010603 Sara Lee: 2002 Profit Below Forecasts

Chicago - Sara Lee Corp., which makes everything from Ball Park hot dogs to Hanes underwear, said it expects fiscal 2002 profits to miss Wall Street estimates, as it spends more on marketing, restructures its U.S. meat business and seeks acquisitions.

The company told investors at a conference in New York that it expects to earn $1.25 to $1.35 per share for fiscal 2002, which ends in June 2002. Analysts had expected Sara Lee to earn $1.40 to $1.53 per share, with a consensus forecast of $1.48, according to tracking firm Thomson Financial/First Call.

Chicago-based Sara Lee said challenging retail market conditions, a strong dollar relative to the euro, and investments in technology and reorganization, among other factors, will impact fiscal 2002. Sara Lee said its forecast for fiscal 2002 is based on the euro trading at 85 cents.

“I think the magnitude of the fiscal 2002 earnings revision certainly caught me by surprise,” said John McMillin, food industry analyst at Prudential Securities. “I knew Sara Lee had some broken parts, but I didn't know the whole thing needed fixing,”

Shares of Sara Lee closed down 64 cents, or 3.34%, at $18.51 on the New York Stock Exchange on Wednesday. The stock has underperformed the Standard & Poor's 500 index by 23% since the start of the year.

The company said it expects fiscal 2002 operating profit to climb in the mid-single digits at its food and beverage unit, but it sees flat profits for the household products segment, due to the projection of a weak euro. Sara Lee sees fiscal 2002 operating profits at its intimates and underwear unit will fall by a percentage in the double digits.

TIME TO GROW AGAIN

Sara Lee also said it expects its marketing expenditures to increase more than 5% in fiscal 2002 as it focuses on growing sales.

The company also said that after a period of major divestments, such as its Coach luxury goods brand, it is in position to make major acquisitions that fit its food or household products businesses.

“We will not defer or delay crucial projects -- projects that will contribute significantly to the longer-term financial strength and growth prospects for this company -- in order to minimize the impact on next year's earnings,” President and Chief Executive Officer C. Steven McMillan said in a statement.

Armed with $3 billion from divestitures and annual free cash flow approaching $1 billion, the company can spend $4 billion without affecting its credit rating, company officials said.

“Given the size of Sara Lee, perhaps larger acquisitions than we've historically made may be more likely than they have in the past,” McMillan said in an interview.

McMillan declined to comment on specific companies, but analysts note that Sara Lee would be the one U.S. company that could have a place for all of Dial Corp.'s business lines, which include air fresheners, soap and canned meats. Dial management has said it will suggest to the board later this year whether or not the company should be sold.

TOO BIG AN APPETITE?

But some financial analysts think that Sara Lee, which in the past year has restructured the company to focus on food, intimates and underwear and household products, would be biting off more than it could chew with a major acquisition. The company also said on Wednesday that it would spend $40 million in fiscal 2002 to combine its 10 U.S. meat businesses into two units -- retail and food service.

“They certainly have the capability of being acquisitive,” said Patrick Schumann, consumer products analyst at Edward Jones. “They're generating the cash, but they appear not to have a solid enough foundation to add something of size.”

Until now, Sara Lee has operated its various meat businesses separately, something that is more difficult to do in a shrinking retail environment where purchasers are looking to deal with fewer vendors. The company is also looking to save money by consolidating research and development and procurement.

“In terms of the outlook for reshaping the meat business... it looks like it's going to take at least another year to 'right-size' the business. They can't get growth going for some reason,” said Ann Gurkin, analyst at Davenport & Co.

The restructured meat business will have operations in larger cities, where it will be easier to recruit graduates who don't want to live in places like West Point, Mississippi, the home of Bryan Foods, and Haltom City, Texas, where State Fair Foods is located.

Sara Lee also said it is reorganizing its intimates and underwear management structure in Europe, eliminating a layer of management. The company plans to consolidate its four major continental Europe intimate apparel companies -- DIM, Playtex, Lovable and Sans -- into a group led by Jacques Michaud, the chief executive officer of DIM.

In the United States, Sara Lee's hosiery, sock and direct operations will be combined into a new Sara Lee Legwear and Direct group.

On April 25, Sara Lee said it expected to earn $1.34 to $1.37 for fiscal 2001. That outlook has not changed. Analysts currently expect the company to earn $1.31 to $1.36 for fiscal 2001, with a consensus of $1.34, according to First Call. Sara Lee's fiscal year 2001 ends next month.

RETURN TO HOME PAGE

E-mail: sflanagan@sprintmail.com