Sara Lee Corporation
Sara Lee Reports Increased Sales for Second Quarter Fiscal 2004
Company reports diluted EPS of $.39 for the second quarter of fiscal
2004, in-line with company's earnings forecast and First Call mean
estimates; Cash flow from operations up 17% through the first half
Sara Lee Corporation today announced that net sales for the second quarter of
fiscal 2004, ending Dec. 27, 2003, were $5.0 billion, up 5% compared to $4.8
billion in the prior year's quarter. For the first six months of fiscal 2004,
sales were $9.7 billion, up 4% over the same period a year ago. During the
second quarter, and year-to-date period, sales benefited from favorable foreign
currency exchange rates, particularly the strong euro, and growth in Sara Lee
Meats, Beverage and Household Products.
Diluted earnings per share (EPS) for the second quarter of fiscal 2004 were
$.39, compared to $.42 in the prior year. Diluted EPS were at the high-end of
the company's forecasted range of $.35 to $.40, and in-line with the First Call
mean estimates of $.39. For the first half of fiscal 2004, diluted EPS were
$.68, versus $.80 in fiscal 2003.
Cash flow from operations for the second quarter was $700 million, resulting in
a record first half level of $1 billion for the company. The increase in the
first six months of fiscal 2004 was driven by a reduction in the use of funds
for working capital and a strong focus on generating cash in each line of
business.
Total media advertising and promotion (MAP) spending rose 1% in the second
quarter, including a 1% increase in both media advertising and other advertising
and promotions. Higher MAP spending was reported in Bakery, Beverage and
Household Products. For the first half of fiscal 2004, MAP spending was up 3%,
driven by a 5% rise in media advertising, and a 1% increase in other advertising
and promotion.
Corporate unit volumes decreased 3% during the second quarter. Through the first
six months of fiscal 2004, corporate unit volumes also decreased 3%.
"In the second quarter, Sara Lee delivered sales growth and we achieved our
earnings expectations while continuing to generate very strong cash flow," said
C. Steven McMillan, chairman, president and chief executive officer of Sara Lee
Corporation. "Innovative new products from leading brands such as Sara Lee,
Jimmy Dean and Hillshire Farm, continued momentum for both the Senseo coffee
system and the Direct Selling operations, and the effect of favorable currency
all contributed to growth in the quarter. However, a disappointing holiday
season for apparel led to lower sales and earnings in Intimates and Underwear.
"For the first half of fiscal 2004, our cash flow reached a record $1 billion,
which was driven by a strong management focus on cash flow in each line of
business. Also in this quarter, we completed the sale of our Italian hosiery
business, Filodoro, which generated cash proceeds of $37 million, allowing us to
re-deploy some financial and management resources to areas that have greater
potential for growth," added McMillan.
Performance Review
A performance review for each line of business follows. All dollar amounts are
in millions. Unit volumes exclude acquisitions and divestitures.
MEATS
Sara Lee Meats is a leader in the branded packaged meats business in the United
States, Europe and Mexico.
Second Quarter Highlights
-- Net sales increased as a result of the strong euro, pricing and
favorable product mix
-- Unit volumes decreased slightly, primarily due to lower volumes at
foodservice in the United States
-- Operating segment income rose despite significant raw material cost
increases
-- Major brands and new products continued to perform well
Second Quarter Change Six Months Change
--------------------------------------------------
In millions 2004 2003 $ % 2004 2003 $ %
----------------------------------------------------------------------
Net Sales $1,083 $976 $107 11.0% $2,078 $1,899 $179 9.4%
----------------------------------------------------------------------
Increase /
(decrease) in net
sales
from:
Changes in foreign
currency
exchange rates $- $(40) $40 $- $(68) $68
Dispositions - - - - 4 (4)
----------------------------------------------------------------------
----------------------------------------------------------------------
Operating segment
income $115 $113 $2 2.1% $216 $203 $13 7.0%
----------------------------------------------------------------------
Increase /
(decrease) in
operating segment
income from:
Changes in foreign
currency
exchange rates $- $(4) $4 $- $(8) $8
Exit activities and
business
dispositions - 7 (7) 5 8 (3)
Unit volume change vs. 2003
Second Six
Quarter Months
2004 2004
---------- ----------
Global unit volume (1) % 0 %
U.S. 0 % 1 %
Retail 0 % 1 %
Deli 6 % 9 %
Foodservice (5) % (3)%
Europe (1) % (1)%
Mexico (2) % (1)%
Overview
-- Net sales for the quarter rose 11%, driven by higher net average selling
prices in connection with increased raw material costs, favorable
product mix and the impact of the strong euro. Year-to-date, sales were
up 9%.
-- Raw material costs, both pork and beef, in the second quarter were
significantly higher compared with the same quarter last year.
-- Operating segment income for the quarter was up 2%, driven by increased
sales, positive product mix, lower selling and distribution costs, and
favorable currency exchange rates, which more than offset higher raw
material costs as well as the year-over-year impact of last year's
favorable adjustments to exit costs. Operating segment income for the
first six months was up 7%.
