Sara Lee Says Quarterly Income Rose Sharply

Downers Grove, Ill., Feb. 4 - Sara Lee Corp.:

“We’re pleased to report a strong second quarter, which was even better than our first quarter, and was highlighted by significant profit growth”

• Diluted EPS as reported of $0.53, compared to $(0.02) in the prior-year second quarter
• Adjusted EPS¹ of $0.36, compared to $0.19 a year ago, driven by strong operating performance
• Company raises guidance for fiscal 2010 Adjusted EPS to $1.00 – $1.05 per share
• Pricing actions and innovation drove improved volume trends in the second quarter
• Cash flow from operations of $472 million in the first six months, up $258 million year-over-year

Sara Lee Corp. (NYSE: SLE) today reported strong operating income growth for the second quarter of fiscal 2010, driven by significant improvement in operating segment income across the company, particularly in the North American Retail and International Beverage business segments, and lower corporate expenses. Net income also rose sharply, driven by higher income from continuing and discontinued operations, partially due to one-time tax benefits and lower charges for significant items. Net sales were unchanged in the second quarter as favorable foreign currency exchange rates were offset by slightly lower corporate unit volumes, lower prices and the impact of divestitures. Cash from operations continued to improve, primarily due to higher operating income.

“We’re pleased to report a strong second quarter, which was even better than our first quarter, and was highlighted by significant profit growth,” said Sara Lee Corp. chairman and chief executive officer Brenda C. Barnes. “On an adjusted basis, every segment of our continuing business, along with Household and Body Care, delivered income growth in the quarter. During this period we recalibrated pricing, which helped us deliver improved volume trends. Based on the strong first half performance, we have raised guidance and feel very confident in our full year outlook. We also are making significant investments across our business designed to drive growth this year and beyond. We believe that we will have a strong 2010 and are confident that in 2011 we can deliver meaningful additional profit improvement.”

Barnes added, “We made further progress toward completing the divestiture of our Household and Body Care businesses, thus far receiving binding offers for body care and air care for a combined 1.595 billion euros. We are also making progress toward selling the remainder of the business.”

Financial Review

Net Sales and Unit Volumes

Net sales for the second quarter of fiscal 2010 were $2.9 billion, unchanged versus the year-ago period as favorable foreign currency exchange rates were offset by the impact of divestitures, slightly lower unit volumes and lower selling prices. The company’s adjusted net sales decreased 2.7%. Total Sara Lee unit volumes were 1.0% lower in the second quarter, but increased 0.7% excluding the impact of planned exits from commodity and kosher meats in the North American Retail segment. On a comparable basis, in the first quarter of fiscal 2010, volumes decreased 2.4%. Unit volume trends generally showed improvement in the second quarter driven by innovative new products, successful trade spending and strategic pricing initiatives.

¹ The term “adjusted EPS” and other “adjusted” financial measures are explained and reconciled to each item’s most comparable U.S. generally accepted accounting principles measure at the end of this release.

Operating Income

Sara Lee reported second quarter operating income of $282 million, compared to an operating loss of $(4) million in the prior-year period. Adjusted operating income increased to $319 million in the second quarter, up 75.8%. The improvement in adjusted operating income included a $103 million increase in total adjusted operating segment income for all continuing business segments, $27 million of favorable mark-to-market variances on commodity derivatives and lower corporate costs.

Discontinued Operations

Net sales for the international household and body care businesses, which are being reported as discontinued operations, were $565 million in the second quarter of fiscal 2010, compared to $484 million in the prior-year period, a 16.8% increase. This was primarily due to strength in most of the core categories and favorable foreign currency exchange rates. Adjusted net sales increased 5.4%.

Operating segment income in the second quarter was $63 million, an increase of $19 million compared to the year-ago period. The increase was driven by higher net sales, Project Accelerate and continuous improvement savings, lower commodity costs and favorable foreign currency exchange rates, which were partially offset by higher media advertising and promotion (MAP) spending. Adjusted operating segment income was up 44.9% in the second quarter.

