The Wacky World of Sara Lee

At first glance, it's hard to even know what numbers to look at in Sara Lee's (NYSE: SLE  ) fiscal-second-quarter earnings report. Between gains on sales of pieces of the business and results from discontinued operations, investors have to do a little financial gymnastics to figure out what profit actually represents what's left of Sara Lee.

For the quarter, the core business reported $0.24 in earnings per share, an 11% decline from last year and a penny shy of analysts' expectations. Sales from continuing operations also fell and were short of Wall Street's estimates.

While Sara Lee's quarter shared some similarities with other consumer goods companies that have reported earnings, like Procter & Gamble (NYSE: PG  ) and Clorox (NYSE: CLX  ) , it's clear the company faces additional struggles. Similar to P&G and Clorox, economic conditions appear to still be weighing on Sara Lee, however, unlike the others, it was unable to get much of a lift from its international businesses. While adjusted net sales grew 7% in the international beverage division, the adjusted operating income in that segment slid 11%. The international bakery group was even worse, posting an adjusted sales decline of 7% and adjusted operating income of just $5 million.

When commodities attack
Of particular note in Sara Lee's quarter was the impact of commodity prices. We've heard mention of rising commodity costs from most of the consumer goods companies, but it appears to have been a much bigger problem for Sara Lee, which makes sense, because of the company's focus on food. Yesterday we also saw J.M. Smucker (NYSE: SJM  ) announce price bumps due to green coffee prices and commodity costs ate into Flowers Foods' (NYSE: FLO  ) fourth quarter, and that company dropped its 2011 earnings guidance.

There may be some relief ahead, as Sara Lee will continue to see the impact of price increases it pushed through in the first half of its fiscal year, and it's already planning further price increases. However, the company doesn't sound particularly confident that price increases will be enough to counteract the commodity increases, particularly when it comes to coffee.

$1 billion lost
But rising commodity costs may not be the prime issue for Sara Lee investors. The company is getting ready to split itself in two. One company will retain the Sara Lee name and take with it the North American food businesses -- which include brands like Sara Lee, Hillshire Farm, and Ball Park -- and the as-yet-unnamed second business will take the company's beverage portfolio and the struggling international bakery business.

A recent article from Bloomberg took Sara Lee to task for opting to split the company up rather than pursue any of a number of takeover attempts that included private equity suitors KKR (NYSE: KKR  ) and Apollo Global Management and strategic buyer JBS. The article suggested that management's unwillingness to sell the company has cost shareholders roughly $1 billion.

More generally, though, the article criticized the company for a decade full of action -- defined primarily as acquisitions and dispositions -- but little in the way of results for investors. The underwhelming track record has to make shareholders wonder whether the upcoming split will really be the key to unlocking the company's value or, as one analyst in the article put it, it's simply the company "[giving] up on its commitment to creating shareholder value in favor of just doing something."

Want to keep up with the saga at Sara Lee? Add it to your Foolish watchlist.

Clorox, Flowers Foods, and Procter & Gamble are Motley Fool Income Investor selections. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


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