Sara Lee fresh bakery challenged in fiscal '10

by Eric Schroeder
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DOWNERS GROVE, ILL. — Operating income within the North American Fresh Bakery unit of Sara Lee rose 72% to $44 million in the fiscal year ended July 3. On an adjusted basis, operating income fell 4% to $60 million from $63 million in fiscal 2009.

Net sales in the segment eased 3% to $2,128 million from $2,200 million, driven down by lower prices and lower unit volumes, which more than offset the impact of the 53rd week and favorable sales mix.

For the fourth quarter, operating income was $8 million, down 65% from $23 million, reflecting a $16 million charge for a partial withdrawal liability relating to a multi-employer pension plan, higher MAP spending behind the Sara Lee brand, lower prices and lower unit volumes. On an adjusted basis, operating income in the quarter was $17 million, down 39% from $29 million. Net sales in the quarter were $587 million, up 5% from $560 million.

“The North American Fresh Bakery segment had a challenging fiscal 2010 as price competition in the category intensified,” Sara Lee said. “In response to the competitive environment, the segment adjusted its pricing during the course of the year and saw its branded unit volumes starting to recover in the second half of fiscal 2010. Overall profitability of the segment, however, was flat in fiscal 2010.”

Sara Lee said unit volumes within its Fresh Bakery segment decreased 3%, excluding the 53rd week, as slightly higher unit volumes for branded bread were more than offset by volume weakness in private label bakery products. Branded volumes were helped by new products such as Sara Lee Soft & Smooth Plus bread, the company said.

“Although input costs, most notably wheat, are rapidly increasing, the segment is confident that it can successfully manage through this in fiscal 2011, through a combination of commodity hedging and strategic pricing,” Sara Lee said. “Assuming a moderately improving competitive environment, the North American Fresh Bakery segment is expected to return to its trajectory of gradually increasing profitability in fiscal 2011. However, the segment anticipates operating income to be down in the first quarter, as price levels are meaningfully lower than in the early part of fiscal 2010 and the segment is investing in both its branded and private label business to strengthen its market position. To offset these factors, cost reduction efforts have been intensified to adjust the business to the new price levels.”

In its International Bakery business, Sara Lee narrowed its operating loss to $14 million from $194 million in fiscal 2009. On an adjusted basis, the segment had operating income of $45 million in fiscal 2010, down 13% from $52 million in fiscal 2009.

Sales for the year eased 1% to $785 million from $795 million.

“The International Bakery segment continued to face macro-economic and competitive headwinds in its core Spanish market in fiscal 2010, but the French refrigerated dough business and the Australian frozen bakery business did well during the year,” Sara Lee said. “In Spain, while unit volumes were still under pressure from private label competition, the business worked diligently on improving its business model through cost reductions, restructurings and right-sizing of the manufacturing footprint. During fiscal 2010, Sara Lee sold several bakeries to a third-party manufacturer, which helped improve the segment’s plant utilization rates and reduce its cost per unit. All of these actions have helped mitigate the impact of lower unit volumes on the segment’s profitability.”

For the fourth quarter ended July 3, the International Bakery business sustained a loss of $18 million, which compared with a loss of $201 million in the same period a year ago. The loss primarily reflected a $21 charge related to Project Accelerate. On an adjusted basis, operating income in the quarter fell 24% to $11 million from $14 million. Net sales were $184 million, down 2% from $188 million in the fourth quarter of fiscal 2009.

Heading into fiscal 2011, Sara Lee said the International Bakery segment has a better foundation to build on, led by an improved business model in its Spanish bakery business, as well as continued strong performance in European refrigerated dough and Australian frozen bakery.

Overall, Sara Lee Corp. had income of $506 million in fiscal 2010, equal to 92c per share on the common stock, up 39% from $364 million, or 52c per share, in fiscal 2009. Sales for the year were $10,793 million, down narrowly from $10,882 million. For the fourth quarter ended July 3, Sara Lee had income of $187 million, up from a loss of $14 million in the same period of fiscal 2009. Sara Lee sustained significant impairment charges during 2009, which adversely affected results. Sales totaled $2,769 million, up 4% from $2,657 million.

The company said it expects 2011 full-year earnings per share guidance to be in the range of 93c to $1.02 per share, with total operating income forecast at $1,000 million to $1,085 million and net sales at $11,200 million to $11,500 million.

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