Sara Lee Corp reported lower-than-expected quarterly sales and forecast an earnings range for 2011 that is largely below analysts' estimates, as the maker of Jimmy Dean sausages invests more to market its brands in what remains a tough environment for food makers.
Shares of Sara Lee, which is searching for a new chief executive after Brenda Barnes stepped down to recover from a stroke, were down 1.2 percent in afternoon trade. They fell nearly 5 percent earlier in the session.
Adding to pessimism on Wall Street, the U.S. government cut its forecast for world wheat harvests due to a devastating drought in Russia. Prospects for tighter wheat supplies have sent prices for the commodity higher.
The maker of Sara Lee baked goods and Hillshire Farm lunch meat said it was confident it can cope with rapidly rising wheat costs in 2011 through commodity hedging and price increases, which may take the form of reducing promotions or higher actual prices.
"It will ultimately depend on where wheat settles in the future ... and what our competitors do," Christopher J. (CJ) Fraleigh, head of North American retail and foodservice, said in an interview.
Fraleigh, who some analysts see as a CEO candidate, added that Sara Lee expects to raise prices this year across most of its portfolio to make up for an expected 15 percent increase in the cost of ingredients.
Goldman Sachs analyst Judy Hong said it might be difficult for Sara Lee to offset rising costs with price hikes, given the intense competition in the grocery aisle.
"In addition, (the) international beverage outlook also looks soft, given macro headwinds," Hong said in a research note.
Still, increases in price and volume are included in Sara Lee's 2011 forecast, said Marcel Smits, its interim CEO. The forecast calls for earnings of 88 cents to 95 cents per share from continuing operations and sales of $11.2 billion to $11.5 billion.
Analysts on average were expecting earnings of 94 cents on sales of $11.0 billion.
"We have a number of issues to work through," Smits, another likely CEO candidate, said in the same interview. He cited commodity costs and foreign exchange rates.
The 2011 forecast "represents a more challenging environment around input cost inflation, the need for marketing investments and sluggish volumes across the business," Stifel Nicolaus analyst Christopher Growe said in a research note.
Fraleigh told analysts on a conference call that the macroeconomic environment is not getting worse, but it is not getting dramatically better either.
"Maybe we see a dim light, but we certainly don't see a bright light at the end of the tunnel yet. I think we've got a little more ways to travel," Fraleigh said.
WEAK SALES HIT BY PRICE COMPETITION
Net income was $187 million, or 28 cents per share, in Sara Lee's fiscal fourth quarter, ended July 3, compared with a year-earlier loss of $14 million, or 2 cents per share.
Excluding one-time items, profit fell to 19 cents per share from 26 cents, hurt by investments in new product launches and a drop in the market value of some commodities positions.
Net sales rose 4.2 percent to $2.77 billion, falling short of the $2.86 billion expected by Wall Street.
Excluding the impact of an extra week during the period, foreign exchange rates and acquisitions, adjusted sales fell 2.8 percent, partly due to lower volumes and prices.
Earlier this week, Sara Lee said Barnes was stepping down permanently as chairman and chief executive and it had begun a search for a successor. She suffered a stroke in May.
During her tenure, Barnes oversaw a major overhaul of Sara Lee, looking to streamline its portfolio and focus on food and coffee. It has sold or spun off units that sell products from clothing to air fresheners.
The company is also quietly seeking buyers for its bread business, but has not launched a formal auction, sources said last month. Smits declined to comment on any potential sale of the bread business.
Sara Lee shares were down 17 cents, or 1.2 percent, at $14.30 in afternoon trade on the New York Stock Exchange. (Reporting by Martinne Geller; Editing by Lisa Von Ahn, Leslie Gevirtz)