Sara Lee's 2011 Earnings Forecast Falls Short of Analysts' Projections

Sara Lee Corp., the maker of Jimmy Dean breakfast foods and Ball Park franks, gave a 2011 earnings forecast that trailed some analysts’ estimates as the U.S. economic recovery slows.

Earnings will be 93 cents to $1.02 a share in the year ending June 2011, Sara Lee said today in a statement. The average estimate of analysts in a Bloomberg survey was $1.02. Sara Lee’s forecast includes 5 cents to 7 cents a share from discontinued operations.

Sara Lee is vying with other foodmakers for sales as consumers maintain tightened budgets, with the U.S. slump abating less quickly than economists estimated. Confidence among consumers, whose spending accounts for about 70 percent of the U.S. economy, tumbled in July to its lowest level in a year.

“High unemployment rates and economic uncertainty have led consumers to spend cautiously,” Brian Weddington, a New York- based analyst at Moody’s, said in an interview. “Consumers have traded down to store brands and purchased more low-priced food. We expect these spending patterns to continue into next year, restricting revenue growth for packaged food producers.”

Last quarter, North American organic sales at Kraft Foods Inc., the world’s second-largest food company, fell 1.3 percent. The figure excludes items such as acquisitions. Kellogg Co., the largest U.S. maker of breakfast cereal, reduced its profit forecast for the year on July 29 after North American cereal sales dropped 13 percent last quarter.

Competitive Landscape

In contrast, Swiss-based Nestle SA, the world’s largest food company, yesterday lifted its full-year forecast after sales rose faster than analysts anticipated in the first half. Increasing sales of Nescafe and Pure Life water in emerging markets helped fuel the gain, the company said.

Sara Lee, based in Downers Grove, Illinois, fell 10 cents to $14.37 at 4 p.m. in New York Stock Exchange composite trading. The stock has risen 18 percent this year.

Fourth-quarter earnings at Sara Lee also missed projections as commodity costs for ingredients like wheat, meat and coffee increased in the North American retail business, which accounts for more than one-fourth of sales. Sara Lee’s commodity costs will rise 15 percent this fiscal year, after a 1 percent decline in fiscal 2010, interim chief financial officer Mark Garvey said on a conference call today.

In response, Sara Lee will raise prices in “a majority of our businesses,” C.J. Fraleigh, head of the North American retail and foodservice operations, said in a telephone interview.

Jimmy Dean

Excluding some items, profit was 19 cents, compared with the 21-cent average projection. Net income was $187 million, or 28 cents a share, compared with a loss of $14 million, or 2 cents, a year ago. Sales excluding foreign currency fluctuations and divestitures dropped 2.8 percent to $2.57 billion.

Net sales in the North American retail business rose 6.8 percent to $742 million, fueled by Jimmy Dean breakfast sandwiches and Hillshire Farm smoked sausage. International beverage sales increased 4.8 percent to $804 million, bolstered by Senseo and L’OR single-serve coffee, the company said.

Increased marketing spending and unfavorable foreign currency exchange rates will lead to little-changed or slightly declining profits in the beverage unit this fiscal year, the company said. Marketing costs for beverages rose 81 percent in the fourth quarter.

Bread Business

Price competition on bread hurt Sara Lee’s North American fresh bakery unit, and Fraleigh said he expects first-quarter operating income to decline as the company removes some bread items from its lineup and invests to win back customers. The company hired Bank of America Corp. to advise it on options for its North American bread unit, people familiar with the matter told Bloomberg News last month.

“I guess it makes sense to get rid of bread,” said John Baumgartner, an analyst at Telsey Advisory Group in New York. “If you have a willing buyer and the price is right, there is no sense to hang onto it.” He has a 12-month target price of $18 on the shares.

Sara Lee said this week that Brenda Barnes is resigning as chairman and chief executive officer, focusing on her health after taking leave in May to recover from a stroke.

Marcel Smits will stay on as interim CEO and James S. Crown will remain chairman during the search for a successor. Smits and Fraleigh are both contenders for the job, according to D.A. Davidson & Co. analyst Tim Ramey.

To contact the reporter on this story: Matthew Boyle in New York at mboyle20@bloomberg.net

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