Sara Lee Earnings Preview: Well Position for Future Growth

SLE: Sara Lee logo
Sara Lee

Sara Lee (NYSE:SLE) is due to announce its Q2 results Thursday, February 2. It is a leading manufacturer of meats, bakery and beverages and markets these products in food service and retail channels in the U.S. and Europe. In 2011, input inflation remained one of the greatest concerns for the company. Sara Lee also announced plans to split into two separate, pure-play International Beverage and North American Meat companies after divesting its non-core businesses by 2012 and making acquisitions in the two segments. By splitting into two and selling its non-core assets, the company hopes to better market the meat and international beverages businesses, go for acquisitions to improve the market share, and unlock cost synergies. The company competes with major food and consumer companies like Kraft Foods (NYSE:KFT) and Nestle (NYSE:NESN).

See our full analysis for Sara Lee

Developments in Company Split

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

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. It has been divesting its bakery, tea and coffee businesses in North America to reallocate resources to its core meat business.

Among its international operations, Sara Lee is focusing on strengthening its tea and coffee businesses, with expanded footprint in Europe and Latin America. It recently acquired Café Damasco in Brazil, CoffeeCompany and House of Coffee in Europe and divested its international bakery business in Europe. In the upcoming earnings, we will watch out for further announcements on this front and the expected revenue growth through acquisitions and related updates with pro-forma financials as well as updates on sale of non-core businesses and assets.

Margins Under Pressure

The company has experienced significant input cost volatility in 2011 and expects commodity costs to continue to increase and suppress gross margins in 2012, offset by cost-cutting efforts and higher pricing. Given that the company targets gross margins up to 36% by 2013-14 (from 32.4% in 2011), we will watch out for its cost performance and impact of its pricing efforts; although we expect the company to realize maximum cost-efficiency as it completes business reorganization later in the year.

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

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