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Sara Lee Profit Declines as Ingredient Costs Advance

Sara Lee Second-Quarter Profit Declines on Ingredient Costs
Sales in the international beverage division, which includes Senseo coffee, rose 1.7 percent last quarter, accounting for 38 percent of total revenue. Photographer: Daniel Acker/Bloomberg

Feb. 8 (Bloomberg) -- Sara Lee Corp., the foodmaker that plans to split itself up next year, posted a 64 percent drop in second-quarter profit, missing analysts’ projections as costs for raw ingredients rose.

Profit, excluding items such as discontinued businesses, fell to $107 million, or 24 cents a share, in the quarter ended Jan. 1, Sara Lee said today in a statement. Analysts on average projected 25 cents, according to a Bloomberg survey. Commodity costs increased by about $127 million.

“Clearly they are getting hammered by higher input costs and cannot pass them through as much as they had hoped for,” D.A. Davidson’s Tim Ramey said in an interview. “The second quarter was only a faint whiff of the commodity price pressure yet to come.” The analyst, based in Lake Oswego, Oregon, has a neutral rating on the shares.

Sara Lee, led by Chief Executive Officer Marcel Smits, decided last month to separate its meat business from its beverage and bakery operations after failing to agree on takeover terms with potential buyers. Sales in the international beverage division rose 1.7 percent last quarter, accounting for 38 percent of total revenue.

That business’s brands include Douwe Egberts and Senseo coffee, while the meat operations include labels such as Ball Park hot dogs and Hillshire Farms lunch meat. The meat division, which will keep the Sara Lee name after the spinoff next year, posted a 1.2 percent gain in sales in the latest period.

Sara Lee, based in Downers Grove, Illinois, rose 23 cents to $17.15 at 4:01 p.m. in New York Stock Exchange composite trading. The stock has risen 38 percent in the past twelve months.

Ingredient Costs

Prices for raw materials like wheat, sugar and coffee are surging, forcing food companies to pay more. Sanford C. Bernstein analyst Alexia Howard said in a report last month that commodity costs may rise by an average of 6.7 percent for food companies in 2011, up from her October projection of 5 percent.

“History shows us that food stocks tend to underperform the market as commodity costs rise, since gross margins are crushed,” she said.

Sara Lee’s adjusted operating margin, or the percentage of sales left after the cost of goods sold and excluding items such as overhead expenses associated with discontinued operations, shrank to 10.6 percent in the quarter. That compared with 12.9 percent a year ago.

Uncertainty

“The biggest uncertainty going into the quarter was around profit margins, and I think it could have been a lot worse,” analyst John Baumgartner of Telsey Advisory Group said in an interview. The New York-based analyst has a price target of as much as $20 on the stock.

J.M. Smucker Co., maker of Jif peanut butter and Folgers coffee, today said it raised the list price for most of its U.S. coffee products, mainly goods under the Folgers and Dunkin’ Donuts brands, by an average of 10 percent. Flowers Foods Inc., the bakery with brands such as Nature’s Own, today lowered its profit forecast for the year. CEO George Deese spoke of volatility in ingredient expenses on a conference call with analysts today.

Sara Lee chose to pursue its split after rebuffing informal offers from JBS SA and a buyout group led by Apollo Global Management LLC. Smits reiterated today that there’s nothing preventing new offers for the company before the separation.

On Jan. 28, the same day as the split announcement, Sara Lee lowered its forecast for full-year earnings to as much as 89 cents a share, from a previous top range of 94 cents. Sara Lee reaffirmed that forecast today. Analysts project 88 cents on average.

Smits’s Succession

The board then promoted Smits, 49, to lead Sara Lee in January, about five months after predecessor Brenda Barnes resigned to focus on her health. C.J. Fraleigh, who currently runs the North American retail and food-service unit, will become chief of the meat business after the split.

Second-quarter sales from continuing operations fell less than 1 percent to $2.35 billion. Sara Lee’s discontinued operations include the North American fresh bakery business and its international household and body-care unit.

Net income for the period more than doubled to $880 million, or $1.37 a share, from $371 million, or 53 cents, a year earlier.

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

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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