-- MAP spending decreased 3% in the quarter, due primarily to a 15% decline
in media expense as a result of an optimization in media strategy and
execution.
Retail
-- U.S. retail unit volumes equaled last year's second quarter levels,
despite higher selling prices. The success of new, value-added products
launched during the past year under the company's leading meat brands,
including Hillshire Farm Deli Select Ultra Thin sliced meats, Jimmy Dean
breakfast sandwiches and Ball Park smoked sausage, helped sustain
volumes.
-- Sara Lee deli unit volumes continued to grow, up 6% in the quarter,
primarily driven by increased distribution levels for the Sara Lee
product line. Year-to-date, deli unit volumes were up 9%.
-- Several on-trend new products were launched during the quarter.
Hillshire Farm Appetizer Tubs and Emeril's Gourmet sausages in the
United States, Aoste Stickado salami snacks in France and Germany, and
Weight Watchers' deli meats in Belgium appealed to consumers' increasing
demand for convenience, comfort and wellness.
-- The European meats business showed slightly lower unit volumes, but
sales and profits were up in the quarter, driven by the strength of the
euro.
-- In Mexico, unit volumes were down in the second quarter due to weakness
in the supermarket channel. Net sales decreased due to lower unit
volumes and the weaker peso. Profits also decreased in Mexico, due to
lower sales, higher raw material costs and unfavorable currency effects.
Foodservice
-- Net sales were slightly up as a result of higher pricing to cover
increased raw material costs. Profits also were up, due to improved
product mix and lower selling and administrative costs. Foodservice unit
volumes in the United States were down 5% in the quarter and 3%
year-to-date, due to lower volumes at a key foodservice customer.
BAKERY
Sara Lee Bakery is a leader in the U.S. fresh baked goods market, and holds
important positions in the U.S. and European refrigerated dough and European
fresh bread markets. Sara Lee Bakery also enjoys leading positions in frozen
baked goods in both the United States and Australia.
Second Quarter Highlights
-- Net sales increased 1%, driven by currency, new products and favorable
pricing and mix
-- Sara Lee brand sales grew significantly with strength in all categories
-- Overall U.S. fresh bread sales decreased due to weakness in regional
breads
-- Operating segment income improved significantly as a result of ongoing
cost reductions
Second Quarter Change Six Months Change
-------------------------------------------------
In millions 2004 2003 $ % 2004 2003 $ %
----------------------------------------------------------------------
Net Sales $871 $862 $9 1.0% $1,707 $1,684 $23 1.4%
----------------------------------------------------------------------
Increase / (decrease)
in net sales
from:
Changes in foreign
currency
exchange rates $- $(30) $30 $- $(51) $51
----------------------------------------------------------------------
----------------------------------------------------------------------
Operating segment
income $55 $21 $34 157.8% $95 $66 $29 43.4%
----------------------------------------------------------------------
Increase / (decrease)
in operating segment
income from:
Changes in foreign
currency
exchange rates $- $(3) $3 $- $(5) $5
Exit activities and
business
dispositions 3 (19) 22 - (18) 18
Accelerated
depreciation (1) - (1) (2) - (2)
Unit volume change vs. 2003
Second Six
Quarter Months
2004 2004
---------- ---------
Global unit volume (4) % (3)%
U.S. (4) % (4)%
Fresh baked goods (6) % (5)%
Refrigerated dough (7) % (5)%
Frozen retail 20 % 19 %
Foodservice (7) % (9)%
Europe 1 % 0 %
Fresh 2 % 1 %
Refrigerated 0 % (3)%
Overview
-- Net sales for the quarter increased 1% as strong sales for Sara Lee
fresh breads and Sara Lee frozen retail baked goods, higher sales in the
Spanish fresh bread division and favorable currency trends more than
offset softness in the U.S. regional fresh bread business and lower
bakery foodservice sales. For the first half, net sales were up 1%.
-- Operating segment income rose 158% compared with the quarter a year ago.
Higher restructuring expense in the prior year contributed 129% to this
increase. The remaining operating segment income increase of 29% was
partially attributable to higher gross margins and a lower cost
structure resulting from prior restructuring actions. Strong sales for
frozen Sara Lee heritage products, a very strong retail pie season,
positive product mix in the U.S. refrigerated dough business and
favorable foreign currency exchange rates also contributed to the profit
increase.
-- Sara Lee brand sales continued to grow, up nearly 20% in the second
quarter, driven by the success of both the fresh and frozen lines.
-- MAP spending was up 9% for the quarter and up 17% year-to-date,
primarily due to increased spending on the Sara Lee brand.
Fresh Baked Goods
-- In the second quarter, double-digit sales growth for fresh bakery
products sold under the Sara Lee brand in the United States partially
offset continuing softness in the company's regional fresh bread brands.
The growth of the Sara Lee brand continues to enhance the product mix of
the U.S. fresh business.
-- European baking showed volume and sales growth in the quarter, primarily
driven by the continued success of Bimbo crustless breads in Spain.
