SARA LEE TO SELL NON-CORE UNITS

Byline: Rosemary Feitelberg / With contributions from Melanie Kletter / Scott Malone / Vicki M. Young / Arnold J. Karr

NEW YORK — Narrowing the scope of its business essentially to items that can be wrapped in plastic, Sara Lee Corp. Tuesday said it will spin off Coach leather goods through an IPO and sell Champion and the fabrics division of the hotly-contested Courtaulds.
In the new Sara Lee alignment, Sara Lee’s efforts will be focused on three business segments: Intimates and Underwear, Food and Beverage, and Household Products.
Sara Lee will also spin off PYA/Monarch, a regional food service distributor with sales of over $2.7 billion a year. But the three apparel-related companies slated to be jettisoned represent over $1.5 billion in sales, two highly sought-after brand names and, in the case of Courtaulds, a significant piece of European market share.
The moves immediately were seen as an indication of the direction C. Steven McMillan will take when he succeeds John Bryan as chief executive of Sara Lee on July 1. McMillan, currently president and chief operating officer, told a press conference at the Pierre Hotel Tuesday that nine companies have inquired about buying the Courtaulds division, and others have inquired about Champion. He did not identify the interested parties.
He said the actions, which were accompanied by the acquisitions of one apparel business and two related to food, are indicative of the company’s new focus as “a consumer packaged goods company.” He said that would “make us more understandable to the financial community and drive higher returns and faster growth.” Sara Lee’s shares rose 5/16 to 18 7/8, on Tuesday.
McMillan said the changes should not significantly affect employment. In what he referred to repeatedly as “reshaping” Sara Lee’s business portfolio, McMillan said the aim is to give the company a tighter focus and to increase resources for future growth. Selling two businesses and spinning off two others with IPOs should also give the company the maximum after-tax benefits for shareholders, he said.
Under the new structure, intimates and underwear would account for 41 percent of Sara Lee’s sales, food and beverage 47 percent and household products 12 percent. That varies considerably from the current setup where personal products, including branded apparel, comprise 39 percent of sales, foods 24 percent, food service 14 percent, coffee and tea 13 percent, and household and body care 10 percent.
The deals are expected to generate $2.5 billion in funds that will be used for additional acquisitions, repurchase of shares, investment for internal growth and deployment of assets to build the company. McMillan also said that he is not opposed to looking at larger acquisitions than the company has made in the past. “This is a high-class problem I’m looking forward to having,” he said.
The company has built its business by offering apparel, in a variety of styles and sizes, that is widely distributed and priced competitively, McMillan said, noting that a few years ago, Sara Lee closed some of its hosiery mills in order to focus more on marketing than production.
“Apparel has been a very significant part of our business for the past 20 years. We focus our product on basics, non-fashion items for repeat purchases.”
Sara Lee is honing in on intimate apparel since that category has been outperforming other apparel categories for the past few years. Profits of Sara Lee’s intimate apparel have increased by 9 percent per year, “well above” apparel overall, according to McMillan.
He said that Sara Lee now aims to focus on global, leading brands; reach consumers through multiple distribution channels; innovate their product development; and achieve breakthrough economics. The latter was defined as a cost structure that is not easily duplicated by competitors.
“Very simply, we want to put the product in front of every customer in every setting where they have the opportunity to buy.”
Kurt Barnard, president of Barnard’s Retail Trend Report, said, “It makes an awful lot of sense. It’s very easy for a large company to be over-diversified when they start stretching their tentacles — such a company runs a great risk of losing control. This move is a preventive measure for Sara Lee.”
Barnard observed that the acquisition of prestigious name brands doesn’t always add to a company’s bottom line. “In the case of Sara Lee, they do have a core business. The company is a mass market operation. Coach has a good name, for example, but it is not a mass market product. Compared with overall operations, Coach is a very small contributor to [the bottom line].”
William Leach, food analyst at Donaldson Lufkin & Jenrette, has a “buy rating” on the company and noted that it makes sense for the company to consolidate the products that they have into core categories. As for Coach and a possible IPO, Leach predicted that the company’s first option is to sell Coach to a buyer if the price is right. An IPO, he said, is somewhat risky, and when it could be floated would “depend on market fluctuations.” The analyst added that Sara Lee has not locked itself into any set course, but would probably review that option while it tries to find a buyer over the next several months.
