Sara Lee Grows Net Sales and Operating Income in FY08 First Quarter Despite Challenging Input Cost Environment

Downers Grove, Ill., Nov. 7 - Sara Lee Corporation today announced that net sales for the first quarter of fiscal 2008, ending Sept. 29, 2007, were $3.1 billion, up 8.3% over the comparable period last year. Net sales increases were strongest in the three international business segments. The corporation's adjusted net sales – which exclude the impact of foreign currency exchange rates and acquisitions/divestitures – increased 4.5% in the first quarter of fiscal 2008 with growth in five of the six business segments. Corporate unit volumes were up 1% in the first quarter.

Sara Lee reported operating income of $294 million for the first quarter of fiscal 2008, an increase of 15.5% compared to $254 million in the year-ago period, while adjusted operating income – which excludes the impact of significant items, foreign currency exchange rates and acquisitions/divestitures – declined 1.5% in the first quarter. This slight decline in adjusted operating income in the quarter occurred in a very challenging input cost environment, with prices for commodities such as wheat, poultry, pork and green coffee at significantly higher levels than a year ago and other input costs such as packaging, energy and labor costs increasing as well.

In the first quarter of fiscal 2008, the company invested heavily behind new product launches and brand-building advertising campaigns for brands such as Hillshire Farm, Jimmy Dean, Sara Lee, Senseo, Ambi Pur and Sanex, resulting in an increase in total media advertising and promotion (MAP) spending of 21.1%. The North American retail meats (+20.4%), North American retail bakery (+16.2%) and household and body care (+34.7%) business segments reported the strongest increases in MAP spending in the quarter.

“Our first fiscal quarter saw important investments in our business. Marketing and R&D spending increased significantly to develop and support new, innovative products that will be the bedrock for a successful fiscal 2008,” said Brenda C. Barnes, chairman and chief executive officer of Sara Lee Corporation. “I’m also pleased to note that in the face of historically high commodity prices we were able to offset the increases with appropriate pricing actions. This demonstrates the strong brand equities across our portfolio as well as our much improved selling capabilities,” Barnes concluded.

In the first quarter of fiscal 2008, diluted earnings per share (EPS) from continuing operations were $.28 per share versus $.34 per share in the first quarter of fiscal 2007. The diluted EPS were impacted by various significant items, as shown in the table below, which on a year-over-year basis decreased diluted EPS by $.18 per share. The remaining increase in diluted EPS from continuing operations of $.12 was primarily the result of a lower effective tax rate, favorable foreign currency exchange rates and lower interest expense during fiscal 2008.

In the first quarter of fiscal 2008, diluted EPS as reported were $.28 per share versus $.44 per share for the year-ago period. Diluted EPS were impacted by various significant items, as shown in the table below, which on a year-over-year basis decreased diluted EPS as reported by $.20 per share. The remaining increase in diluted EPS was $.04 per share.

Other First Quarter Fiscal 2008 Financial Highlights

• Net cash used in operating activities was $62 million in the first quarter, compared to $148 million of net cash used in the comparable period last year. The $148 million of cash used in operating activities in the prior year’s period included $236 million of cash used by continuing operations and $88 million of cash generated by discontinued operations.
• Net interest expense was $29 million for the first quarter, a decrease of $20 million compared to the year-ago period, primarily resulting from a lower debt level.
• General corporate expenses were $67 million in the first quarter compared to $84 million in the year-ago period, with the decrease primarily due to a decrease in charges related to foreign currency contracts, lower pension expense related to divested businesses and lower transformation costs.
• The company repurchased 1.5 million shares of its common stock in the first quarter at an average price of $15.95 per share, for a total cost of $24 million. At the end of the first quarter, approximately 43 million shares remained authorized by the board of directors for repurchase.
• At the beginning of the first quarter of fiscal 2008, the corporation received contingent tobacco sale proceeds of $130 million, which contributed $.18 per share to diluted EPS in the quarter. The company received $120 million, or $.16 per share, related to the sale of the tobacco business in the prior year’s first quarter.
• The effective tax rate for continuing operations for the first quarter of fiscal 2008 was a charge of 24.5%, compared to a benefit of 24.3% in the prior year’s period. For additional information on the tax rate, please see the table "Summary of Income Tax Amounts for the First Quarters Ending September 29, 2007 and September 30, 2006."

