Mother's Day is this Sunday, and when I started digging into the recent third-quarter for Sara Lee's (NYSE:SLE), I started thinking about Mother's Day, specifically Mother's Day cakes. The company's recent results are a little bit like the cakes we've all no doubt tried to bake for our mothers as children. It looks great on the outside - icing can cover a multitude of sins - but when your mother cuts beyond the frosting she finds that the cake is missing a few key ingredients... and possibly salt has been substituted for sugar.
Read on to dig into the numbers and learn why the quarter left me with such conflicted feelings.
Appetizing First Glance
In the period ended March 29 the Illinois-based company known for its Jimmy Dean sausages and other tasty fare cooked up a healthy profit of 30 cents per share, which is markedly above the 16 cents a share it reported in the comparable period one year ago. Meanwhile its revenue line was up from $2.9 billion last year to $3.2 billion in the period. Not bad right?
A quick gander at a breakdown of its operations reveals that the company posted sales increases in most of its major business units. In fact, its household and body care, international bakery, international beverage, and North American retail bakery all showed double-digit increases in net sales. The only unit that showed some weakness was food service which was essentially flat on the sales front. Again, that’s not too shabby.
In short, this is all good news because it demonstrates Sara Lee's ability to grow and profit despite a lackluster economy and stiff competition from other major players in this space such as Kraft Foods (NYSE:KFT) and ConAgra Foods (NYSE:CAG). Rising sales and unit operations results also give Sara Lee some cushion against rising commodities inputs. (To learn how companies protect against sudden increases in input costs, read Corporate Use Of Derivatives For Hedging.)
Hidden Problems
While Sara Lee's top line did grow at a healthy pace a mentioned above, management was also quick to point out that it received a boost from the strong euro and from price increases. Now don't get me wrong, it all counts, and I'll certainly take it; however, it leaves me a bit concerned too. The euro benefit might not always be there. Price increases may have given Sara Lee's sales a bit of a boost in the most recent quarter, but I doubt they are sustainable. Tightening purse strings and competitive offerings may make passing along further price increases difficult.
Another concern is that full-year 2008 adjusted earnings per share could come in at 80-84 cents a share. As recently as February, in conjunction with its second quarter numbers, the company said it could earn (Core Sara Lee EPS) between 82-88 cents per share. This isn't the end of the world by any stretch, as analysts were reportedly expecting 82 cents a share anyway; however, it's still a disappointment. It could leave a sour taste in the mouth of analysts, not be a good thing in this market.
Put the Fork Down?
Sara Lee's third quarter numbers were decent overall, but a bleak forecast for 2008 forced me to pause mid-bite. In addition, I would remain cautious because the competitive environment and rising costs could be a burden going forward.
For more on financial statement analysis, see Financial Statements: Introduction.