Sara Lee: Say It Isn't So

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"Say that everything is still OK,
that's all I want to know,
And what they're saying, oh, please,
Say it isn't so."

-- "Say It Isn't So," written by Irving Berlin and sung by Billie Holiday and others

Today, Sara Lee (NYSE: SLE) was expected to earn $0.31 a share but delivered $0.24, including multiple charges and gains that netted out to a nickel's worth of reduction in earnings, on a sluggish 1% increase in revenue. It was not a pretty picture.

And it's constantly lowering 2005 earnings guidance, a disturbing trend. At the end of 2004, the company was looking for $1.61 to $1.71 a share. Then in January, that was pruned back rather sharply to $1.46 to $1.56 a share. Now it is being lowered to $1.39 to $1.41 for the fiscal year that ends June 5 -- and that's down from the $1.59 the company earned last year. The good news is that the latest guidance includes a charge for repatriating earnings from outside the U.S. -- a charge not in previous estimates -- which reduces earnings but does not materially affect the company's potential to produce revenue.

Sara Lee blamed lower results on higher commodity costs across all lines of business and the very difficult European retail environment. While you can say that higher raw material costs are plaguing everyone from General Mills (NYSE: GIS) to Kraft (NYSE: KFT), those costs aren't killing their earnings. In fact, Kraft reaffirmed today that it expects 2005 profits to increase 12% to 15%.

After slumping sharply in early morning trading, the stock has since recovered and is down only 3% in afternoon trading.

The company's restructuring may hold some appeal for investors. Sara Lee plans to shed assets contributing 40% of sales to focus on foods, beverages, and household products. The apparel business, which includes the likes of Hanes, Playtex, and others and has $4.5 billion in annual sales, will be spun off to shareholders. That should enable management to concentrate on the company's core business.

The company also plans to sell Meats Europe, its direct-to-customer sales operation, and its U.S. retail coffee business (minus the fast-growing Senseo brand). These businesses, with total annual sales of $1.85 billion, could provide cash to help reduce Sara Lee's net debt (total debt minus cash) of $4 billion or increase its dividend, depending on which one provides the highest return to shareholders.

There is a lot of uncertainty here, but one thing isn't in jeopardy. The company is making enough greenbacks to pay its generous 3.6% dividend.

Short-term, an earnings rebound is not in the cards, at least in my opinion. Intermediate-term, the company has a restructuring to complete -- and that is going to create uncertainty. How the restructured company will perform is anyone's guess. With so much uncertainty, the best investors should expect in the near term is for the stock to move in step with market averages.

Interested in other companies that pay dividends? Mathew Emmert has picked Sara Lee and plenty of others for his Income Investor newsletter. Click here for a 30-day free trial.

Fool contributor W.D. Crotty does not own stock in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy .