SARA LEE NET DIP EXPECTED

Byline: Evan Clark

NEW YORK — The “soft retail environment” currently at work in the U.S. is expected to cut into Sara Lee Corp.’s Intimates and Underwear profits, possibly pulling third-quarter earnings per share below prior-year levels.
As it announced slightly higher income from continuing operations during the second quarter, Sara Lee said it expects diluted earnings per share from total operations for the present quarter to fall in the 26- to 29-cent range — below or flat with year-ago earnings of 29 cents. This also falls below the current Wall Street consensus estimate of 31 cents for the third quarter.
In a statement, president and chief executive C. Steven McMillan noted: “The soft retail environment has continued into January and we expect this weakness to lead to lower profits for our Intimates and Underwear operations, causing us to lower our earnings expectations for the third quarter.”
The news contributed to a $1.06 drop in Sara Lee stock, to $21.75 in New York Stock Exchange trading Wednesday.
For the second quarter ended Dec. 30, the Chicago-based apparel and food giant reported earnings from ongoing operations, excluding extraordinary items, of 42 cents a diluted share, beating Wall Street’s estimates of 41 cents by a penny. Net income for the quarter was $798 million, or 92 cents a diluted share, 105.1 percent above year-ago results of $389 million, or 42 cents. Earnings from continuing operations including extraordinary items dropped 59.7 percent, to $151 million from $375 million during the year-ago quarter.
Operating income for the overall company fell 1 percent to $609 million in the quarter. However, Sara Lee noted that, on a constant currency basis, operating income rose 4 percent.
Sales for the period ended Dec. 30 increased 2.7 percent, to $4.76 billion. This compares to year-ago sales of $4.63 billion.
Sara Lee said it has expanded its divestiture program and revealed blueprints on Wednesday to sell its Champion Europe and Apparel Australasia businesses plus six other nonapparel units. Additionally, the company said it will complete its divestiture of Coach, approximately one-fifth of which was sold through an initial public offering, through a stock exchange offer.
David Leibowitz, managing director at Burnham Securities, told WWD the company, which picked up a penny in the second quarter, will probably be giving it back in the third quarter. “It’s very difficult to conduct business day-to-day on a spread sheet,” he said.
Operating income from the intimates and underwear division, including the company’s global legwear, knit products and intimate apparel businesses, increased 9.9 percent, to $278 million. Including unusual items, the company’s operating income fell 31.6 percent, to $173 million, compared to a year ago.
Sales for this division rose 8.8 percent during to quarter, to $2.13 billion from $1.96 million during the 1999 comparable quarter. Strong points for sales were in its global knits and intimate apparel operations, while its legwear business had stronger profit gains.
Coach contributed strong sales and profit gains for the quarter. As reported, the company’s initial public offering of 19.5 percent of Coach in October resulted in a gain of $105 million and increased diluted earnings per share by 12 cents.
“In the U.S. underwear category, Hanes and Hanes Her Way maintained their number one positions in both the male and female underwear categories, with 12-month unit shares as of November 2000 of 36.6 percent and 38.2 percent, respectively,” said the statement.
Increased spending on marketing and new products propelled strong growth in the company’s U.S. activewear business. Unit volume for screenprint products increased 10 percent, while casualwear units, including those sold through the mass market channel, increased more than 30 percent. Champion brand unit sales rose 8 percent.
Going forward, the firm said its “major area of weakness” in the third quarter would be its intimates and underwear business.
Janet Bergman, vice president of investor relations and corporate affairs, said on a conference call Wednesday that the weakness was because of “the part of our business most heavily exposed to the department and mass merchant retail channels and both, as has been well documented, suffered slower apparel sales in the December quarter in particular.”
She noted that the growth of the intimates and underwear business has slowed over the last three months and is expected to continue to do so into the March quarter.
“Additionally, we have begun to face rather significant pressure from Fruit of the Loom which appears to be operating, albeit in bankruptcy, with a highly focused business model on underwear,” she said. “The positive side of Fruit’s focus on underwear has been our ability to grow our casualwear and printable business at Fruit’s expense, as witnessed by our strong growth and market share gains in the second quarter.”
She noted that the decline for the business in the third quarter would be in the range of 10 to 15 percent with operating profits rebounding in the fourth quarter.
Champion Europe, based in Capogalliano and Florence, Italy, markets Champion-branded apparel, licensed apparel, team uniforms, footwear and accessories throughout Europe. The statement noted: “Champion Europe’s business contains significant fashion elements that no longer fit Sara Lee’s focus on basic branded consumer packaged goods.”
A company spokeswoman said that all three of the Champion divisions — Europe, America and Japan — are slated to be divested and that the company, “just happens to be close to a deal on Europe.”
Leibowitz said that “the high-end branded fleece goods market has seen a shifting in the last five or six years, as the major athletic labels — Nike, Reebok, Adidas — have entered the fray.
The firm’s Apparel Australasia business, based in Kingsgrove, New South Wales, will also be divested during the third quarter. The marketer of hosiery, intimated apparel, commercial workwear and casual clothing generates nearly half of its $135 million in annual sales from its workwear and casual clothing sectors, which are not considered core categories for Sara Lee.
In addition to these two apparel businesses Sara Lee also reported plans to divest six food-related businesses. Overall, the eight new divestitures will affect about 7000 jobs worldwide.
This brings the number of divestitures made by the company since it revealed plans to focus on core businesses last May to 14. The consumer goods conglomerate still carries more than 100 businesses.
McMillan noted: “Disposing of these noncore companies, allows us to apply our financial and management resources toward the future growth of a smaller number of more focused business positions,” he said.
On the call, he noted that together the 14 businesses were losing money and that the divestitures will provide additional cash flow.
In an expected move, Sara Lee also reported plans to divest its remaining 81 percent stake in Coach through an exchange offer that will allow Sara Lee shareholders the opportunity to exchange their common stock in the company for shares of Coach. The exchange, still subject to the approval of the Sara Lee board, is expected to be completed by the end of April.
For the six months net income rose 62.6 percent, to $1.05 billion, or $1.20 a diluted share, from $647 million, or 70 cents, a year ago. Earnings from continuing operations fell 36.9 percent, to $389 million from $616 million during the 2000 second quarter.
Sales rose to $9.21 billion, a 3.8 percent increase over year-ago sales of $8.87 billion.

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