Sara Lee’s Core Businesses Stabilize As Company Heads For Split

Sara Lee’s (NYSE:SLE) core meat business continued to stabilize last quarter, with improved volume and mix trends, even though the bakery categories lagged. The Coffee and Tea beverage segment also maintained sales in its key European markets. However, with the slower pace of recovery, the company now expects to meet its sales and operating income objectives for the fiscal at the low end of their previous guidance.

The company will soon split into two separate, pure-play companies as International Beverage business, renamed D.E Master Blenders 1753, will spin-off North American Meats business. The split is expected to improve the profitability of the company’s core businesses, which have been under-performing and trailing peers despite an envious portfolio of market leading meat and beverages brands. The company competes with major food and consumer companies like Kraft Foods (NYSE:KFT) and Nestle (NYSE:NESN).

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Meat Business Stabilizing

Sara Lee’s Meat business continued to stabilize past quarter, with positive pricing in both the retail and foodservice & specialty meats segments. The recovery was evident from reverse volume loss trends, with 1% decline in Q3, compared to 3.5% decline in Q2 and 5.7% decline in Q1 (y/y). Overall, North American Retail Q3 sales improved 1% and Foodservice sales grew 3%. Unit volumes in the retail segment were flat for the quarter, continuing a sequential improvement from volume declines of 7.3% over the prior year in Q1 and a 4.9% decline over the prior year in Q2. The Foodservice segment showed mixed results as strong sales and mid-single-digit volume growth in meats helped by Aidells acquisition were offset by high-single-digit volume declines in bakery. Coffee and Tea continued its strong performance in Western Europe (especially the Netherlands, France and Spain) in Q3.

But Margins Still Under Pressure

However, gross margin and operating income continued to decline over the quarter due to lower volumes and higher commodity costs, only partially offset by higher pricing. It was also adversely affected by SG&A increases due to stranded costs, costs for the stand-alone company and one-off innovation costs. Several of Sara Lee’s non-core businesses have so far weighed on the company’s profitability, particularly through inefficient supply-chain management. The split and sale of non-core businesses would help the company streamline its supply chain and rationalize operating expenses to improve returns.

We have a revised $22.69 Trefis price estimate for Sara Lee, at 5% premium to the current market price.

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