Business Performance Review

North American Retail Meats

• Net sales increased 3.3% to $650 million in the first quarter of fiscal 2008, driven primarily by an improved sales mix; adjusted net sales also increased 3.3%.
• Operating segment income was $28 million in the first quarter, compared to $27 million in the year-ago period. The increase was driven by lower transformation charges compared to last year’s period, procurement and other continuous improvement savings, and improved operating results in Mexico. Partially offsetting these factors were significantly higher commodity and other input costs and increased MAP spending behind new product launches. Adjusted operating segment income was $29 million, compared to $48 million in the prior year’s period.

Unit volumes, excluding acquisitions, increased 3.1% in the first quarter, consisting of flat unit volumes for retail meats and significantly higher unit volumes for commodity meats (see footnote on "Net Sales Bridge" table). Major new product launches in the first quarter included Hillshire Farm Deli Wraps and Premium Hearty Slices and Jimmy Dean D-Lights breakfast sandwiches. The Jimmy Dean brand reported significant sales growth and maintained its leading position in the total U.S. protein breakfast category. During the first quarter of fiscal 2008, Sara Lee increased its total packaged meats market share by 1.0 share points to 22.2% according to IRI share data (12 weeks ending August 26, 2007).

North American Retail Bakery (including Senseo coffee)

• Net sales increased 4.0% to $518 million in the first quarter of fiscal 2008, driven by higher selling prices to offset increases in input costs; adjusted net sales also increased 4.0%.
• Operating segment income was $8 million in the first quarter, compared to $5 million in the year-ago period. The increase is attributable to lower transformation charges compared to the prior year’s period, higher selling prices, and procurement and other continuous improvement savings. These factors were partially offset by higher commodity and other input costs and increased MAP spending. Through strategic pricing initiatives and risk management actions U.S. fresh bakery was able to completely offset the unprecedented increase in wheat costs in the quarter. Adjusted operating segment income was $9 million, compared to $10 million in the prior year.

Unit volumes, excluding acquisitions, decreased 2.9% in the first quarter, primarily due to declines in non-branded fresh bakery and frozen bakery. Sara Lee Soft & Smooth 100% Honey Wheat bread was launched in the first quarter to help the Sara Lee brand strengthen its position as the No. 1 fresh bread brand in America, with a 7.9% share according to IRI share data (12 weeks ending August 26, 2007).

Foodservice

• Net sales declined 2.9% to $522 million in the first quarter of fiscal 2008, due to lower unit volumes, partially offset by the effect of higher pricing and positive sales mix; adjusted net sales declined 3.0%.
• Operating segment income increased 8.4% to $21 million in the first quarter, primarily driven by lower transformation charges compared to last year’s period, higher selling prices and savings from procurement and other continuous improvement initiatives. These factors were partially offset by increases in commodity and other input costs. Adjusted operating segment income was $21 million, compared to $24 million in the prior year.

Unit volumes, excluding acquisitions, decreased 8.4% in the first quarter, primarily due to the planned exit of certain low-margin meat and sauces & dressings businesses and volume softness in baked goods, which more than offset double-digit growth in Douwe Egberts One-Touch liquid coffee concentrates.

International Beverage

• Net sales increased 25.4% to $706 million in the first quarter of fiscal 2008 driven by strong unit volumes, higher selling prices, positive sales mix and favorable foreign currency exchange rates; adjusted net sales rose 15.0%.
• Operating segment income increased 30.6% to $121 million in the first quarter, primarily driven by higher unit volumes, a sales mix shift into higher margin single-serve, instant and premium coffees, selling price increases taken over the past twelve months and favorable foreign currency exchange rates. These factors were partially offset by higher MAP and SG&A expenses and increased commodity and other input costs. Adjusted operating segment income increased 23.8% to $124 million.

