Sara Lee (SLE)

Sara Lee Corporation (SLE) is a global consumer packaged goods company that manufactures and markets a diverse array of branded products. In fiscal 2008, the company reported results in six business segments: International Beverage (24%), North American Retail Meats (18%), Household & Body Care (17%), North American Retail Bakery (17%), Foodservice (17%),and International Bakery (7%). Effective September 5, 2006, the company completed the spin-off of its Branded Apparel business, which is now known as Hanesbrands Inc. (Hanesbrands) and trades on the NYSE. In the North American Retail Meats business, Sara Lee sells pork, poultry, and beef products in packaged form under leading brand names, such as Hillshire Farm, Ball Park, Jimmy Dean, Bryan, Kahn's and Best s Kosher. International Beverage sells coffee and tea products in Europe, Brazil, Australia and Asia. In Europe, the prominent brands are Douwe Egberts, Senseo, Maison du Caf , Marcilla, Merrild and Pickwick. In South America, significant brands include Caf do Ponto, Caf Caboclo, Uni o and Caf Pil o. Foodservice sells a variety of meat, bakery and beverage products to foodservice customers in North America, including hot dogs, sausages, luncheon meats, bacon, bread, buns, bagels, rolls, frozen pies, cakes, cheesecakes, coffee, sauces, dressings, condiments, etc. The Household & Body Care product lines include items for body care, air care, shoe care, etc., such as Kiwi, Ambi Pur, Sanex, Duschdas, and Radox. North American Retail Bakery produces fresh and frozen baked products, such as Sara Lee, Earth Grains, Grant's Farm, Holsum, Sunbeam, etc. International Bakery sells a variety of bakery products in Europe and Australia, including a variety of bread, buns, rolls, specialty bread, refrigerated dough, frozen desserts and ice cream under the Bimbo, CroustiPate, Ortiz, BonGateaux and Sara Lee brands.

Beginning in 2000, under the then new CEO C. Steven McMillan, management began to focus on modifying the operations of Sara Lee and approved the disposal of 17 businesses, such as PYA/Monarch Foodservice, Coach, Champion Europe, Australian apparel, and the international tobacco operations. Proceeds were used to partially fund The Earthgrains Company acquisition, which was the largest in Sara Lee's history at $2.86 billion, including the assumption of Earthgrains' debt.

Adopted in 2004, Sara Lee's Brand Segmentation strategy was used to focus management's attention on those brands that have the greatest potential for profitable long-term growth. All of the company's retail brands were classified in one of four categories: (1) Strategic Investment (receiving the largest proportionate level of marketing spending, research and development, capital investment and management attention) (2) Support and Grow (3) Sustain and (4) Manage for Cash (given the least amount of marketing investment and other support). The process identified the company's strategic brands.

In July 2004, Brenda Barnes joined Sara Lee, and on February 10, 2005, she was appointed CEO, which coincided with the management announcement of The Transformation Plan, a five-year project to position the company for sustained long-term growth. The three-pronged plan encompasses 1) organizing the business operations around consumers, customers, and geographic markets 2) bringing focus to the portfolio and 3) enhancing operational efficiency. Sara Lee divested approximately 40% of the then existing portfolio including Branded Apparel, European apparel, and European meats. As a result, the company's portfolio has become focused on food, beverage, and household products. Proceeds from the disposals were used to fund investments in other growth areas and strengthen the company's financial position.

The goal of Sara Lee's Transformation Plan is to create a focused consumer brand company generating 4% to 5% sales growth and 5% to 8% EPS growth by fiscal 2010. Through a combination of focusing the portfolio to 60% of then current operations, spinning off Branded Apparel, and implementing multiple cost savings programs, including the implementation of SAP, Sara Lee should emerge as a smaller but leaner company by fiscal year 2010. The revenue base of the company is expected to decline from $19.6 billion in fiscal 2004 to $14.0 billion in fiscal 2010. Concurrently, debt ought to be reduced from $4.8 billion to the range of $1.5 billion to $2.0 billion. Management reduced debt by almost $1.7 billion during fiscal 2007 to $2.8 billion.

