Sara Lee: Playing With Commodities Reporting

Sara Lee (SLE) reported strong Q1 results. (Call Transcript) Sales are up approximately 9.6% and operating income up approximately 20.5%. This, of course, is excellent news and shows operating leverage. As sales go up more money flows to the bottom line. Here are a few storm clouds to consider.

In its own “Forward Looking Statement” the company alerts investors that possibly the relationship with Wal-Mart, its single largest customer could change. Specifically, if Wal-Mart changes its inventory levels this may cause Sara Lee to back up somewhat. They also mention that in these difficult times many of their sales are on credit terms. Some retailers are not going to make it and therefore Sara Lee may lose money and find sales diminished in the future. At this point, I cannot identify on Sara Lee’s statements how it accounts for doubtful accounts.

The report does mention the company has lost $35 million in mark to market commodities contracts. Sara Lee, being a food company, buys a lot of commodities. As commodities have dropped in value, Sara Lee is sucking wind on a lot of positions. The company has announced changes as to how it will account for commodities losses. Read this quote from the press release:

As of the first quarter of fiscal 2009, the corporation includes these mark-to-market gains and losses in general corporate expenses until such time that the exposure being hedged affects the earnings of the business segment. At that time, the cumulative gain or loss previously recorded in general corporate expenses for the derivative instrument will be reclassified into the business segment’s results.

Sounds like a shell game to me. At the very best this is apples and oranges.

Disclosure: None