APPAREL UNIT SINKS SARA LEE 3RD-QUARTER NET

Byline: Evan Clark

NEW YORK — Sara Lee Corp. said Wednesday that a double-digit drop in operating income in its apparel division dragged down third-quarter earnings and ongoing difficulties with soft goods will continue to bruise the packaged goods giant for the rest of the year.
Net income dropped 8 percent to $241 million, or 28 cents a diluted share, from $262 million, or 29 cents, a year ago. Wall Street had penciled in earning expectations of 27 cents a share. Comparing only ongoing operations, income fell 3.2 percent. The quarter included a $12 million gain from business disposition. Total revenues for the period ended March 31 rose 3.2 percent to $4.31 billion from $4.18 billion a year ago.
Operating income in the intimates and underwear division dropped 12.4 percent to $169 million compared to a year ago. Excluding acquisitions, divestitures and currency fluctuations, operating profit fell 15 percent. Sales for the division rose 4.6 percent to $1.86 billion.
The business was expected to be weak due to softness at retail and competitive pressure from Fruit of the Loom which, while restructuring in Chapter 11, is focusing on men’s and boys’ underwear. Eschewing a price war, Sara Lee has chosen to put greater marketing support behind its brands to maintain market share.
Operating profits for the division will likely decline in the fourth quarter as well. Previously, the casualwear and printable T-shirt businesses were expected to buoy the division for the fourth quarter. While casualwear continued to deliver solid results during the third quarter, the printables business “disappeared” in March after a strong start for 2001 and will not be able to help pull up the division in the next quarter.
Unit sales for the intimate apparel operations were flat for the quarter, while global legwear volumes were down 9 percent on continued weakness in consumer demand for sheer hosiery. Unit sales for the knit products operations fell 3 percent.
On a conference call Wednesday, a spokeswoman said, “These businesses are extraordinarily healthy in terms of marketing position and brand strength.” Two major competitors, Fruit of the Loom and Warnaco, are also in the midst of serious financial difficulties.
C. Steven McMillan, president and chief executive, added in a statement, “The slowdown in the U.S. economy, and increased competitive issues in several key markets, clearly had a negative impact on our third-quarter results, but we continued our emphasis on product development and brand building, including a 9 percent increase in total corporate marketing spending.”
For the nine months, total net income was up 42.2 percent to $1.29 billion, or $1.48 a diluted share, from $909 million, or 99 cents, a year ago. Profits for ongoing operations fell 27.2 percent to $630 million. The period included unusual items which, in aggregate, cost $203 million before taxes. Revenues rose 3.6 percent to $13.52 billion during the nine months compared to $13.05 billion a year ago.
The intimates and underwear division saw a year-to-date operating income of $649 million, a 5 percent improvement. Sales were up 6.2 percent to $6.04 billion. Both periods included results of the Coach business, which is now fully divested with a total gain of about $1 billion for Sara Lee.

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