-- Continuing the expansion of the Sara Lee fresh bread line, four new Sara
Lee breads were launched in the United States at the beginning of the
third quarter. Delightful White and Wheat, fresh breads with lower
carbohydrates and lower calories; Heart Healthy Multi-Grain bread; and
Country Potato bread. Full distribution was achieved for the new Sara
Lee breads in the company's 33-state territory, and initial consumer
response has been very positive.
Refrigerated Dough
-- U.S. refrigerated dough benefited in the second quarter from a positive
mix and a more efficient promotional spend, offsetting volume declines.
Frozen Baked Goods
-- For the second quarter, unit volumes rose 20% and sales increased 11%
for U.S. frozen retail baked goods, mostly due to increased distribution
and market share gains. The company's heritage products - cheesecake,
pound cake and Danish - showed strength in the quarter, primarily due to
effective trade promotions.
-- In the frozen business in Australia, second quarter sales and profits
were positively impacted by favorable foreign currency exchange rates.
-- Results for the foodservice bakery business in the United States
decreased in the second quarter, mainly due to lower frozen pie sales to
a key customer.
BEVERAGE
Beverage is one of the largest producers of roast and ground coffee in the
world, competing in both retail and out-of-home categories. Its primary markets
are Europe, the United States and Brazil.
Second Quarter Highlights
-- Net sales were up, driven by price increases and favorable currency
-- Senseo sales more than doubled compared with last year's quarter
-- Coffee unit volumes were down slightly, mostly due to declines in
foodservice
-- Operating segment income was up as a result of favorable currency
Second Quarter Change Six Months Change
-------------------------------------------------
In millions 2004 2003 $ % 2004 2003 $ %
----------------------------------------------------------------------
Net Sales $821 $731 $90 12.3% $1,513 $1,350 $163 12.1%
----------------------------------------------------------------------
Increase / (decrease)
in net sales
from:
Changes in foreign
currency
exchange rates $- $(82) $82 $- $(134)$134
----------------------------------------------------------------------
----------------------------------------------------------------------
Operating segment
income $123 $121 $2 2.3% $221 $207 $14 6.8%
----------------------------------------------------------------------
Increase / (decrease)
in operating segment
income from:
Changes in foreign
currency
exchange rates $- $(17) $17 $- $(28) $28
Unit volume change vs. 2003
Second Six
Quarter Months
2004 2004
---------- ---------
Global unit volume (1) % (1)%
Retail 1 % 0 %
Europe (2) % (1)%
U.S. (3) % 6 %
Brazil 10 % (1)%
Out-of-home (5) % (3)%
Europe (2) % (3)%
U.S. (7) % (4)%
Overview
-- Favorable foreign currency exchange rates, particularly for the euro,
and price increases instituted during the past year in Brazil, Europe
and the United States to cover higher green coffee prices drove the 12%
sales growth in the quarter.
-- Global unit volumes were down 1% in the quarter as a 10% volume gain in
Brazil was offset by volume declines in both Europe and the United
States. The U.S. foodservice business was down 7%, and the European
retail business was down 2%. Year-to-date, unit volumes were down 1%.
-- Operating segment income grew 2% in the second quarter, driven primarily
by the strong euro. A favorable product mix in Europe as a result of
Senseo's ongoing success also contributed to the higher profits.
Offsetting this growth were lower results at foodservice in the United
States, higher pension costs and higher SG&A costs in Europe.
-- MAP spending for the Beverage business rose 3% in the quarter, driven by
a 19% increase in media advertising spending, particularly for Senseo.
Retail
-- For the quarter, European retail coffee sales growth was primarily
driven by the favorable impact of the strong euro, increased pricing due
to higher green coffee prices and a favorable product mix as a result of
the strong performance of Senseo. Unit volumes in Europe were down 2% as
a result of slightly declining markets and a retailer price war in Spain
benefiting private label and competing brands' volumes.
-- Senseo had a very strong second quarter. Sales more than doubled
compared with last year due to strong growth in every market - the
Netherlands, Belgium, France and Germany. Senseo was launched in Denmark
in the second quarter.
-- Unit volumes for the second quarter were down 3% in the U.S. retail
coffee market as volumes were negatively affected by aggressive price
discounting by competitors. Year-to-date, unit volumes were up 6%, due
to a very strong first quarter. Sales were up for the second quarter and
the first six months as a result of price increases taken over the past
year.
-- In Brazil, unit volumes recovered during the second quarter, up 10%,
after volume weakness in the first quarter as a result of coffee price
increases. Sales were up significantly for the quarter and year-to-date,
mainly driven by favorable changes in foreign currency rates as well as
the price increases. Operating profits also rose as a result of the
pricing strategy.
Out-of-home
-- Unit volumes in the U.S. foodservice coffee market decreased 7% during
the quarter and 4% year-to-date, as a result of weakness in the roast
and ground coffee segment due to heavy price competition and lower
volumes at a key customer. Unit volumes in the U.S. coffee concentrates
segment were up 3% during the quarter, and 7% year-to-date. Total
foodservice coffee sales in the United States were down 2% in the
quarter, but up 1% year-to-date.
