Sara Lee Worth $21, Readies for Company Split

SLE: Sara Lee logo
Sara Lee

Sara Lee (NYSE:SLE) is the leading manufacturer of meats, bakery and beverages and markets these products in food service and retail channels in the U.S. and Europe. Last year the company announced plans to split into two separate, pure-play beverage and meat companies after divesting its non-core businesses by 2012. Under the plan, the international beverage business will be spun off, tax-free, into a new company. The remaining company will include Sara Lee’s North American Retail and North American Foodservice businesses, focusing primarily on strengthening its leading market position in the meats business. The company competes with major food and consumer companies like Kraft Foods (NYSE:KFT) and Nestle (NYSE:NESN).

Currently, the International Beverage division is the biggest source of value for Sara Lee, accounting for more than half of its stock value.

See our full analysis for Sara Lee

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Focus on North American Meat and International Beverage Categories

In North America, Sara Lee is focusing heavily on the meat business with popular retail brands like Jimmy Dean, Hillshire Farm and Ball Park already occupying highest market shares in their respective product categories.

Sara Lee has been divesting its less profitable bakery, tea and coffee businesses in North America to reallocate resources to its core meat business. In May 2011, Sara Lee acquired Aidells Sausage, a San Francisco-based premium meats company, to expand its presence into the organic and natural meats segment.

Among its international operations, Sara Lee is focusing on strengthening its tea and coffee businesses in Europe and Latin America. It recently acquired Café Damasco, a Brazilian coffee company, and leading Dutch café store operator, CoffeeCompany, and Norwegian House of Coffee. Sara Lee is also in the process of divesting its international bakery business in Spain, Portugal, France and possibly Australia.

Efforts to Increase Margins Through Pricing and Savings to Offset High Commodity Inflation

Sara Lee’s input commodity prices have experienced significant volatility in the recent past. Despite efforts to offset commodity price increases with pricing and saving efforts, commodity costs increased approximately $646 million in FY 2011 over prior year. This increase in commodity costs was only partially offset by approximately $468 million in pricing actions, with 6% pricing in North American Retail and International Beverage divisions and 10% in North American Foodservice division.

The company expects commodity costs will continue to increase in 2012. Yet with cost-cutting, savings and further pricing efforts, the company hopes to reduce its fixed and variable costs and has set a target to boost gross margins to 36% by 2013-14 (which currently stands at 32.4%).

We have a $21 Trefis price estimate for Sara Lee, 10% ahead of the current market price.

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