Net income was $66 million in the second quarter versus $23 million in the year-ago period, primarily due to improved business performance, the recognition of $27 million of net tax benefits and $8 million in benefit from the cessation of depreciation and amortization in compliance with U.S. GAAP rules, which were partially offset by $19 million in charges for various significant items.

Earnings Per Share

Diluted EPS as reported were $0.53 per diluted share in the second quarter compared to a loss of $(0.02) in the year-ago period. Diluted EPS from continuing operations were $0.43 per diluted share, compared to a loss of $(0.06) in the year-ago period, while diluted EPS from discontinued operations were $0.09 per diluted share, versus $0.03 in the comparable period last year.

During the quarter, results in both continuing and discontinued operations were influenced by a number of significant items, including:

Continuing Operations

• After-tax charges of $24 million, or $(0.03) per diluted share, for business exits, Project Accelerate costs and asset impairments, the latter associated with the write-down of fixed assets at the North American Foodservice and International Bakery segments.
• Income of $119 million, or $0.17 per diluted share, from significant tax items, primarily resulting from the favorable conclusion of various tax audits in jurisdictions around the world, the release of Brazilian valuation allowances and the utilization of current-year United Kingdom net operating losses.

Discontinued Operations

• After-tax charges of $19 million, or $(0.02) per diluted share, for benefit plan curtailment losses, business disposition transaction costs and retention bonuses.
• Income of $27 million, or $0.04 per diluted share, from significant tax items, primarily related to the benefit of capital loss carryforwards, the utilization of prior-year United Kingdom net operating losses and various tax settlements in jurisdictions around the world.

The combination of these significant items resulted in a net benefit of $103 million, or $0.15 per diluted share, in the second quarter of fiscal 2010. Adjusted EPS were $0.36 in the second quarter, compared to $0.19 per share in the second quarter of fiscal 2009. For more detail on the impact of significant items on diluted EPS in the current- and prior-year periods, see table “Impact of Significant Items on Diluted Earnings per share.”

Cash from Operations

Net cash from operating activities was $285 million in the second quarter, compared to $252 million in the comparable period last year; primarily driven by higher operating income.

Financial Highlights

• Project Accelerate is a company-wide cost saving and productivity initiative focused on outsourcing actions, supply chain efficiencies, SKU rationalization and organizational simplification. As compared to last year, the project is expected to generate between $75 million and $100 million of incremental benefits in fiscal 2010, of which $48 million has already been realized in the first six months of the year.
• MAP spending increased 4.9% in the second quarter, primarily driven by a significant increase in spending at the North American Retail segment behind category-leading brands such as Jimmy Dean, Hillshire Farm and Ball Park.
• Net interest expense was $32 million in the second quarter, compared to $36 million in last year’s period, due to lower interest rates and less average debt outstanding.
• General corporate expenses declined to $60 million in the second quarter, compared to $91 million in the year-ago period, primarily due to $27 million of favorable mark-to-market variances on commodity derivatives and $4 million of lower corporate costs, on an as reported basis.
• The effective tax rate for continuing operations in the second quarter was a negative (21.5)%, compared to a negative (0.8)% in the year-ago period, a decrease primarily driven by the impact of significant items in the quarter. Excluding significant items, the effective tax rate would have been 26.7%. For further detail on the tax rate, see table “Tax Rate Reconciliation – Fiscal 2010.”
• On December 11, 2009, Sara Lee announced it received a binding offer of 320 million euros from The Procter & Gamble Company to acquire the company’s Ambi Pur air care business. The proposed transaction, which is subject to customary closing conditions and regulatory clearances, is expected to close during fiscal year 2010. Sara Lee will consult with relevant works councils during the process. The company has also received significant interest in the remainder of its international household and body care businesses, which includes shoe care, insecticides and non-European cleaning brands, and is continuing to pursue divestiture options for these businesses.
• The company did not repurchase any shares of its common stock in the second quarter. Earlier in fiscal 2010, the board of directors authorized a $1.0 billion share repurchase program, in addition to the 13.5 million share authorization remaining under the prior program.

Six-Month Results

Continuing Operations

For the first six months of fiscal 2010, Sara Lee reported net sales of $5.4 billion, down 3.6% over the comparable period last year, while adjusted net sales decreased 3.0% in the first half. Operating income was $607 million in the first six months, compared to $289 million in the year-ago period, while adjusted operating income increased 77.1%.

Discontinued Operations

Net sales were $1.1 billion, up 4.6% in the first six months, while adjusted net sales rose 3.3%. Operating segment income was $132 million in the first half, versus $105 million last year, while adjusted operating segment income increased 41.0%.

EPS and Cash from Operations

Diluted EPS, as reported, were $0.94 in the first six months of fiscal 2010, compared to $0.30 for the first half of fiscal 2009. Adjusted EPS for the comparable six month periods were $0.60 versus $0.34 (see table “Reconciliation of Diluted EPS as reported to Adjusted EPS”). Net cash from operating activities was $472 million in the first six months of fiscal 2010, compared to $214 million in the first half of fiscal 2009 – the $258 million increase was primarily driven by higher operating income and better inventory management.

Business Performance Review

North American Retail

The North American Retail segment delivered another strong quarter, building on the past two years of business improvements. Operating segment income increased significantly in the first half of fiscal 2010 despite some unit volume softness at the start of the year. Over the course of the second quarter, targeted consumer and customer spending led to attractive price points for high-quality products, which drove unit volume growth (excluding commodity and kosher meat exits). In the second half of the year, volumes are likely to continue to improve, while operating segment income comparisons will be less robust due to strong year-over-year comparisons, increasing commodity costs and further reinvestment to fuel future growth. Operating margins reached a relatively high level in the second quarter of fiscal 2010 and are likely to contract in the short-term as the retail segment reinvests and laps very favorable commodity costs.

Operating segment income was $122 million in the second quarter, compared to $73 million in the year-ago period, an increase of 66.6%; adjusted operating segment income rose at a similar pace. The increase was primarily the result of favorable supply chain performance, Project Accelerate and continuous improvement savings, lower input costs and strong performance from the segment’s core retail business. These factors were partially offset by higher MAP spending in support of campaigns for the Jimmy Dean and Hillshire Farm brands.

Unit volumes declined 2.7% in the second quarter due to significantly lower volumes for commodity meats, which the company is exiting, and the impact of the exit of the kosher meats business. Excluding these planned exits, unit volumes for the core retail business were up 3.3% in the second quarter. Net sales of $745 million were flat in the quarter on a reported and adjusted basis, as favorable sales mix into higher-margin products was offset by the impact of trade spending and the exits of commodity and kosher meats. The retail segment’s key brands continued to show generally positive market share trends and maintained their premium pricing in the quarter. The Jimmy Dean brand increased its share of the frozen protein breakfast category by 2.4 points to 54.3%, according to Information Resources, Inc. (IRI) share data, FDMx + Walmart, 12 weeks ending December 13, 2009, while the Hillshire Farm brand increased its share in lunchmeats by 1.0 points to 13.3%, per the same IRI market share data.

North American Fresh Bakery

Similar to the first quarter of fiscal 2010, the North American Fresh Bakery segment reported higher adjusted operating segment income and adjusted operating margin in the second quarter, despite a very competitive marketplace. However, branded volumes were soft and as a result the business will continue to recalibrate pricing to drive sales, building on unit volume trends that were starting to show improvement at the end of the second quarter. The second half of the year is likely to show better unit volume performance and a reinvestment of some of the first half operating income in strategic pricing actions and marketing support for the introduction of innovative new products such as Sara Lee Soft & Smooth bread made with Omega-3/DHA and EarthGrains 100% whole grain bread made with Eco-Grain.

Operating segment income was $16 million in the second quarter, compared to a loss of $(16) million in the year-ago period. The increase was primarily due to a $30 million charge for a pension partial withdrawal liability in last year’s second quarter. Adjusted operating segment income was $16 million, up 10.3% compared to $14 million in the prior-year quarter. This was the result of lower commodity costs, lower MAP spending and a decrease in operating costs driven by Project Accelerate initiatives and other continuous improvement savings.