-- In Europe, foodservice unit volumes decreased 2% during the quarter, and
3% year-to-date, mainly due to a weak market environment in the
Netherlands. Unit volumes for European coffee concentrates were up 3% in
the second quarter. Sales in the European foodservice market were up 17%
for the quarter and 16% for the first half, primarily due to the
strength of the euro. In addition, lower volumes were offset by higher
coffee prices.
HOUSEHOLD PRODUCTS
Household Products is Sara Lee's most global business, with important positions
in four core product categories: body care, air care, shoe care and
insecticides. This line of business also includes Direct Selling, which reaches
consumers through an independent sales force in countries around the world.
Second Quarter Highlights
-- Net sales increased in all four core categories due, in part, to the
strong euro
-- Direct Selling had strong growth in major markets
-- Operating segment income was up, driven by currency and growth in Direct
Selling
-- Core category unit volumes decreased slightly
Second Quarter Change Six Months Change
-------------------------------------------------
In millions 2004 2003 $ % 2004 2003 $ %
----------------------------------------------------------------------
Net Sales $604 $532 $72 13.4% $1,144 $1,010 $134 13.2%
----------------------------------------------------------------------
Increase / (decrease)
in net sales
from:
Changes in foreign
currency
exchange rates $- $(52) $52 $- $(89) $89
----------------------------------------------------------------------
----------------------------------------------------------------------
Operating segment
income $103 $92 $11 11.2% $170 $164 $6 3.5%
----------------------------------------------------------------------
Increase / (decrease)
in operating segment
income from:
Changes in foreign
currency
exchange rates $- $(7) $7 $- $(11) $11
Exit activities and
business
dispositions - - - (2) - (2)
Unit volume change vs. 2003
Second Six
Quarter Months
2004 2004
---------- ---------
Household & Body Care core unit volume (2) % 1 %
Body Care (3) % 4 %
Air Care (6) % (4)%
Shoe Care (3) % (5)%
Insecticides 15 % 18 %
Overview
-- Net sales grew 13% in the quarter, driven by favorable foreign currency
rates, slight sales growth at household and body care, and strong sales
growth in Direct Selling. Year-to-date, net sales were up 13%.
-- Unit volumes decreased 2% in household and body care's four core
categories, driven by volume softness in body care, air care and shoe
care, partially offset by strong unit volume growth in insecticides.
Year-to-date, unit volumes were up 1%.
-- Operating segment income increased 11% in the quarter as a result of
favorable foreign currency exchange rates and strong growth at Direct
Selling.
-- Direct Selling continued its sales growth momentum in the major markets
of Mexico, Australia, the Philippines and South Africa.
-- MAP spending for Household Products increased 6% in the quarter, driven
by an 8% increase in media advertising. MAP spending year-to-date is up
9%.
Household and Body Care
-- In body care, sales for the Sanex brand and local bath and shower brands
were up for the quarter, primarily due to favorable foreign currency
exchange rates.
-- Unit volumes for air fresheners declined in the quarter in several
European markets and the United States as a result of competitive
pressures in the areas of pricing and new product introductions. Ambi
Pur fragrance burner was introduced in eight countries during the
quarter, supported by a TV advertising campaign.
-- Shoe care unit volumes declined in the quarter, primarily due to trade
inventory reductions for Kiwi in the United States. Volume declines in
France and Italy were offset by growth in Malaysia and Thailand as well
as in Africa, where sales have recovered since counterfeit issues are
being dealt with aggressively. Overall, net sales for shoe care grew in
the second quarter due to currency and a favorable product mix.
-- Net sales for insecticides were up in the quarter as this category
benefited from strength in Europe, significant sales growth in Malaysia
and favorable currency exchange rates.
Direct Selling
-- Direct Selling net sales increased significantly, driven by strong
results in nearly every major market and favorable currency exchange
rates. The total number of sales orders increased as independent sales
representatives responded positively to holiday product lines and sales
incentives.
-- Direct Selling profits increased in the quarter due to improved results
in virtually every market, more than offsetting increases in selling,
distribution and pension costs.
INTIMATES AND UNDERWEAR
Sara Lee's Intimates and Underwear line of business includes intimate apparel,
knit products and legwear marketed under some of the most powerful brand names
in the apparel industry. Sara Lee holds leading share positions in these
categories in both North America and Europe.
