $29.46.

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Sara Lee CEO Resigns; Is a Breakup Next?

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-- Reported by Andrea Tse in New York

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