Sara Lee's fiscal 1Q profit rises 15 percent

MILWAUKEE - Sara Lee Corp. managed to increase the North American market share for its namesake breads and other brands in a tough economy during its first quarter, but European sales slumped as consumers started trading down to off-brand products.

Analysts worry that trend could be bad news for the Downers Grove, Ill.-based food company, which has about half of its business in Europe.

Brenda Barnes, chief executive of Sara Lee, said the outlook in Europe was "challenging."

She told investors on a conference call the company is seeing weakness in France and Spain in its bakery division, and is noticing that shoppers are starting to trade down to private label bread in Spain.

The Netherlands, which Barnes said is "crucially important for us," is not as weak as Spain, France and Britain. But she said there are signs consumers there are shifting to segment their shopping. The company will continue to go after these customers, she said.

"We very much are going to play in both sides of that. Brand offerings, price points, merchandising, distribution in places that, you know, where the consumer shops," she said.

Christopher Shanahan, a research analyst with Frost & Sullivan, said the European business slump was a big point of concern for the company since about half of its business is there. He said the majority of its international business is centered in Europe.

"The demand for their goods dropped more than 10 percent over the last year, so that means they're diminishing in share in that market," he said. "Overall they're not earning as much. Luckily, they're seeing stronger growth outside of Europe."

It's that growth in the North American markets that helped push Sara Lee's earnings up 15 percent in the first quarter of its fiscal year. The company said profit rose to $230 million, or 32 cents per share, in the three months ending Sept. 27. That was up from $200 million, or 28 cents per share, in the same period last year.

Sara Lee said it benefited from a weaker dollar and the fact that it had raised prices to offset high commodity costs.

Revenue rose 10 percent to $3.35 billion on sales growth in key business units like North American retail and fresh bakery, and international household and body care.

The earnings beat the expectations of analysts who had predicted, according to Thomson Reuters, that Sara Lee would earn 23 cents per share on sales of $3.35 billion in the quarter.

But shares tumbled after the company lowered its outlook for fiscal 2009, citing a now-stronger U.S. dollar and having more shares outstanding, because it suspended its buyback program. Shares of Sara Lee fell $1.66, or 14 percent, to close at $10.20 Wednesday.

Sara Lee said net sales rose 10.6 percent to $680 million in its North American retail unit, and the gains were driven by higher unit volumes, higher prices and a favorable sales mix — meaning people bought more expensive products. Unit volume rose 2.5 percent, driven by sales of Ball Park hot dogs, Hillshire Farm smoked sausage, lunch meats, cocktail links and Sara Lee frozen sweet goods.

Many key brands, including Jimmy Dean, Senseo and Ball Park, increased their market share in the quarter. The company raised prices on meat products by 5 percent in July and said consumers are still sticking with the brands, not trading down to private label meat products.

North American Fresh Bakery net sales grew 17 percent to $571 million, also driven by higher prices to offset input costs and volume growth of 6.6 percent. The company said it saw growth in branded and private label fresh bakery products. Sara Lee said its market share for its namesake bread, according to Information Resources Inc., grew 0.6 percentage point in the quarter to 8.8 percent, solidifying its lead as the nation's top fresh bread brand.

Shanahan said Sara Lee is gaining market share as more people are eating at home — rather than in restaurants — to save money. Though there's worry about shoppers trading down to private label brands — which are less expensive — the numbers show that the habit of buying their favorite foods is hard to break, he said.

"Their budgets are squeezed more, they're buying less food with the same amount of money and the ability to switch away to other products is diminishing," he said. "Their choices aren't as strong."

But that trade down is happening overseas. Economic pressures in Spain and France led to weak volumes in the international bakery segment. In the segment overall unit volumes fell 11.5 percent in the quarter, while net sales were up 4 percent to $229 million, driven by price increases and favorable foreign currency exchange rates.

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