Net sales decreased 7.5% to $499 million in the second quarter of fiscal 2010, primarily due to lower unit volumes, unfavorable sales mix into private label breads and price decreases following lower input costs and competitive pressures. Unit volumes decreased 4.2%, as higher volumes for private label breads could not fully offset volume declines for branded bakery products, the latter as a result of intense price competition in the category.

North American Foodservice

Building on a solid fiscal 2009 and a strong first quarter of fiscal 2010, the North American Foodservice segment reported higher operating segment income in the second quarter, despite an ongoing shift by consumers away from dining out. As a result of Project Accelerate savings, attractive new business wins, strategic business exits and lower commodity costs, the segment managed to overcome negative category trends. While adjusted net sales and unit volumes were down in the first half of fiscal 2010, most of these declines can be attributed to marketplace dynamics. Management continues to be cautious about full-year results and currently expects a slight decline in adjusted operating segment income for the year, as the second half is likely to become more challenging due to increasing commodity costs and tougher year-over-year comparisons. This will be particularly true for volume, which will be significantly impacted by a lost account that represented approximately 15% of the segment’s volumes, but less than 4% of sales and had a low margin.

The segment reported operating segment income of $45 million in the second quarter, compared to a loss of $(48) million in the year-ago period, the latter primarily due to an $107 million impairment charge. During the current-year quarter, the segment booked a $13 million asset impairment charge for the write-down of fixed assets at a foodservice bakery manufacturing facility. Adjusted operating segment income rose 11.7% to $60 million in the second quarter of fiscal 2010. The increase was primarily driven by lower commodity costs net of pricing, lower SG&A expense and savings from Project Accelerate and continuous improvement initiatives, which were partially offset by the impact of lower unit volumes.

Net sales decreased 13.8% to $529 million in the second quarter of fiscal 2010, primarily due to the divestiture of the direct store delivery (DSD) foodservice coffee business in fiscal 2009, as well as lower unit volumes and lower pricing. Adjusted net sales, which exclude the impact of the dispositions, decreased 5.9%. Unit volume growth in frozen bakery and private label refrigerated dough could not fully offset demand weakness in other parts of the business, a loss of a large, low-margin bakery contract and the impact of planned business exits in foodservice meats, resulting in 2.9% lower unit volumes in the second quarter.

International Beverage

International Beverage continues to drive profitable growth by focusing on innovation in the single-serve and instant coffee categories, expanding in growth markets such as Brazil and Russia and generally holding pricing in most of its key European markets. These initiatives, coupled with favorable foreign currency exchange rates, helped improve top- and bottom-line trends between the first and second fiscal quarters. With the expectation for a strong second half of the year, the segment will continue to focus on strategic pricing, new products and emerging markets.

Reported operating segment income was $172 million, up 59.1% from $108 million in the second quarter of fiscal 2009. The increase was primarily driven by higher net sales, Project Accelerate and continuous improvement savings and favorable foreign currency exchange rates. Adjusted operating segment income rose 35.2%. Both reported and adjusted operating segment income benefited from a $16 million favorable variance in the quarter, largely from mark-to-market currency impacts related to the purchase of raw materials.

Net sales increased 14.8% to $884 million in the second quarter of fiscal 2010, primarily due to favorable foreign currency exchange rates and higher unit volumes. Unit volumes were up 4.8% in the quarter, driven by strong volume growth in Brazil and higher volumes for single-serve and instant coffees. Adjusted net sales were up 1.2%. New products in the quarter included additional Senseo coffee pod varieties in the United Kingdom and Pilão Summer, a coffee blend sold in Brazil. Maison du Café Pepites d’Arome, roast and ground coffee pressed in the shape of a coffee bean for easy dosing and great taste, was voted “Product of the Year 2010” in France during the quarter.

International Bakery

The International Bakery segment continues to face headwinds in its core Spanish market and has implemented numerous actions expected to deliver an improved second half of the year. With new product launches, pricing actions and Project Accelerate benefits in Spain, combined with ongoing strong performance in France and Australia, the segment expects to show positive trends in the upcoming quarters and for the full fiscal year.