Second Quarter Highlights
-- Net sales decreased versus a strong quarter last year
-- Weak holiday sales in the apparel category depressed unit volumes and
sales
-- Operating segment income was significantly lower as a result of lower
sales, lower prices and higher cotton and pension costs
Second Quarter Change Six Months Change
---------------------------------------------------------
In millions 2004 2003 $ % 2004 2003 $ %
----------------------------------------------------------------------
Net Sales $1,639 $1,676 $(37) (2.2)% $3,243 $3,369 $(126) (3.7)%
----------------------------------------------------------------------
Increase /
(decrease)
in net sales
from:
Changes in
foreign
currency
exchange
rates $- $(73) $73 $- $(120) $120
Dispositions - 4 (4) - 4 (4)
----------------------------------------------------------------------
----------------------------------------------------------------------
Operating
segment
income $132 $209 $(77)(36.5)% $259 $422 $(163)(38.6)%
----------------------------------------------------------------------
Increase /
(decrease)
in operating
segment
income from:
Changes in
foreign
currency
exchange
rates $- $(4) $4 $- $(8) $8
Exit
activities
and business
dispositions - 15 (15) (4) 22 (26)
Unit volume change vs. 2003
Second Six
Quarter Months
2004 2004
---------- ---------
Global unit volume (4) % (6)%
Intimate Apparel - Global (4) % (6)%
U.S. (7) % (9)%
Europe (2) % (2)%
Knit Products - Global (4) % (6)%
U.S. (2) % (4)%
Europe (13) % (16)%
Legwear - Global (1) % (3)%
Sheer Hosiery - Global (3) % (9)%
Socks - Global 2 % 4 %
Overview
-- Global unit volumes decreased 4% in the quarter and net sales were down
2%. The declines were primarily the result of soft intimate apparel
sales in the U.S. mass channel, lower fleece sales in U.S. Casualwear,
lower knit products sales in Europe and price decreases in the U.S.
printables market.
-- Compared with a strong second quarter last year, operating segment
income declined 37% in the quarter due to lower sales, lower margins and
increased cotton and pension costs. Year-to-date, operating segment
income was down 39%.
-- MAP spending decreased 3% in the quarter, including a 7% decrease in
media advertising compared with very strong spending last year. For the
first six months, MAP spending was up 6%, driven by a 13% increase in
media advertising focused on new product launches.
Intimate Apparel
-- Worldwide intimate apparel sales decreased in the quarter, mainly due to
the U.S. intimate apparel business.
-- In the United States, intimate apparel unit volumes fell 7% in the
quarter, primarily driven by competition from private label in the mass
channel. In Europe, unit volumes decreased 2% in the quarter, as strong
results in the Dim and Playtex businesses were offset by lower volumes
in the U.K.
-- Profits for intimate apparel fell in the quarter, mainly as a result of
lower sales in the United States and increased pension costs.
-- The European intimates business continued to launch exciting new
products. Dim Body Touch Up, a comfortable, seamless push-up bra, was
introduced in France during the quarter and was supported with an
eye-catching outdoor advertising campaign.
Knit Products
-- U.S. underwear unit volumes and sales declined, as key mass retailers
continued to reduce inventories compared to year-ago levels, despite
retail point of sales (POS) growth for these products during the
quarter. Profits in this group increased as a result of reduced
expenses.
-- Hanes ComfortSoft, men's underwear with a comfortable tagless waistband,
was introduced in the mass channel during the quarter. The launch was
supported by a new TV commercial featuring Michael Jordan. Hanes
Ultimate, another new tagless underwear product, was launched at U.S.
department stores during the quarter.
-- In the women's underwear segment, sales for Hanes Her Way at Home
sleepwear outperformed the overall sleepwear category at a key retailer.
-- International underwear unit volumes were down in the quarter due to a
planned decline in the U.K. and softness in Portugal, more than
offsetting the continued success of Dim Men in France.
-- U.S. Activewear unit volumes decreased in the quarter, mainly due to
lower volumes in Casualwear as a result of soft fleece sales. Sales and
profits in Casualwear decreased as a result of the warm fall and early
winter weather in the United States. Sales and profits in the printable
T-shirt business fell as a result of strong price competition in the
category.
Legwear
-- Net sales and profits in the quarter increased in legwear, primarily
driven by very good results in our U.S. sock business.
-- Worldwide unit volumes for the quarter for legwear decreased 1%,
combining a 2% unit volume increase for socks with a 3% decline for
sheer hosiery.
-- Unit volume growth for socks in the quarter was driven by continued
strong retail sales growth in the U.S. mass retail channel.
-- Total sheer hosiery unit volumes in the United States were flat for the
quarter despite continued category declines. Innovative, new L'eggs
sheer hosiery products, such as Silken Mist Shaper, Silken Mist Toeless
and Sheer Vitality Anti-Cellulite were launched at the end of the second
quarter.
Net Interest Expense, General Corporate Expenses, Tax Rate and Share Repurchase
Net interest expense was $43 million for the second quarter, compared to $50
million in last year's second quarter. The decline in interest expense was
primarily due to lower rates on floating rate debt.
General corporate expenses were $80 million in the second quarter of fiscal 2004
as compared to $60 million in the comparable period of the prior year. The
increase was due to the centralization of certain finance and marketing
functions, which increased corporate administrative costs by $7 million; a $7
million charge to write down certain trademarks to fair value; and higher
pension and employee benefit costs.
The effective tax rate was 17.9% for the second quarter of fiscal 2004, compared
to 17.5% in the prior year's quarter.
During the second quarter of fiscal 2004, Sara Lee Corporation repurchased more
than 1 million shares of its common stock at an average price of $19.93 per
share. Year-to-date, the company has repurchased more than 14 million shares at
an average price of $19.07 per share. Approximately 38 million shares remain
authorized by the board of directors for repurchase.
Exit and Business Disposition Activities
Exit and business disposition activities had no net impact on diluted EPS in
either the second quarter or first six months of fiscal 2004. Exit and business
disposition activities recognized in fiscal 2003 had no net impact on second
quarter diluted EPS, but increased diluted EPS by $.01 for the first six months
of fiscal 2003.
