Sara Lee Cuts Outlook on Rising Costs

Sara Lee Corp. (SLE) Tuesday cut its full-year earnings outlook due to higher raw material costs and sluggish European business, sending its shares down nearly 7 percent.

The news came as maker of Hanes underwear (search), Jimmy Dean sausage (search) and a host of other products reported quarterly earnings slightly ahead of Wall Street estimates.

Sara Lee, which recently put its European branded apparel business up for sale, also said it was considering other measures to shed weaker brands and focus on its strongest businesses. The company expects to disclose more details by the time of an analyst conference in February.

Sara Lee, which has been battling higher commodity costs and sluggish sales in some businesses, lowered its profit forecast to between $1.46 and $1.56 for its fiscal year ending in June from a previous range of $1.61 to $1.71. Analysts on average were expecting $1.64, according to Reuters Estimates.

Costs for commodities like energy, coffee, meat and cotton are now expected to rise $350 million in the current fiscal year, $100 million more than the company's initial expectations, Steven McMillan, chairman and chief executive, said.

At the same time, the company's already comparatively high prices limit its ability to further raise prices without losing sales, he said in a conference call with analysts.

"In some cases, we have created an unhealthy differential between our own shelf prices and those of our competition," McMillan said.

Aside from higher commodity costs, the company has also been hit by sluggish consumer spending in Europe, as well as a price war between traditional European retailers and deep discounters. That has hurt all the company's businesses, especially coffee, he said.

While facing higher commodity prices in recent quarters, Sara Lee has benefited from a weak dollar, which increases the value of sales overseas when they are recorded on the company's income statement, as well as from special items like a fee related to the sale of a tobacco business and cost-saving measures.

But operating profits in most of its business lines were down in the second quarter, which ended on Jan. 1.

"If you look at what is working for them, it's currency, it's restructuring, it's the tobacco benefit. What's not working for them is the basic business," said D.A. Davidson & Co. analyst Timothy Ramey, who rates the company's stock at "neutral."

Sara Lee reported earnings of $326 million, or 41 cents a share, for the second quarter, compared with $312 million, or 39 cents a share, a year earlier.

The latest results exceeded the average forecast of 38 cents a share from analysts polled by Reuters Estimates.

The company had to contend with higher meat prices in 2004 because of lower beef production and higher demand for beef, chicken and pork, fueled by a stronger economy.

Total sales rose 3.6 percent to $5.2 billion, slightly below analysts' average estimate of $5.21 billion.

But volume, which factors out currency and price fluctuations, fell 2 percent as weak regional white bread sales and higher meat prices cut into the number of items sold.

For the third quarter, Sara Lee forecast earnings of 29 cents to 34 cents a share, below analysts' average estimate of 37 cents.

Shares of Sara Lee were down $1.70, or 6.8 percent, at $23.25 in New York Stock Exchange (search) trade, where it was among the biggest percentage losers. The stock reached a four-year high of $25 on Monday.