Sara Lee: Split To Unleash Potential Through Brand Building And Cost Efficiencies

| About: Hillshire Brands (HSH)
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Sara Lee Corporation (SLE) announced Tuesday that it has chosen Hillshire Brands Company as the new name for its North American business. The establishment of Sara Lee can be traced back to 1939 when Nathan Cummings acquired C.D. Kenny Company, a small wholesale distributor of sugar, coffee and tea in Baltimore, with net sales of $24 million. In 1954, the company changed its name to Consolidated Foods and in 1985 the name was changed to Sara Lee Corporation.

Sara Lee has five reporting segments:

  • North American Retail
  • North American Fresh Bakery
  • North American Foodservice
  • International Beverage
  • International Bakery


P/E ((((((((((((((((TTM)))))))))))))))) 143.91
Price to Revenue ((((((((((((((((TTM)))))))))))))))) 1.48
Price to Cash Flow ((((((((((((((((TTM)))))))))))))))) 29.29
Price to Book (MRQ) 5.68
Revenue/Share ((((((((((((((((TTM)))))))))))))))) 13.84
EPS Fully Diluted ((((((((((((((((TTM)))))))))))))))) .14
Dividend/Share ((((((((((((((((TTM)))))))))))))))) .46
Book Value/Share (MRQ) 3.61
Cash Flow/Share ((((((((((((((((TTM)))))))))))))))) .70
Cash (MRQ) 4.47
Operating Margin ((((((((((((((((TTM)))))))))))))))) (%) 4.31
Net Profit Margin ((((((((((((((((TTM)))))))))))))))) (%) 1.03
Gross Margin ((((((((((((((((TTM)))))))))))))))) (%) 31.55

5 Year Annual Growth (%) -1.42
5 Year Annual Revenue Growth Rate (%) -5.40
5 Year Annual Dividend Growth Rate (%) -10.25
5 Year EPS Growth (%) 68.04

Quick Ratio (MRQ) 1.06
Current Ratio (MRQ) 1.32
LT Debt to Equity (MRQ) (%) 44.48
Total Debt to Equity (MRQ) (%) 99.11
Return on Equity ((((((((((((((((TTM)))))))))))))))) (%) 4.61
Return on Assets ((((((((((((((((TTM)))))))))))))))) (%) .98
Return on Investment ((((((((((((((((TTM)))))))))))))))) (%) 1.82
Asset Turnover ((((((((((((((((TTM)))))))))))))))) .95
Inventory Turnover ((((((((((((((((TTM)))))))))))))))) 5.78

Revenue (FY) 8,681.00
EBIT (Mil) (FY) 571.00
EBITDA (Mil) (FY) 922.00
Net Income Excluding Extraordinary Items (Mil) (FY) 338.00
Net Income Including Extraordinary Items (Mil) (FY) 1,287.00
Diluted EPS Excluding Extraordinary Items (FY) .54
Diluted EPS Including Extraordinary Items (FY) 2.06
Yield (%) 2.25
Dividend Record Date 06/14/12
Dividend Rate .46
Price to Revenue ((((((((((((((((TTM)))))))))))))))) 1.48
Price To Cash Flow ((((((((((((((((TTM)))))))))))))))) 29.16
Price to Book (MRQ) 5.65
Total Debt to Equity (MRQ) (%) 99.11
Current Ratio (MRQ) 1.32

Company Highlights

Its leading portfolio of food and beverage brands, including Ball Park, Douwe Egberts, Hillshire Farm, Jimmy Dean, Pickwick Teas, Sara Lee and Senseo, generate nearly $8 billion in annual net sales from continuing operations and employ approximately 20,000 people worldwide.

Sara Lee will become two independent pure-play, publicly-traded companies on June 28, 2012. The company outlined Hillshire Brands' four drivers of profitability. They are higher revenues through innovation and increased brand support; Improved gross margins through new, higher-margin products, brand strength differentiation, and productivity; Increase marketing, advertising, and promotion to five percent of revenue by fiscal year 2015 and make it more-effective; Further cost and productivity programs including a three-year plan to save $100 million and investment in insights and innovation to manage selling, general and administrative expenses.