In the second quarter of fiscal 2004, the corporation completed the sale of
Filodoro Calze S.p.A., a wholly owned European hosiery operation, and received
$37 million of cash consideration. No material gain or loss was recognized in
the second quarter as a result of this transaction.
During the quarter, the corporation recognized $6 million of pretax profits from
the sale of buildings and the settlement of lease obligations related to the
Bakery business. Offsetting this amount was $7 million of pretax charges,
primarily related to severance of corporate office and Bakery personnel. In the
second quarter of fiscal 2003, the corporation's management approved actions to
sever employees, exit leases and dispose of assets in the Bakery segment. These
actions resulted in a pretax charge of $22 million.
In addition, the corporation completed certain restructuring and business
disposition activities for amounts that were less than previously reflected in
the financial statements, and the recognition of these completed transactions
essentially offset the costs associated with the Bakery restructuring actions.
In the first half of fiscal 2004, business disposition activity primarily
consisted of the sale of the corporation's minority ownership interest in
Johnsonville Foods Inc. and the sale of Filodoro. Cash of $114 million was
received from business disposition activities and these transactions resulted in
pretax and after tax gains of $9 million and $4 million, respectively. Through
the date-of-sale, the Filodoro business had fiscal 2004 net sales of $44 million
and an operating loss of $2 million. Exit activities recognized in the first
half of fiscal 2004 reduced pretax and after tax profits by $14 million and $8
million, respectively, and consisted primarily of severance and plant closure
costs in the corporation's Meats and Bakery operations.
In the first half of fiscal 2003, business disposition and exit costs increased
pretax profits, net income and diluted EPS by $12 million, $11 million and $.01
per share, respectively.
Outlook
Sara Lee's management currently expects diluted EPS for the third quarter of
fiscal 2004 to fall within a range of $.41 to $.45, compared to $.33 in the
year-ago period. In January 2004, a portion of the contingencies associated with
the sale of a business in 1999 were resolved and the corporation received a cash
payment, which will benefit third quarter and full year earnings by
approximately $.15 per share. Full-year fiscal 2004 diluted EPS are expected to
be in a range of $1.51 to $1.61, compared to $1.50 in fiscal 2003.
Management expects the challenging market conditions that affected operations in
the second quarter of fiscal 2004, including higher raw material costs,
competitive pricing in printables and weak foodservice markets, to continue into
the third quarter of this year. For full fiscal 2004, however, four of the
company's five lines of business - Meats, Bakery, Beverage and Household
Products - are expected to show good gains in operating segment income, driven
by higher sales from new product activity, select price increases to cover
higher raw material costs and an improved economic and retail environment.
Intimates and Underwear operating segment income will be down for the year,
although improving on a year-over-year basis in the second half as new product
activity and a better market environment drive performance. At current exchange
rates, primarily relating to the euro, foreign currency translations are
expected to have a positive impact on fiscal 2004 results.
Webcast
Sara Lee Corporation's review of second quarter results for fiscal 2004 will be
broadcast live via the Internet today at 9 a.m. CST. During the webcast, the
company will discuss second quarter results and provide an outlook for the third
quarter and full fiscal year. The live webcast can be accessed at
www.saralee.com, and is anticipated to conclude by 10 a.m. CST. For people who
are unable to listen to the webcast live, the earnings review will be available
two hours following the completion of the webcast in the Investors section of
the Sara Lee corporate Web site until Thursday, Feb. 5, 2004.
Forward-looking statements
This news release contains certain forward-looking statements concerning Sara
Lee's expected financial results and cost savings for the third quarter and full
fiscal year 2004. These forward-looking statements are based on currently
available competitive, financial and economic data and management's views and
assumptions regarding future events. Such forward-looking statements are
inherently uncertain, and investors must recognize that actual results may
differ from those expressed or implied in the forward-looking statements.
Consequently, the corporation wishes to caution readers not to place undue
reliance on any forward-looking statements. Among the factors that could cause
Sara Lee's actual results to differ from such forward-looking statements are the
following: (i) impacts on reported earnings from fluctuations in foreign
currency exchange rates - particularly the euro - given Sara Lee's significant
concentration of business in Western Europe; (ii) significant competitive
activity, including advertising, promotional and price competition, and changes
in consumer demand for Sara Lee's products; (iii) a significant reduction in
Sara Lee's business with any of its major customers, such as Wal-Mart, the
corporation's largest customer, including a reduction resulting from adverse
developments in the customer's business; (iv) the impact of declines in equity
markets on the funded status and annual expense of the corporation's defined
benefit pension plans and the impact of such market declines on consumer
spending; (v) Sara Lee's ability to continue to source production and conduct
manufacturing and selling operations in various countries due to changing
business conditions, the financial condition of suppliers and political
environments; (vi) Sara Lee's ability to achieve planned cash flows from capital
expenditures and acquisitions, particularly Earthgrains, and the impact of
changing interest rates and the cost of capital on the discounted value of those
planned cash flows; (vii) Sara Lee's ability to realize the estimated savings
and productivity improvements associated with prior restructuring initiatives;
(viii) fluctuations in the cost and availability of various raw materials; (ix)
the impact of various food safety issues on the consumption of meat products in
the United States and parts of Europe and the profitability of the corporation's
meat business; (x) credit and other business risks associated with customers
operating in a highly competitive retail environment; and (xi) inherent risks in
the marketplace associated with new product introductions, including
uncertainties about trade and consumer acceptance. In addition, the
corporation's results may also be affected by general factors, such as economic
conditions, political developments, interest and inflation rates, accounting
standards, taxes, and laws and regulations in markets where the corporation
competes.
