Sara Lee: Running On The Spot While Increasing Revenues

Sara Lee (SLE) reported an increase of 9.2% in revenues for Q3. While on the surface 9.2% increase sounds good, it also announced that the media and promotional spend increased 28%. Sounds like the marketing program has encountered significant friction or may just be misfiring.

While some significant product categories performed better than the average, no one approached the 28% level. Management needs to publicly address the discrepancy. Consumer marketing companies with mature established products cannot and should not tolerate these kinds of failures.

Sara Lee's press release reported operating profit of $152 million for Q3 07 compared to $151 million for last year. Sara Lee essentially was running on the spot while increasing revenues. It did resort to the magic trick of share buy backs and made the EPS number go up.

To achieve the share buy back, Sarah lee spent $490 million. It increased long term borrowings by $2.9 billion and significantly reduced the dividend that they are paying. These numbers far outweigh the 28% marketing increase that does not seem to be working.

When sales go up 9.2%, the bottom line should reflect the positive changes. The bottom line is more a result of financial engineering, rather than operating performance.

SLE 1-yr chart: