SLE Hillshire Brands Company

Sara Lee Corp. (SLE) reported third-quarter 2012 adjusted earnings of 20 cents per share, below the prior-year earnings of 22 cents as well as the Zacks Consensus Estimate of 25 cents. Lukewarm revenues and margin declines led to the earnings miss in the quarter.

Consolidated Revenue and Margins

Sara Lee's quarterly adjusted net sales (excluding acquisitions) climbed 3.0% to $1,861 million with the Tea and Coffee business as well as the Meat business registering positive top-line growth. Revenues, however, missed the Zacks Consensus Estimate of $1,948 million.

On a year-over-year basis, consolidated adjusted operating income (excluding restructuring expenses) decreased 4.7% to $195.0 million due to higher commodity costs. Management hinted that it is slowly seeing stabilization of coffee costs, the impact from which will be felt in the next few quarters.

Segment Discussion

Packaged food maker Sara Lee is on track to split the company into two publicly traded companies: an international coffee and tea business and a North American retail, foodservice and specialty meats business. Sara Lee will name its international coffee and tea business D.E Master Blenders 1753. The spin-off is expected to be completed by June this year. Henceforth, the two prospective companies have beenreferred to as Tea and Coffee Co. and the Meat Co., respectively.

The Tea and Coffee Co. reported a 4.6% increase in adjusted sales to $929 million as the mix improved (6.5%) and volumes continued to decline (7.3%). Volume growth was affected by floods in Thailand and lower sales in small countries due to aggressive price increases.

All business segments -- Western Europe, Rest of the World and Out-of-Home -- registered growth in the quarter. The segment reported adjusted operating income of $120 million, down 8.7% over the prior-year quarter due to higher selling, general & administrative (SG&A) expenses.

The Meat Co., which will retain the Sara Lee name, recorded revenue of $906.0 million, up 1.3% over the prior-year quarter driven by better pricing in all segments (retail, foodservice and Speciality meats) and improved volume growth. Volumes, though slightly down from prior-year levels, were better than a 3.5% decline witnessed in the sequentially preceding quarter, driven by higher turkey sales during the Easter holidays.

Within the Meat Co., the North American retail business recorded revenue growth of 0.8% to $675 million whereas the foodservice and specialty meats business was up 2.9% to $231 million; both businesses being driven by better pricing. The Meat Co. recorded an adjusted operating income of $96.0 million, down 7.1% over the prior-year quarter.

Outlook

For fiscal 2012, Sara Lee expects to generate earnings at the midpoint of the previously provided guidance range of $0.89-$0.95 per share. Additionally, Sara Lee expects total revenue and adjusted operating income to lie on the lower ends of their previously provided guidance range.

Total net sales guidance range from $7.9 billion to $8.15 billion, whereas the adjusted operating income guidance is in the band of $875 million to $930 million. The tax rate is expected to be 33.4% versus approximately 33% expected before. The company expects to end the year with a cash balance of $300 million and debt of $2.4 billion (versus $1.7 billion previously).

Slimming Down

Post spin-off, the international coffee and tea business will be domiciled in the Netherlands and will move its headquarters to Amsterdam in the second half of 2012. Its operations will be spread across Europe, Brazil, Australia and Thailand and will include popular tea and coffee brands such as Douwe Egberts, Senseo, L’OR EspressO, Marcilla, Pilão, Moccona, Pickwick and Hornimans.

The spin-off is part of Sara Lee’s plan to trim its portfolio in order to provide the best foundation for a strong and focused business. Sara Lee has been shedding its redundant units one by one to focus on its most profitable food and beverage businesses.

Among the latest deals, in early January this year, Sara Lee completed the sale of the majority of its North American Foodservice coffee and tea operations to The J.M. Smucker Company (SJM) in an all-cash transaction. In December 2011, Sara Lee had divested its fresh bakery business in Spain and Portugal to Mexico’s Grupo Bimbo S.A.B. de C.V. Per the terms of the transaction Sara Lee shed its fresh bakery brands in Spain and Portugal as well as seven manufacturing facilities.

Our Recommendation

We currently have a Neutral recommendation on Sara Lee Corporation. The stock carries a Zacks #3 Rank (short-term Hold rating).

 
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