Unit volumes, excluding acquisitions, increased 4.8% in the first quarter, driven by double-digit unit volume growth for single-serve coffee, instant coffee and hot tea. Moccona Premium Selection instant coffee was launched in St. Petersburg, its first Russian market, to build on Sara Lee’s growing position in instant coffees. Unit volumes for Cafitesse liquid coffee concentrate for the foodservice channel grew by mid single-digits.

International Bakery

• Net sales increased 10.2% to $221 million in the first quarter of fiscal 2008, primarily due to favorable foreign currency exchange rates, pricing and higher unit volumes; adjusted net sales rose 1.7%.
• Operating segment income was $13 million in the first quarter of fiscal 2008, compared to $14 million in the year-ago period. Favorable foreign currency exchange rates, higher unit volumes and price increases were more than offset by increases in commodity and other input costs, higher SG&A expenses and a slightly unfavorable sales mix. Adjusted operating segment income was $16 million compared to $15 million in the year-ago period.

Unit volumes, excluding acquisitions, increased 1.8% in the first quarter driven by volume growth in the European refrigerated dough and Spanish fresh bakery business, partially offset by volume weakness in the Australian bakery business. Bimbo Corteza Tierna Integral, a wheat bread with a soft and tender crust, was launched in Spain in the first quarter.

Household and Body Care

• Net sales increased 12.0% to $521 million in the first quarter of fiscal 2008 primarily behind strong unit volumes and favorable foreign currency exchange rates, partially offset by the effect of price promotions and an unfavorable sales mix; adjusted net sales rose 3.6%.
• Operating segment income decreased 27.4% to $57 million in the first quarter, primarily due to higher SG&A and MAP spending. MAP spending was up 35% as the business invested heavily behind new product launches and international roll-outs of products such as Ambi Pur Puresse and 3volution air fresheners and Sanex and Radox body care products. Adjusted operating segment income decreased 19.5% in the first quarter.

Unit volumes, excluding acquisitions, increased 8.7% in the first quarter, driven by double-digit unit volume growth in the air care and body care categories as a result of successful promotions for new products in these two core categories. Ambi Pur Puresse, a range of hypo-allergenic home fragrances, was rolled out internationally with launches in the United Kingdom, Russia, Hungary and the Czech Republic during the first quarter.

Guidance

Sara Lee currently expects full year fiscal 2008 diluted EPS from continuing operations to be in the range of $1.00 to $1.06 per share, which includes $.18 per share of contingent proceeds received in the first quarter of fiscal 2008 from the sale of its tobacco business in fiscal 1999. The change versus previous guidance in EPS, net sales and capital expenditures, as noted below, is solely the result of higher than anticipated foreign currency exchange rates. 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 Excludes a tax benefit of $.21 per share reported in the first quarter of fiscal 2007.

² Represents Sara Lee’s results from and forecasts relating to continuing operations, excluding an $.18 per share tobacco gain in the first quarter of fiscal 2008, as identified in the table above. Management believes that presenting core Sara Lee EPS enables investors to better understand base business earnings. Fiscal 2007 core Sara Lee EPS of $.72 per share included a one-time tax benefit of $.21 per share that was reported in significant items in the first quarter of fiscal 2007.

³ Impact of adjustments to operating income used to compute adjusted operating margin. The dollar amounts are $22 million for the significant items, net in the first quarter of fiscal 2008 and $418 million for the significant items, net in fiscal 2007; $130 million for the contingent tobacco sale proceeds in fiscal 2008 and $120 million for the contingent tobacco sale proceeds in fiscal 2007.

Form 10-Q

In alignment with today’s reporting of Sara Lee’s earnings, the company also filed a Form 10-Q for the first quarter of fiscal 2008 with the Securities and Exchange Commission this morning.