Hillshire Brands will be based in Chicago, and DE Master Blenders 1753, an international beverage business, based in Netherlands. The company which will retain the legacy Sara Lee name will include the North American retail, foodservice and specialty meats business. The company will move its business toward more prepared meals and away from less profitable commodity meat business.

The spin-off is part of Sara Lee's plan to trim its portfolio in order to provide the best foundation for a strong and focused business. Sara Lee has been shedding its redundant units one by one to focus on its most profitable food and beverage businesses.

In early January this year, Sara Lee completed the sale of the majority of its North American Foodservice coffee and tea operations to The J.M. Smucker Company (NYSE:SJM) in an all-cash transaction. In December 2011, Sara Lee had divested its fresh bakery business in Spain and Portugal to Mexico's Grupo Bimbo S.A.B. de C.V.

Moreover, as part of the split, the company also announced a special dividend of $3.00 per share to its shareholders. The board also approved a 1-for-5 reverse stock split immediately after the spin-off. The spin-off is expected to be completed by the end of June. The coffee and tea company to be called CoffeeCo will distribute its common stock to Sara Lee shareholders on June 28, 2012, to the shareholders of record June 14.

Thereafter, the special dividend will be paid to CoffeeCo shareholders on record immediately after the distribution of the CofeeCo common stock. CoffeeCo will then merge with a subsidiary of D.E. Master Blenders 1753. Subsequently, the shares of D.E. Master Blenders 1753 will be distributed among CoffeeCo shareholders.

D.E Master Blenders 1753 will focus on international coffee and tea and Hillshire Brands will focus on meat-centric food products and foodservice operations. Hillshire Brands will include several popular, market-leading consumer brands including Jimmy Dean, Hillshire Farm, Ball Park, Aidells,Gallo Salame and State Fair.The Hillshire name was inspired by the Hillshire Farm brand, which Sara Lee acquired in 1971. Friedrich (Fritz) Bernegger founded Hillshire Farm in New London, Wis., and his entrepreneurial spirit lives on in the company to this day.

Post spin-off, the international coffee and tea business will be domiciled in the Netherlands and will move its headquarters to Amsterdam in the second half of 2012. Its operations will be spread across Europe, Brazil, Australia and Thailand and will include popular tea and coffee brands such as Douwe Egberts, Senseo, L'OR EspressO, Marcilla, Pilão, Moccona, Pickwick and Hornimans.The company which will retain the legacy Sara Lee name will include the North American retail, foodservice and specialty meats business.


The outlook for the food processing industry is fairly neutral. A marginal economic rebound in the U.S. should offset some pricing pressures from continued high commodity costs. The industry is a mature one and programs for cost reduction have already played out.

Other than investor enthusiasm, there is nothing in key statistics or fundamentals that would warrant the relative valuation in the shares. In fact, a weaker ROE and lower profit margin when compared to peers suggest that the stock should be relatively cheaper than the industry average.

The excitement of receiving shares in a spinoff or the special dividend may draw investors into the stock. After recent price activity, investors may want to wait for some of the enthusiasm to come out of the shares before accumulating a position.

Investors looking for other opportunities in the food processors could look to strong competitors like Campbell Soup Company (NYSE:CPB) or General Mills (NYSE:GIS). Both companies look attractive on a relative valuation basis and pay a higher dividend yield than Sara Lee. Operating margins at the two companies are fairly impressive for a mature industry with 15.9% and 16.2% for CPB and GIS respectively. The industry has generally followed the broader market but may outperform if the economy continues to soften during the summer.


This stands to be the last major breakup for a company that once made everything from pantyhose to golf carts. In the last year, Sara Lee has completed the sale of its household and body care business, its North American bakery business, and the majority of its North American Foodservice coffee business.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.