We have provided additional information in our Form 10-K for fiscal 2003, which
readers are encouraged to review, concerning factors that could cause actual
results to differ materially from those in the forward-looking statements. Sara
Lee undertakes no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise.
Company Description
Sara Lee Corporation (www.saralee.com) is one of the world's leading branded
consumer packaged goods companies, selling its products in nearly 200 countries.
The company has three global businesses - Food and Beverage, Intimates and
Underwear, and Household Products - through which it manufactures and markets
products of exceptional quality and value under leading, well-known brand names
such as Sara Lee, Earth Grains, Jimmy Dean, Douwe Egberts, Chock full o' Nuts,
Hanes, Playtex, Bali, Dim, Kiwi, Ambi Pur and Sanex.
Consolidated Statements of Income Sara Lee Corporation (NYSE)
---------------------------
(in millions except per share amounts)
----------------------------------------------------------------------
Thirteen Weeks Ended Twenty-Six Weeks Ended
--------------------------- ---------------------------
Dec. 27, Dec. 28, Percent Dec. 27, Dec. 28, Percent
2003 2002 Change 2003 2002 Change
--------- --------- ------- --------- --------- -------
Net sales $ 5,017 $ 4,776 5.1 % $ 9,683 $ 9,310 4.0 %
--------- --------- --------- ---------
Cost of sales 3,070 2,874 5,938 5,626
Selling,
general and
administrative
expenses 1,523 1,434 2,988 2,800
(Income) charges
for exit
activities
and business
dispositions 1 (3) 5 (12)
Interest expense 62 68 132 135
Interest income (19) (18) (40) (37)
--------- --------- --------- ---------
4,637 4,355 9,023 8,512
--------- --------- --------- ---------
Income before
income taxes 380 421 (9.6) 660 798 (17.2)
Income taxes 68 73 118 142
--------- --------- --------- ---------
Net income $ 312 $ 348 (10.0) $ 542 $ 656 (17.3)
========= ========= ========= =========
Net income per
common share
Basic $ 0.39 $ 0.44 (11.4) $ 0.69 $ 0.83 (16.9)
========= ========= ========= =========
Diluted $ 0.39 $ 0.42 (7.1) $ 0.68 $ 0.80 (15.0)
========= ========= ========= =========
Average shares
outstanding
Basic 792 783 785 783
========= ========= ========= =========
Diluted 799 818 802 816
========= ========= ========= =========
See accompanying notes to financial statements.
Operating Results by Industry Segment Sara Lee Corporation (NYSE)
---------------------------
(in millions) Thirteen Weeks Ended
----------------------------------------------------------------------
Sales Operating Income
------------------- -------------------
Dec. 27, Dec. 28, Percent Dec. 27, Dec. 28, Percent
2003 2002 Change 2003 2002 Change
--------- --------- ------- --------- --------- -------
Sara Lee Meats $ 1,083 $ 976 11.0 % $ 115 $ 113 2.1 %
Sara Lee Bakery 871 862 1.0 55 21 NM
Beverage 821 731 12.3 123 121 2.3
Household
Products 604 532 13.4 103 92 11.2
Intimates and
Underwear 1,639 1,676 (2.2) 132 209 (36.5)
--------- --------- ------- --------- --------- -------
Total sales
and operating
segment
income 5,018 4,777 5.0 528 556 (4.9)
Intersegment
sales (1) (1) 39.3 -- -- --
Amortization of
identifiable
intangibles -- -- -- (25) (25) 0.3
General corporate
expenses -- -- -- (80) (60) (32.0)
--------- --------- ------- --------- --------- -------
Total net sales
and operating
income 5,017 4,776 5.1 423 471 (9.9)
Net interest
expense -- -- -- (43) (50) 13.0
--------- --------- ------- --------- --------- -------
Net sales and
income before
income taxes $ 5,017 $ 4,776 5.1 % $ 380 $ 421 (9.6)%
========= ========= ======= ========= ========= =======
Twenty-Six Weeks Ended
----------------------------------------------------------------------
Sales Operating Income
------------------- -------------------
Dec. 27, Dec. 28, Percent Dec. 27, Dec. 28, Percent
2003 2002 Change 2003 2002 Change
--------- --------- ------- --------- --------- -------
Sara Lee Meats $ 2,078 $ 1,899 9.4 % $ 216 $ 203 7.0 %
Sara Lee Bakery 1,707 1,684 1.4 95 66 43.4
Beverage 1,513 1,350 12.1 221 207 6.8
Household
Products 1,144 1,010 13.2 170 164 3.5
Intimates and
Underwear 3,243 3,369 (3.7) 259 422 (38.6)
--------- --------- ------- --------- --------- -------
Total sales
and operating
segment
income 9,685 9,312 4.0 961 1,062 (9.4)
Intersegment
sales (2) (2) 26.5 -- -- --
Amortization of
identifiable
intangibles -- -- -- (50) (49) (2.5)
General corporate
expenses -- -- -- (159) (117) (35.6)
--------- --------- ------- --------- --------- -------
Total net sales
and operating
income 9,683 9,310 4.0 752 896 (16.0)
Net interest
expense -- -- -- (92) (98) 6.1
--------- --------- ------- --------- --------- -------
Net sales and
income before
income taxes $ 9,683 $ 9,310 4.0 % $ 660 $ 798 (17.2)%
========= ========= ======= ========= ========= =======
See accompanying notes to financial statements.