As part of The Transformation Plan, Sara Lee should achieve additional operating efficiencies. Overall, the cost savings programs should generate annual savings in the range of $575 million to $800 million by fiscal 2010. SAP is expected to be implemented over the two years ending in fiscal year 2008. The centralization of functions, including information technology, procurement, and services should result in savings of between $175 million and $250 million, and infrastructure rationalization will likely yield annual savings of between $100 million and $200 million. By the end of fiscal 2008, management believes SAP will process 90% of the company's gross sales. Management expects the operating margin to expand to 12% by fiscal 2010 from 7.7% in fiscal 2005. Over the five years, approximately $250 million of the savings will be used to enhance the portfolio through targeted marketing programs and new product development. During the first quarter of fiscal 2008, the company implemented a "360-degree" marketing approach, which resulted in increased marketing and advertising expenses in fiscal 2008, marketing and advertising spending increased 9.4%.

Management is aggressively implementing the five-year Transformation Plan. Under the plan, management is identifying and exiting unprofitable and less profitable businesses. The company divested the direct selling, U.S. retail coffee and European Branded Apparel businesses generating $573 million in after-tax proceeds. In August 2006, Sara Lee sold the European meats business to Groupe Smithfield for $575 million. Also, Sara Lee spun-off Hanesbrands, Inc. in September 2006. The new North American headquarters facility in Downers Grove, just outside of Chicago, became fully operational in late 2006. In addition, a Chief Information Officer and a Chief Procurement Officer were hired and those organizations have been staffed. Management plans to establish a multi-million dollar research and development campus in the company's Downers Grove corporate headquarters facility, which should be operational by early 2009. In August 2006, the sale of the European meat business was completed. In the first quarter of fiscal 2008, the company exited several unattractive businesses in the Foodservice segment, namely the DSD bakery, DED Foodservice, and commodity meat businesses. Further in March 2008, Sara Lee divested its entire interest in the Mexican meats joint venture. Further, with the implementation of operational efficiency initiatives, such as centralized procurement common IT systems, Lean Enterprise, and the Process Improvement-to-Excellence program, Sara Lee is moving forward to become a leaner, more efficient, and more integrated operating company.

Management is committed to increasing sales by introducing new products. With the growing popularity of healthier snacking, the demand for whole grain products has increased. The company has focused on the trend by blending whole-grain and white flour under the company's flour-blend strategy. Sara Lee introduced flour-blend breakfast breads including Soft & Smooth whole-grain white bread and English muffins. Other new products include Ambi Pur 3volution, Douwe Egberts Caf Switch, Hillshire Farm Entr e Salads, Jimmy Dean Skillets and Breakfast Bowls, Senseo cappuccino, and more Sara Lee Soft & Smooth bakery products. Separately, Sara Lee acquired the Pennsylvania-based Butter-Krust Baking business, which has strengthened the company's distribution network in the mid-Atlantic region and expanded the customer base by an additional 20 million consumers. In fiscal 2008, the company plans to launch Sara Lee Ultra Premium lunchmeat, Hillshire Farm Hearty Slices lunchmeat (catering to customers preferring a thicker cut of meat), Stuffins (a handheld breakfast and snack innovation under the Sara Lee and Jimmy Dean brands), Caffiato (and iced coffee and tea system), Toastworks (toasted sandwiches), Ambi Pur 2Motion, Kiwi Comfort Insoles, Pyre l Naturals, Sanex Invisibles, Senso Caf Choco, Top Quality Liquid coffee concentrate, Flavorit, and several new flavors of Sara Lee snackable pies. In the second quarter of 2008, the company launched Caf -ado and new sausage products.

Backed by strong cash flows, management has returned value to shareholders through stock repurchase programs. In fiscal 2008, cash flow from operating activities increased 22% to $600 million from $492 million in fiscal 2007. In August 2005, the Board of Directors increased the repurchase authorization by an additional 100 million shares. In fiscal 2006, the company repurchased more than 30 million shares at an average price of $18.67 per share, and in fiscal 2007, the company repurchased $686 million worth of its shares. During fiscal 2008, the company repurchased 19.7 million shares at a cost of $315 million ($16.02 average price per share).

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