Sara Lee said it is confident of seeing an improvement in its North American bakery division after price competition hit the category in the US food group’s last fiscal year.

The company this morning (12 August) booked an increase in full-year profits, driven by an “improved operating performance” across the company and despite a fall in sales.

However, the firm’s North American Fresh Bakery segment experienced a “challenging” year with sales down 3.3% to US$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.

Speaking on Sara Lee’s earnings call today, CJ Fraleigh, CEO of the company’s North American retail and foodservice division, reiterated that the bakery segment, described previously by one analyst as the firm’s “achilles heel”, had ended the year with a “difficult quarter” resulting in top and bottom line declines.

“Sales softness resulted in continuing challenges in the industry as branded pricing has been lower than was anticipated,” Fraleigh told analysts. “Much of the decline in the quarter related to the pricing challenges. Also, some of that was due to one-time adjustments related to employee benefits and adjustments made to third party bread distributors.”

Fraleigh added that with wheat prices trading higher, the question through the 2011 fiscal year will be whether the company can pass the prices along effectively.

“We recognise this is a key questions and a challenge for our business. However, based on past experience, we are confident our brands will be able to pass on the prices effectively, even though the ride might be bumpy quarter to quarter. We have prepared well for the headwinds we have faced today,” he said.

Looking ahead, Fraleigh 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.”

Shares in Sara Lee dropped $0.29 or 2% to $14.18 at 12.03 in New York trading today.