Sara Lee Corp. Reports Weak Second Quarter Net Sales

The company's global body care and European detergents businesses were sold in December 2010. The company received cash proceeds of $1.6 billion and recognized an after-tax gain of $539 million on the dispositions in the quarter.

In the second quarter, the North American retail segment focused on its core brands and pricing to offset commodity increases. This resulted in 4.5 percent of sales growth attributed to pricing, versus 2.3 percent in the first quarter. Net sales increased 1 percent in the second quarter, on a reported and adjusted basis, to $754 million.

Volume declined by 4.9 percent while sales mix added 2.9 percent, driven by strength in the key strategic brands Jimmy Dean, Hillshire Farm and Ball Park. Despite taking pricing actions, the segment grew share in six of 12 core categories. Jimmy Dean increased its leading market share in the frozen protein breakfast category by 3.0 points versus last year to 59.8 percent, while Hillshire Farm smoked sausage increased market share by 0.5 points to 29.6 percent (IRI share data, 12 week ending Dec. 12, 2010).

This quarter compares to a very strong year-ago period, during which adjusted operating segment income increased significantly with the benefit of lower commodity costs. In the quarter, the segment reported an adjusted operating margin of 11.6 percent versus 16.4 percent last year, which was well above the segment's trend line of gradual improvement. Operating segment income declined 28 percent in the second quarter, on a reported and adjusted basis, to $88 million. Despite a favorable sales mix shift into higher margin products, operating segment income declined versus a favorable prior-year period driven by higher commodity costs net of pricing, volume declines, increases in MAP spending behind core brands along with continued investment in infrastructure and systems, particularly the new Kansas City sliced meat plant which will become operational in the third quarter of fiscal 2011.

While pricing lagged significant commodity cost increases in the first half, the second half will benefit from the pricing actions taken in the first half, along with additional actions planned for the third quarter. The segment will also benefit from the timing of key brand and infrastructure investments, both of which were weighted more heavily toward the first half of the year. As a result of active price management, continued focus on cost savings and efficiencies and strong growth prospects, the segment expects to report improved top-line and bottom-line results for fiscal 2011.

North American Foodservice segment results continue to be impacted by the loss of two large customer contracts in fiscal 2010: a high-volume, low-margin bakery contract lost in the third quarter and a low-volume, high-margin liquid coffee contract lost in the fourth quarter. The segment reported a 2 percent decline in net sales in the quarter, on a reported and adjusted basis, to $517 million. However, operating segment income, as reported, increased 29 percent in the second quarter to $59 million, with the prior year including $15 million of charges primarily for an asset impairment on the write-down of a manufacturing facility. Adjusted operating segment income declined by 2 percent.

Strong top-line performance in the company's meats, frozen bakery and liquid coffee categories was offset by volume declines attributed mostly to the bakery contract loss. As a result, segment unit volumes declined 16 percent but sales mix improved 8 percent. The segment offset the loss of the high-margin liquid coffee contract and higher commodity costs net of pricing with profitable new business, favorable sales mix and cost control initiatives, resulting in only a slight decline in adjusted operating segment income.

In the second half of fiscal 2011, the segment expects improving overall trends and continued momentum in meats and liquid coffee. The negative impacts of the two large customer contract losses will ease as the segment laps the quarters in which the contracts were lost. Volume improvement combined with the full realization of pricing actions and continued cost savings, will drive second half sales growth and full year profit growth.