The segment reported an operating segment loss of $(1) million in the second quarter, primarily due to costs associated with Project Accelerate and for the impairment of certain fixed assets in the Spanish bakery business. The segment reported an operating segment loss of $(19) million in the year-ago period. Adjusted operating segment income was $12 million, compared to $11 million in the prior-year quarter, driven by lower commodity costs and Project Accelerate and continuous improvement savings, partially offset by reduced prices and lower unit volumes.

Net sales increased 7.1% to $211 million in the second quarter, driven by favorable foreign currency exchange rates, partially offset by a 2.8% decline in unit volumes and lower prices. Adjusted net sales decreased 6.6%. Successful new products launched in the second quarter included Ortiz wheat bread in Spain and various new Sara Lee branded foodservice bakery products in Australia. In addition, Bimbo Tender Bakery bread was named “Product of the Year 2010” in Spain and the Bimbo brand was recognized by Spanish consumers and industry experts as one of the 25 “Super Brands” for 2010.

Discontinued Operations

In spite of continued weak market conditions in Europe and an ongoing process to divest the business, the discontinued international household and body care operations delivered impressive top- and bottom-line performance for the second consecutive quarter, while also increasing marketing investment. Growth came from numerous new product successes, strategic pricing actions and Project Accelerate cost savings. Sara Lee continues to work toward the divestiture of the entire business while delivering strong results and investing in the business appropriately.

Operating segment income was $63 million in the second quarter, up $19 million versus the year-ago period, primarily driven by higher sales, Project Accelerate and continuous improvement savings and favorable foreign currency exchange rates, which were partially offset by higher MAP spending. Adjusted operating segment income was up 44.9%. Net sales increased 16.8% in the second quarter to $565 million, driven by favorable foreign currency exchange rates and growth in body care’s successful new products such as Sanex Zero% and NaturProtect, shoe care’s strength in the United States and Africa, and insecticides’ very strong sales in India and Malaysia. Adjusted net sales were up 5.4%.

Guidance

Sara Lee currently expects full-year fiscal 2010 total diluted EPS to be in the range of $1.36 to $1.41 per share, which includes $0.19 per share of contingent sale proceeds received in the first quarter of fiscal 2010 from the sale of its tobacco business in fiscal 1999, and a $0.17 per share gain from significant items realized in the first six months of fiscal 2010. Full-year 2010 adjusted EPS is expected to be in the range of $1.00 to $1.05 per share, compared to $0.82 in fiscal 2009. This represents an increase of $0.09 to $0.10 per share compared to the last guidance provided by the company. The $0.09 to $0.10 per share increase is comprised of our expectation of $0.03 to $0.04 per share of improved operational performance, $0.02 from a lower anticipated tax rate and $0.04 from the cessation of depreciation and amortization expense for H&BC. EPS guidance also includes anticipated benefits from a 53^rd week and favorable currency exchange rates. This adjusted EPS guidance implies that the second half of fiscal 2010 will be lower than the second half of the previous year. The primary drivers are comparisons to unusually low corporate expense in the second half of last year (approximately $25 to $30 million lower than the expected expense in the second half of fiscal 2010), lapping a positive commodity mark-to-market variance of $40 million, and significant business re-investment.

Guidance does not include any additional significant items that may occur during the remainder of fiscal 2010, such as one-time expenses related to Project Accelerate. If any of the household and body care transactions closes before the end of fiscal 2010, this may have an impact on the fiscal 2010 guidance.

Looking at the business segments, Sara Lee currently expects four out of the five continuing business segments, as well as the discontinued international household and body care operations, to show an increase in adjusted operating segment income in fiscal 2010. The company continues to be cautious about the North American Foodservice segment, as market trends remain weak for that segment.

Actual results may differ from this guidance due to future significant events that may occur, the nature, timing and financial impact of which are not yet known.

(1) Fiscal 2010 has an extra, 53^rd week.

(2) Amounts are rounded and may not add to the total.

(3) Diluted EPS excluding significant items and contingent sale proceeds. See explanation of non-GAAP measures at the end of this release.

.