Sara Lee Corp. (SLE) registered decent second quarter 2012 earnings of 27 cents per share that climbed 28.6% from 21 cents posted in the year-ago period. Earnings also exceeded the Zacks Consensus Estimate of 25 cents by 8%.
However, including the charges, the company had to suffer a loss due to impairment charges and gains on the sale of businesses were $170 million, primarily resulting from the renegotiation of global IT contracts and spin-related advisory fees. Sara Lee’s total commodity costs increased by $169 million in the reported quarter. However, they were partially offset by higher prices worth $151 million.
For fiscal 2012, Sara Lee reaffirms its earnings guidance to be in the range of 89 cents to 95 cents per share,amidst unfavorable foreign currency exchange rates and the reclassification of North American Foodservice Beverage as a discontinued operation.
Consolidated Revenue and Margins
Sara Lee’s quarterly adjusted net sales climbed 5.8% to $2,044 million compared with $1,932 million in the prior-year period. Revenues lagged the Zacks Consensus Estimate of $2,153 million.
The results were driven by strong 12% yearly growth in Coffee & Tea business.
However, Meat businesses turned around in the second quarter as selective pricing actions were effective in reversing volume loss trends in key categories. The declining rate in volume slowed down in the second quarter to 3.5% after a volume decline of 5.7% in the first quarter.
Sara Lee also continues to make good progress in reducing corporate expenses. Excluding significant items, general corporate expenses were $21 million in the second quarter of 2012, a decline of $20 million from the prior year, primarily due to lower corporate headcount costs and pension expenses. Sara Lee expects to bring down general corporate expense to $85-$95 million.
Sara Lee forecasts total net sales to be in the range of $7.9 billion to $8.15 billion for fiscal 2012. This also reflects unfavorable foreign currency exchange rates and the reclassification of North American Foodservice Beverage as a discontinued operation.
On a year-over-year basis, adjusted operating income climbed 1.4% to $265.0 million. Meat operating income plummeted 19.0% to $30.0 million, while Retail increased 4.8% to $88.0 million.
Sara Lee forecasts its adjusted operating income, including acquisitions, to be in the range of $875 million to $930 million for fiscal 2012.
Slimming Down
The company’s policy of streamlining the portfolios to provide the best foundation for a strong and focused business continued in the quarter, with more plans for the future.
During the quarter, Sara Lee closed the divestiture of its North American foodservice coffee and shot beverage business to J.M. Smucker Company (SJM). Smucker will make an upfront payment of $350 million in cash for the purchase and has agreed to pay $50 million to Sara Lee through the next 10 years. The deal was announced in October 2011. It also completed sale of its fresh bakery business in Spain and Portugal to Grupo Bimbo SAB. Additionally, Grupo Bimbo also gets to own Sara Lee’s seven manufacturing facilities.
Other Financial Details
As on December 31, 2011, cash and cash equivalents were $2,751 million and long-term debt was $1,935 million.
Sara Lee’s net cash from operating activities for the second quarter was $253 million versus $205 million in the prior year. The decrease was primarily due to a significant decline in the cash generated by discontinued operations as divestitures were completed, a one-time EUR60 million payment to the Netherlands pension plan in the first quarter and higher cash payments for significant items.
The company expects cash of $300 million at the end of 2012 and year-end debt of $2.4 billion.
The company expects to declare and pay the $3.00 special dividend in the fourth quarter of fiscal 2012.
Our Take
Commodity-price inflation andcompetition in the branded food industry along with the presence of stiff competitors are matters of concern.
Currently Sara Lee holds a Zacks #4 Rank. On a long-term basis, we maintain an Underperform rating on the stock with a short-term Sell rating.
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