food

Strong Q1 for Sara Lee, Including Bakery

Sara Lee Soft and Smooth breadSara Lee's now three-year-old turnaround push continued to yield performance improvements through the first quarter of its fiscal '09. On Wednesday, the company reported net sales up 9.6% to $3.3 billion, and operating income up 20.5% to $353 million for the period versus first-quarter 2008.

Profit rose to $230 million or 32 cents per share, from $200 million or 28 cents per share, versus last year's first quarter.

Net sales gains, seen across all business segments, were driven by price increases and favorable foreign exchange rates--but also by volume increases, particularly in the North American retail and fresh bakery segments and international household and body care. SL also realized market share gains in nearly every key brand within its major product categories.

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The N.A. bakery business saw unit volumes increase by 6.6% despite pricing increases, operating income grow 3.6% to $19 million, and operating margin edge up 0.4%, to 3.3% versus the first quarter of 2008.

The profitability of Sara Lee fresh bread, in particular, has been watched by analysts because its operating margin has been under 3%, compared to margins in the high single digits for competitors such as Flowers and Weston, the Chicago Tribune noted in August. In fiscal 2008, the N.A. bakery business had an operating margin of 2.5% (up 2.6% from a -0.1 operating margin in fiscal '07).

In addition to some margin growth, Sara Lee's fresh bread brand has recently improved on its existing No. 1 U.S. position, increasing its share by 0.6 percentage points to reach an 8.8% market share, according to IRI data for the 12 weeks ending Sept. 21.

Sara Lee attributed some of bread's gains to a high-visibility marketing campaign for Sara Lee Soft & Smooth breads, built around the "High School Musical 3: Senior Year" movie and launched at the end of last year's first quarter. That campaign, designed to reach the bread's 6- to-14-year-old target audience, includes a TV commercial featuring members of the "HSM 3" cast, on-pack and in-store promotions, premiere events, a microsite and a video contest.

The company's North American retail business saw net sales grow 10.6% to $680 million in the first quarter, operating income increase by $38 million to $57 million, and operating margin grow 5.2% to 8.3%.

Unit volumes increased 2.5%, driven by Ball Park hot dogs; Hillshire Farm smoked sausage, cocktail links and lunch meats; and Sara Lee frozen sweet goods. Those brands, plus Jimmy Dean and Senseo, all increased market shares during the period. Ball Park grew its Labor Day holiday share by 2.3 points to 22.4%, according to IRI.

Net sales increases in international divisions included a 10.3% gain (to $779 million) for beverages, a 4% gain (to $229 million) for bakery, and 7.7% gain (to $562 million) for household and body care. Only the last product category failed to see a gain in operating margin, with a 0.4 point loss.

Sara Lee, however, did lower its outlook for fiscal 2009. It now expects earnings per share in the range of 99 cents to $1.06, compared to previous guidance of earnings per share of $1.12 to $1.20. The company said the outlook revision reflects the stronger dollar and higher shares outstanding as a result of suspending its stock buyback plan during the current poor economic climate.

During the Webcast of the financials report, Chairman and CEO Brenda C. Barnes stressed that Sara Lee continues to focus on protecting its margins, as well as growing volume. She added that Sara Lee is working extremely closely with retailers, who have had to reassess the numbers of brands and SKUs they carry and just about every other aspect of their businesses as a result of the "radical changes" in consumer behavior and the retail marketplace in recent months.

Barnes said that both big brands and strong retailers stand to gain share as a result of the economic crisis.

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