Sara Lee Corporation (NYSE)
---------------------------
Consolidated Balance Sheets
(in millions)
----------------------------------------------------------------------
December 27, June 28,
2003 2003
-------------------------------
ASSETS
Cash and equivalents $ 591 $ 942
Trade accounts receivable 2,095 1,928
Inventories 2,698 2,704
Other current assets 396 378
Net assets of businesses held for sale 1 1
-------------------------------
Total current assets 5,781 5,953
Other non-current assets 242 284
Property, net 3,343 3,350
Trademarks and other identifiable
intangibles, net 2,106 2,110
Goodwill, net 3,436 3,387
-------------------------------
$ 14,908 $ 15,084
===============================
LIABILITIES AND EQUITY
Notes payable $ 131 $ 75
Accounts payable 1,262 1,286
Accrued liabilities 3,071 2,834
Current maturities of long-term debt 1,064 1,004
-------------------------------
Total current liabilities 5,528 5,199
Long-term debt 4,608 5,157
Deferred income taxes 172 200
Pension obligation 1,178 1,178
Other non-current liabilities 1,041 901
Minority interest in subsidiaries 60 358
Preferred stock -- 39
Common stockholders' equity 2,321 2,052
-------------------------------
$ 14,908 $ 15,084
===============================
See accompanying notes to financial statements.
Notes to Financial Statements
1.) Exit and Business Disposition Activities
Exit and business disposition activities had no net impact on
diluted earnings per share in either the second quarter or first
six months of fiscal 2004. Exit and business disposition
activities recognized in fiscal 2003 had no net impact on second
quarter diluted earnings per share and increased diluted earnings
per share by $.01 for the first six months of fiscal 2003.
In the second quarter of fiscal 2004, the corporation completed
the sale of Filodoro, a wholly owned European hosiery operation,
and received $37 million of cash consideration. No material gain
or loss was recognized in the second quarter as a result of this
transaction. During the quarter, the corporation recognized $6
million of pretax profits from the sale of buildings and the
settlement of lease obligations related to the Bakery business.
Offsetting this amount was $7 million of pretax charges primarily
related to severance of corporate office and Bakery personnel. In
the second quarter of fiscal 2003, the corporation's management
approved actions to sever employees, exit leases and dispose of
assets in the Bakery segment. These actions resulted in a pretax
charge of $22 million. In addition, the corporation completed
certain restructuring and business disposition activities for
amounts that were less than previously reflected in the financial
statements, and the recognition of these completed transactions
essentially offset the costs associated with the Bakery
restructuring actions.
In the first half of fiscal 2004, business disposition activity
primarily consisted of the sale of the corporation's minority
ownership interest in Johnsonville Foods Inc. and the sale of
Filodoro. Cash of $114 million was received from business
disposition activities and these transactions resulted in pretax
and aftertax gains of $9 million and $4 million, respectively.
Through the date of sale, the Filodoro business had net sales of
$44 million and an operating loss of $2 million. Exit activities
recognized in the first half of fiscal 2004 reduced pretax and
aftertax profits by $14 million and $8 million, respectively, and
consisted primarily of severance and plant closure costs in the
corporation's Meats and Bakery operations. In the first half of
2003, business disposition and exit costs increased pretax
profits, net income and diluted earnings per share by $12 million,
$11 million and $.01 per share.
2.) Subsequent Event
Under the terms of a 1999 agreement related to the sale of a
European cut tobacco business, the corporation is entitled to
receive cash payments if tobacco continues to be a legal product
in the Netherlands, Belgium and Germany through 2010. In January
2004, the contingencies associated with a portion of these
payments passed, and the corporation received a cash payment of
$119 million. The receipt of this cash will be recognized in the
corporation's earnings in the third quarter of fiscal 2004 and is
expected to increase diluted earnings per share by approximately
$.15 per share. The contingent payment arrangement is described in
the corporation's annual report. Should additional amounts be
received they will be recognized in income upon receipt.
CONTACT: Sara Lee Corporation
Julie Ketay (Media), 312-558-8727
Aaron Hoffman (Analysts), 312-558-8739