Breaking Up Is Easy To Do At Sara Lee

To say that food firm Sara Lee's (NYSE:SLE) operations are in flux is a significant understatement. It continues to sell off divisions, with the latest being the sale of the domestic bakery operations to Grupo Bimbo for $959 million. SLE is also on the hunt for a CEO, and was recently the topic of takeover speculation by private equity firms. Those brave enough to own the shares are holding out for potential upside in the businesses that will remain.

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First Quarter Review
Net sales fell 0.5% to $2.6 billion. The company detailed that price increases and a favorable shift to higher-margin products were enough to offset lower volumes and negative currency fluctuations. It also relayed that its adjusted measure of sales that it considers to be recurring in nature rose 1.5%.

By division, sales fell in all but the North American retail segment that reported a 7.3% increase on the back of volume growth at Hillshire Farm and Jimmy Dean breakfast sandwiches. Management also said it continues to "invest heavily" in these two core brands. The North American bakery business saw sales fall 4.6% and will be sold off to Mexican bakery giant Grupo Bimbo. The third North American business distributes food to restaurants, such as the concepts run by Darden Restaurants (NYSE:DRI) and Brinker (NYSE:EAT), and saw a 2.6% top-line decline as it lost two accounts.

International beverage reported a slight 0.9% sales decline as strong volume growth and price increases were offset by negative foreign exchange movements. International bakery logged a 9% sales decrease as it struggled in Spain and saw lower volume, prices, and a similar currency hit.

Cost of sales rose 2.7% as higher food prices adversely affected food input costs. This negative sales leverage sent operating income down more than 48% to $169 million. A healthy number of one-time items, charges and gains from the sale of other businesses resulted in a 32.3% fall in net income to $192 million, or 29 cents per diluted share, though income from continuing operations was only 10 cents.

Outlook
For the year, Sara Lee expects 92 to 99 cents in diluted earnings from continuing operations as sales should reach $12.9 billion.

After the Bimbo sale, what will remain are core coffee and meat businesses, though at this point it's difficult to determine what their sales or profit trends will be going forward, though management believes that, "in both categories, we are a leading player, with healthy margins and a strong track record of innovation."

Bottom Line
The latest business sale will further shore up the capital base and allow for share buybacks to boost earnings. For now, prospective investors may want to stay on the sidelines for tangible signs that the remaining businesses can grow consistently. The fact that the company didn't get bought out for a premium to current market values suggest the stock is fairly valued and doesn't have much further upside potential. Existing shareholders have made plenty of money if they held past spinoffs, including Coach (NYSE:COH) and Hanesbrands (NYSE:HBI), but future gains for Sara Lee investors are highly uncertain.

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