Refocusing Sara Lee’s portfolio will involve continually analyzing the company’s other businesses, he said. There are also plans to focus resources and product segments on a worldwide basis, pursue opportunities internationally in order to build brand recognition, eliminate underperforming businesses and move to a more centralized management structure.
Attaining a better global presence is a priority, since Sara Lee is widely-known as a North American and West European company, McMillan said. Latin America, Asia and Africa are areas where the company aims to increase its presence.
The company plans to look into additional acquisitions including possibilities in the intimate apparel category. McMillan noted that it was no coincidence that Sara Lee has opted to acquire an intimate apparel company outside the U.S., in buying Sol y Oro, Argentina’s leading intimate apparel and branded underwear company.
MacMillan said he is routinely asked how Coach fits into Sara Lee’s portfolio: “Coach has a fashion component. There’s nothing wrong with fashion in and of itself. But it’s something we prefer not to be in. Fashion tends to have good years and bad years. We prefer to have all good years.”
Coach is also clearly a retail business, which is not a priority for Sara Lee, he said, adding that with its strong track record and and brand value, Coach should be worth more outside Sara Lee than within it.
After the press conference, McMillan said he has no plans to license any of the company’s intimate apparel or hosiery brands, or to scale back on manufacturing. Sara Lee has closed some hosiery facilities but that was due primarily to capacity needs.
McMillan also noted that Sara Lee has been sourcing overseas for a number of years, and does not need to shift production, as some competitors are now doing.
He said Tuesday’s announcement was driven by opportunities more than any changes in leadership. But there is no doubt there is a changing of the guard. Bryan already held the president and ceo post when McMillan joined the company 24 years ago.
The Sara Lee announcement adds considerably to the consolidation and acquisition sweepstakes going on throughout apparel, from prestige and luxury brands to the mass market.
Champion, a $500 million business, has built somewhat of a cult following on college campuses with its all-cotton, oversized sweatshirts and T-shirts. While the brand is widely known for its jock-inspired basics, Champion Jogbra, a women’s activewear collection, has also developed a steady following and generates about $50 million in sales.
As part of Sara Lee’s recent restructuring earlier this month, Robert Hall, president and ceo of Champion Jogbra, assumed that same title for Champion. He replaced Michael Flatow, who was named president and ceo of Sara Lee Hosiery.
Coach in recent years has worked hard to transform itself from a classic brand into one with a younger and more contemporary image. It has expanded dramatically beyond its historical offerings of leather handbags, and now nearly half of Coach sales come from other products, including shoes and accessories. Watches, launched last year and produced under license by Movado Group, are on target to be a $100 million business at retail within five years, and the firm has expanded into furniture. The company also operates its own stores, including a flagship store on Madison and 57th Street.
Founded nearly 60 years ago, Coach is a vertical company with manufacturing capabilities and a network of wholly-owned stores. Last year, total sales were about $550 million. Sara Lee acquired Coach in 1985, when its sales were about $18 million.
Coach reportedly went on the selling block in late 1997, but a sale was never completed.
Acquired after a contentious takeover battle earlier this year, Courtaulds’ fabrics business is a $400 million operation producing synthetic warp- and weft-knit fabrics, primarily for the intimate-apparel market. With plants in 17 countries, including the U.S., its wide geographic reach could prove valuable to U.S. mills looking to broaden their horizons.
“It could be highly desirable to several domestic mills,” said Bryan Hunt, analyst with First Union Capital Markets. “Being able to sell into Asia, Africa and Mexico, with facilities in low-cost regions feeding growing markets for consumer products, makes it a great opportunity for a domestic operation.”
A handful of large U.S. mills produce knitted fabrics for intimate apparel, including Guilford Mills Inc., Milliken & Co. and Dyersburg Corp. With Dyersburg currently facing difficulties with its creditors and Milliken not known for making large acquisitions, Guilford appears the most likely buyer, sources said. Officials at Guilford offered no comment on the matter.
Central to the Intimates and Underwear component of the continuing business is the Hanes brand. Hanes Hosiery controls about 30 percent of the estimated $300 million of the sheer business done in department stores and the brand holds double-digit market share in numerous women’s, men’s and children’s underwear classifications.