There has been much speculation in recent weeks about the future US food group Sara Lee. Plans to sell its North American bread business have been rumoured, a move some believe would herald a break-up of the business. This week, chairman and CEO Brenda Barnes stepped down after illness and the company issued its annual results, as well as an outlook for the first quarter of its next fiscal year that disappointed some analysts.
The news this week that Sara Lee’s chairman and CEO Brenda Barnes is to step down permanently, was followed by the firm’s full-year results and its insistence that the performance of the North American bakery division will show improvements.
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Shares of Sara Lee slid 1.2% in afternoon trading yesterday (12 August) as the US food group forecast fiscal 2011 earnings that trailed some analysts’ estimates.
The forecast calls for earnings of US$0.88 to $0.95 per share from continuing operations and sales of $11.2bn to $11.5bn, while the average estimate of analysts in a Bloomberg survey was $1.02 earnings per share.
“From a near term perspective, Sara Lee is calling out a weaker 1Q11 set of results as pass through pricing catches up to inflation,” Barclays Capital analyst Erica Chase said. “But, even further out, when one takes into account the EPS swing factors into fiscal 2010, we still don’t see the valuation on a calendar 2011 basis as much more compelling versus our prior thinking on the stock.”
Shares dropped to $14.37 at 4pm in New York trading following the release of the results.
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By GlobalDataWith the US slump abating less quickly than economists had estimated, confidence among consumers, whose spending accounts for about 70% of the US economy, tumbled in July to its lowest level in a year, according to Bloomberg.
“High unemployment rates and economic uncertainty have led consumers to spend cautiously,” Brian Weddington, a New York-based analyst at Moody’s, told the publication. “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.”
During the six-month period, commodity costs for ingredients like wheat, meat and coffee increased in Sara Lee’s North American retail business, which accounts for more than one-fourth of sales.
Which may go some way to explain why the company’s North American fresh bakery segment – described previously by analysts as the group’s “Achilles heel” – experienced a “challenging” year with sales down 3.3% to $2.1m.
In response to what the company described as a “competitive environment”, the segment adjusted its pricing during the year and saw its branded unit volumes start to recover in the second half of the year. However, overall profitability remained flat across the year.
“The company’s outlook was in line with our expectations,” Morningstar analyst Erin Swanson told just-food. However, she added: “Regarding the North American fresh bakery business, we do believe that the business continues to struggle in this challenging economic environment.”
She said: “We’re maintaining our fair value estimate for Sara Lee following the release of the firm’s fourth-quarter and full-year results, which support our thesis that a lack of brand strength, as well as weak consumer spending, will hinder the packaged food firm’s sales growth and profitability.”
Goldman Sachs analyst Judy Hong believes it might be difficult for Sara Lee to offset rising costs with price hikes, given the intense competition in the grocery aisle.
“In addition, [the] international beverage outlook also looks soft, given macro headwinds,” Hong told Reuters.
But despite the poor performance from the North America bakery division, the company says it is confident of seeing an improvement.
CJ Fraleigh, CEO of the company’s North American retail and foodservice division, said he believes the North America bakery segment is “well positioned” to continue to show improvements over time.
“We have operational initiatives that we have been working on for more than a year and are now rolling out across our system during fiscal 2011,” he said. “Combined with a more stable pricing environment, we expect a noticeable improvement in fiscal 2011. And in terms of wheat price [increases], we are confident we can manage through this situation and with strategic pricing and favourable headwinds, that will keep us competitive in the market this fiscal year.”
In recent years, Sara Lee has been cutting costs and removing product lines to focus on its core food and beverage businesses: coffee, frozen bakery and branded meats like Hillshire Farms products and Jimmy Dean sausage.
However, despite cost savings from efficiency improvements, adjusted operating margins slipped 3.9 percentage points to 5.3%, mostly reflecting Sara Lee’s stepped-up investment in marketing and advertising.
Swanson said: “In our view, this is a wise investment given the challenging economic environment. However, because consumers tend to consider price rather than brand in several of the categories in which Sara Lee competes, we intend to monitor whether this spending ultimately spurs profitable volume growth.”
She added that Sara Lee’s profitability is likely to be pressured in fiscal 2011.
“Beyond increased advertising investments, we anticipate that input cost inflation will return due to increased demand for commodities in emerging and developing markets. As a result, we forecast an adjusted operating margin of 8.6% for fiscal 2011, down slightly from the 8.8% margin generated in fiscal 2010, and significantly lower than the mid-teens operating margins generated by its peers.”
In the immediate term however, Sara Lee will turn its attentions to recruiting a replacement to Brenda Barnes, who officially stepped down from her role as chairman and CEO earlier this week in order to focus on improving her health.
Shares of Sara Lee were up 1.60% to $14.60 at 10.41am in New York trading this morning.
