Sara Lee Slimming Down

Conglomerate Sara Lee (NYSE:SLE) posted a 5% increase in second-quarter earnings to $0.41, handily topping expectations, on sales that rose 3.6% to $5.2 billion. Unfortunately, the sweet results came with a rather bitter aftertaste. Citing the impact of rising raw materials costs, retail price wars, and soft European consumer spending, the company has scaled back its second-half outlook and is now forecasting fiscal 2005 earnings of $1.46 to $1.56, well below a prior range of $1.61 to $1.71.

High commodity costs have plagued many companies over the past few quarters, from General Mills (NYSE:GIS) to Procter & Gamble (NYSE:PG) to Kraft (NYSE:KFT). Coffee, for example, has soared to a four-and-a-half-year high, prompting Kraft to raise the price on a can of Maxwell House by 14%. The decision followed earlier hikes announced by Procter & Gamble and Starbucks (NASDAQ:SBUX).

Sara Lee had been expecting to shell out an extra $250 million this year for raw materials, but with cotton, meat, and energy prices (among others) remaining stubbornly high, management has now been forced to revise that figure to $350 million. With retailers (particularly in Europe) exerting strong pricing pressure, there are precious few opportunities to pass those increased costs along to consumers.

Sara Lee has made a concerted effort to shed its nonessential parts and mold itself into a more cohesive business, rather than a loose confederation of disparate companies. The company has divested its Coach leather goods subsidiary, as well as its European tobacco holdings -- which are now throwing off $120 million in annual royalty payments. It has also announced that its European intimate apparel lines have undergone a "strategic review," meaning they too are likely on the auction block.

Still, what is left behind is hardly a stripped-down version, with five distinct segments (three of which just reported declining operating income) offering products ranging from Jimmy Dean Sausage to Hanes underwear to Endust furniture cleaner. As Tom Gardner explained earlier this month, one of the principal keys to success lies in a company's ability to do three things: focus, focus, focus. While he was referring to the fertile small-cap fields where he mines for Hidden Gems, even larger companies should be wary of the path of di-worse-ification, which often leads to a pronounced lack of operational focus.

To its credit, though, Sara Lee has established a brand segmentation strategy, which it claims to be a "valuable tool for focusing resources." The plan involves funneling a larger percentage of advertising dollars to the brands that it deems have the most upside potential, and last quarter sales of those nine brands jumped 14%, easily outpacing the company's overall 4% growth rate.

Let's not forget, Sara Lee was an early Motley Fool Income Investor selection, and for valid reasons. The company may be far-flung, but its everyday brands are market leaders, and 28 of them raked in more than $100 million in combined sales last year. All those revenues help generate ample cash flows, which have enabled the firm to consistently raise its dividend yield to 3.4% -- double that of the Standard & Poor's 500. That generosity allows for a little more patience as the company works through sluggish conditions.

Not only does Sara Lee offer an attractive yield, but also since its inclusion in Motley Fool Income Investor , its 19% total return has outperformed the market by nearly four points. Sign up today for a no-obligation, free-trial offer.

Fool contributor Nathan Slaughter seldom has the willpower to resist a Sara Lee pie, but he owns none of the companies mentioned.