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Sara Lee stock falls on disappointing earnings, reduced guidance

by Benjamin Miraski
May 06, 2008

Sara Lee Corp. posted sharply higher earnings based on stronger sales in its bakery businesses and favorable exchange rates. However, the company missed analysts’ expectations by two cents and revised full-year estimates lower, sending the stock down 6 percent.

For its third quarter ended March 29, the Downers Grove-based provider of food and household goods such as Sara Lee, Jimmy Dean and Kiwi, reported net income of $211 million, or 30 cents per diluted share.  Earnings were 82 percent higher than in the year-prior quarter of $116 million, or 16 cents per diluted share.

Excluding items, the company earned $154 million, or 22 cents per diluted share, 57 percent higher than in the same quarter of the previous year when the company earned $98 million, or 13 cents per diluted share.

Wall Street estimated diluted per-share earnings excluding items at 24 cents per share, as compiled by Zacks Investment Research Inc.

In the third quarter, Sara Lee recognized a loss of $24 million on the sale of its stake in Qualtia Alimentos, a Mexican meats business.  The company also had a reduced equity base from the same period a year ago because of a continuing share repurchase plan.  The average number of diluted shares outstanding decreased by 28 million from the same quarter last year.

Net sales in the quarter were $3.2 billion, up 10 percent from the same period in the year prior when net sales were $2.9 billion.

As with many food manufacturers, Sara Lee is battling higher commodity costs across the board. Theo de Kool, chief financial officer, speaking in the earnings conference call, said the outlook is no better. 

“Our expectation on commodity costs is that they will continue to go up,” de Kool stated. “That’s why we continue to increase our prices where we can to pass it through to the customer. We have been relatively successful so far.”

CEO Brenda Barnes said that Sara Lee still has a lot of flexibility in pricing despite an economy that's causing consumers to pay heavy attention to their expenses.

“We’re seeing very little adverse effect,” Barnes said. “We have only seen modest trade-down effects in two businesses.”

While the company is raising prices, the increases haven’t kept pace with commodity costs, although de Kool said he expects that this will finally happen in the fourth quarter.

The international beverage segment of Sara Lee showed strong sales increases during the quarter, but its operating income was lower than the year prior.  Sales were $807 million, an increase of 22.6 percent over the same period in the prior year, when net sales were $658 million. However, operating income of the segment fell to $130 million, down 11 percent from $146 million in the comparable period.

“The international beverage business was the biggest disappointment versus what we internally were looking for,” said Eric Katzman, an analyst who covers the company for Deutsche Bank.

Barnes cautioned the analysts to look at the segment's result as an anomaly.

“We think this is a long term, healthy business with lots of growth opportunity,” Barnes said. “I wouldn’t take this quarter and have a long term worry about the coffee segment.”

The company took a number of hits from analysts in the conference call for fluctuations in its effective tax rate. When de Kool said it was up to the analysts to understand where the company was in meeting a tax rate forecast, he met a sharp rebuttal.

“Well, actually I don’t know where you are.  You have so many significant items and other things,” said William Leach, an analyst with Neuberger Berman Inc.

For the quarter, a number of plus and minus special items produced a net gain of 8 cents per diluted share. In the last three quarters, the company has seen a boost of 11 cents per diluted share from its one-time items.

The company lowered its guidance for its current fiscal year.  The company now estimates earnings excluding items to be 80 cents to 84 cents per diluted share on total net sales of $13.2 billion.  This compares with adjusted earnings of 74 cents per share in fiscal year 2007, when the company reported net sales of $12 billion. The adjustment to fiscal 2007’s earnings was made to allow for a comparison with the company’s projections excluding the Mexican meat business.

For the nine months ended March 29, the company reported net income of $593 million, or 82 cents per diluted share, compared with a net income of $387 million in the first nine months of the year prior, or 52 cents per diluted share.  Excluding items, Sara Lee earned 71 cents per diluted share in the first nine months of fiscal year 2008, compared with 59 cents in the same period of fiscal year 2007.

Net sales in the nine months were $9.7 billion, 9.6 percent higher than net sales in same period of the year prior of $8.9 billion.

Sara Lee stock closed at $13.86, down 90 cents from the previous day’s closing price of $14.76.