SARA LEE CORP. AIMS TO SELL TEXTILE PLANTS
Byline: Catherine Curan
NEW YORK — Sara Lee Corp. aims to get out of the textile manufacturing game to focus on marketing.
The $20 billion-a-year global food and consumer products company said Monday it plans to take a $1.6 billion after-tax charge in its second or third fiscal quarter to cover a proposed three-year program to “deverticalize” its operations. It will sell such assets as textile plants and outsource some administrative functions to cut costs.
Wall Street greeted the plan enthusiastically, running the stock price up 6 3/4 to 49 5/16 on a turnover of 9.6 million shares on the New York Stock Exchange.
The plan involves divesting:
Substantially all of the company’s 13 U.S. yarn and textile operations related to knit products such as T-shirts, underwear and casualwear.
A few of the 48 worldwide intimate apparel manufacturing operations.
Hosiery manufacturing operations and other assets, both food and nonfood related, over the next three years.
Businesses with revenues of less than $1 billion;
Sara Lee also plans:
To repurchase stock with the $3 billion in cash the company expects to raise in the next three years.
To continue in the near term to buy needed knit products domestically from a new company expected to be created out of Sara Lee’s former assets.
To cut costs by outsourcing or centralizing administrative functions such as payroll and computer services.
Sara Lee expects to realize after-tax savings of between $25 million and $50 million in fiscal 1998 and between $100 million and $125 million annually by the year 2000. It also expects cash flow to increase by $500 million over the next three years from the sale of textile plants.
In a conference call with journalists, Steve McMillan, president of Sara Lee, indicated the sweeping nature of the restructuring by saying, “We’re going to look essentially at all of our fixed assets around the world.”
Asked if a particular Coach plant in Florida were on the block, McMillan replied, “It could be sold, along with any plant around the world.” He said Sara Lee is undertaking the restructuring moves now because “I think strategically we will be a better company organized around brand-building rather than manufacturing.”
Intimate apparel manufacturing operations are the next area targeted for divestiture. McMillan said these plans have not progressed as much as the sale of the textile plants, but added, “It’s entirely possible something could be completed by the end of our fiscal year [on June 30, 1998].” There are 48 plants worldwide, and a very small number of these would be affected.
Looking ahead, McMillan said, “The model of an efficient corporation in the new millennium is very different than the model today.” He said in addition to breaking up its manufacturing, Sara Lee may outsource other operations, such as distribution.
“This allows us to focus on developing products and marketing our brands,” he said, citing Nike as an example of a highly successful company that owns no manufacturing facilities. “This allows Sara Lee to exit some parts of the business that require significant asset investments and redeploy the assets” to be more competitive in the long term.
Sara Lee executives insisted the new program would not cause layoffs, at the plants or internally. McMillan said the write-off does not include any severance costs.
“We don’t anticipate a material impact on employment,” said McMillan, noting employees will be shifted to the new owners of the operations, and he contrasted this restructuring to a plan announced in 1994 that included massive job cuts. He said the plants would continue to operate and expansion might create more jobs.
He declined to specify which of 13 U.S. plants producing products related to knits were likely to be sold. But he said Sara Lee is in serious negotiations to sell some of the plants to an investor group led by Jack Ward, who retired from Sara Lee 1 1/2 years ago as senior vice president for knitwear operations. The other investors have backgrounds in the textile industry, McMillan said.
McMillan said Sara Lee hopes to complete the deal for some of the plants by Jan. 1, 1998. The plants involved spin yarn, make fabric and do some cutting and dyeing. Sara Lee expects the new company to supply the majority of its textile needs for knits in the foreseeable future and plans to have reasonably long-term supply agreements, McMillan said. He declined to discuss the price or terms of the deal.
Initially, Sara Lee will keep its sewing facilities for knits, divesting only facilities for yarns and textiles. “If we feel we can shed some more along that line, we might,” Sara Lee’s chief financial officer, Judy Sprieser, told WWD in a telephone interview.
After selling the textile operations, Sara Lee will be one-fifth of the way to completing the restructuring, McMillan said. In response to a question, McMillan said the return on the textile plants is lower than on other operations because of the heavy investment in the facilities. While the plants have been returning somewhat more than the industry average of about 11 to 12 percent, the overall target for Sara Lee businesses under the new program is 20 percent.
McMillan stressed that Sara Lee is not leaving the South Carolina region just because it may sell a few plants. Sales and marketing organizations based in the area will remain.
Sprieser said Sara Lee will look at outsourcing any raw materials, as well as sewing capabilities for intimate apparel. She said about 10 to 20 plants will be divested initially, noting intimate apparel manufacturing is done globally at smaller plants and is more complex than the highly concentrated textile business.
Asked about businesses up for sale — rather than assets the company plans to divest while retaining the brands — Sprieser said Sara Lee will not sell an entire line of business, such as one of its four core areas. These are: bakery/packaged meats, coffee/grocery, household/bodycare and personal care products. But it might sell pieces of any group. “We don’t see the value in spinning off most businesses to focus on just one area,” Sprieser said.
In the most recent year ended June 28, Sara Lee’s personal products group, which includes knitwear, intimate apparel, hosiery and leather goods under such brands as Champion, Hanes, Playtex, Bali, L’eggs and Coach, posted sales of $7.5 billion and operating income of $761 million.
She declined to comment on specific businesses that are up for sale, but said, “In personal care products, you might see it [sale of a business] happen,” and noted this segment has the lowest return of all Sara Lee’s businesses.
The recently announced closing of luxury leather goods firm Mark Cross and the sale of Aris-Isotoner to Totes are part of an ongoing initiative to either fix, close or sell businesses with a return on investment of less than 20 percent before taxes, and this program will continue, she said.
The $1.6 billion charge is expected to be mainly noncash. A little more than half the charge will come from intangibles such as goodwill related to assets that Sara Lee is looking to sell. The remainder relates to the value of the assets themselves.
The savings of $25 million to $50 million will come from several sources. These include lower costs of supply, and Sara Lee expects to obtain better prices for merchandise as the plants become more efficient, and from savings in capital expenditures for the plants. Savings also will come from lower fixed costs and lower depreciation and amortization costs related to the divested assets. Earnings per share will benefit because there will be fewer shares outstanding.
In the last few years, Sara Lee’s goal has been to achieve an after-tax return on total assets of no less than 15 percent. This year, the total was 16 percent, and McMillan said the new three-year plan could raise that number to more than 20 percent.
Commenting on concerns that Sara Lee will turn its back on U.S. textile manufacturing, McMillan said, “This is not a program to allow us to all of a sudden go offshore.” He noted Sara Lee’s textile operations are the third largest in the U.S., and the company plans to continue to get supplies from the plants it invested in heavily in 1989 and 1990. “These are large-scale …modern, efficient facilities,” he said. “What’s changed is that now it’s not necessary for us to own these assets.”
Asked about results in the first quarter to date, Sprieser said the period looks fine so far for personal care products. “Hosiery is the soft spot in the whole picture,” she said, adding that Sara Lee is going for margin and returns, not volume, which will result in some “slippage.” However, knits and intimate apparel look strong.