020807 Sara Lee Earnings Fall, Revenues Rise

Chicago (Reuters) - Consumer goods maker Sara Lee Corp. said quarterly net earnings fell from a year ago, when it posted an $862 million gain from the spin-off of its Coach leatherware business.

The maker of Ball Park hot dogs, Playtex bras and Kiwi shoe polish said it earned $351 million, or 43 cents a share, in the fiscal fourth quarter ended June 29, compared with $973 million, or $1.19 a share, a year earlier.

Before one-time items, the company earned 42 cents a share, compared with 37 cents a year ago, matching analysts' average estimates as tracked by Thomson First Call.

Shipments, excluding acquisitions and divestitures, rose 1%. Sara Lee also forecast fiscal-first quarter and full-year 2003 earnings in line with Wall Street's view.

Chicago-based Sara Lee has spent the past two years restructuring. In addition to the Coach spin-off, it cut slow-growing lines at its PYA Monarch Food service unit and pieces of its Champion apparel line. It bulked up in bakery with its August 2001 acquisition of No. 2 U.S. fresh bread company Earthgrains, and it has been pumping more into marketing, boosting advertising 12% in the year.

"I see them trying to do a much better job with what they have, but they're obviously still in the early stages," said Lehman Brothers analyst Andrew Lazar. "They're still doing a tremendous amount of marketing reinvestment because the overall volume growth rates aren't there."

Revenue rose to $4.5 billion from $3.9 billion, helped largely on additional sales from Earthgrains. Bakery sales rose to $803 million from $181 million a year earlier.

Operating income rose 7%, as the bakery gains and those in Sara Lee's meat and apparel lines offset weakness in its beverage and household products units. Before acquisitions and divestitures, operating profit rose 2%.

"I am comfortable with our portfolio," Chief Executive Steve McMillan told Reuters in an interview. "We've sold off 25% of the revenues of the business. Right now we're going to focus, for the next year or so, on using our excess cash flow primarily to reduce debt."

McMillan said that a stronger euro against a weakening U.S. dollar could boost sales by about 1% next year, if current trends hold. The company has forecast 2003 sales growth of 2% to 4%, allowing for a swing in currency.

MEATS, APPAREL DRIVE PROFIT; WAL-MART SEEN IMPORTANT

Apparel sales fell 1% to $1.6 billion, reflecting lower revenue after the divestment of some units. Operating profit climbed 19% to $232 million, helped by sales of higher margin products such as Sara Lee's new Bali Shoulder Spa and Playtex Magic Feeling bras.

"They've taken a lot of costs out of the (apparel) business, and they had a bad quarter a year ago," said Banc of America Securities analyst William Leach.

U.S. sales of Playtex brand products to Wal-Mart Stores Inc. rose 30% in the quarter. The company's status with Wal-Mart was a recurring theme throughout an earnings review with analysts.

"Wal-Mart is a very significant customer and we've been able to drive their (apparel) business in the categories we compete in very significantly," McMillan told Reuters.

Sales of Sara Lee meats, which recently consolidated 10 units into a centralized U.S. business, fell 4% to $901 million, reflecting a decline in some U.S. categories and lower meat consumption in Europe.

Meats business operating income rose 11% to $102 million on lower commodity prices and better sales of higher-margin products like Jimmy Dean Fresh Taste Fast! precooked breakfast sausage.

Sales in Sara Lee's coffee and tea business, with brands such as Hills Bros. in the United States and Douwe Egberts in Europe, fell 1% to $642 million, hurt by softness in the United States. Operating profit fell 15% to $102 million, as lower commodity costs drove store prices down.

Household products sales, including Kiwi shoe polish and Sanex body care, rose 1% to $534 million on strength of the body- and air-freshener categories. Operating profit fell 7% to $106 million, as Sara Lee invested in direct selling operations and saw softness in insecticide sales due to mild European weather.

COACH SKEWS RESULTS

In its 2001 fiscal fourth quarter, Sara Lee had a $130 million pretax charge for divestitures, a $92 million charge for related costs, and an $862 million gain from the completed distribution of the Coach business. Net income in last year's fiscal fourth quarter was boosted $673 million, or 82 cents, by these actions.

The company said it expects first-quarter earnings of 27 cents to 29 cents a share, compared with 26 cents a year earlier. Full-year earnings are pegged at $1.44 to $1.50 a share, compared with $1.36 a year earlier, Sara Lee said. The forecasts are in line with analysts' average first-quarter estimate of 29 cents and full-year estimate of $1.48, as tracked by First Call.

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