Wells Fargo: Sara Lee Earnings Fall Short Of Expectations

Sara Lee SLE reported F1Q11 adjusted EPS from continuing operations of $0.13 versus the $0.18 consensus and our $0.20 estimate. The delta versus Wells Fargo's forecast was driven by lower-than-expected gross margins as $90 mm of higher commodity costs more than offset $28 mm of higher pricing. Volume growth was stronger-than-expected, increasing 4.4% in NA Retail and 1.7% in Int'l Beverages, despite higher pricing. Media, advertising and promotion expense increased $13 mm of 18% in the quarter driven by these two core segments. Wells Fargo is maintaining its F2011 and F2012 EPS estimates of $0.95 and $1.20, respectively. Wells Fargo expects margins to improve on a sequential basis over the coming quarters as announced price increases are implemented. Management raised its F2011 EPS guidance from continuing operations to the $0.92-0.99 range from the $0.88-$0.95 range based upon favorable currency and lower interest expense. Note that the NA Fresh Bakery Business is still included in continuing operations, but will be reclassified to disc ops in the current quarter. Wells Fargo's valuation range is based upon an 11.5-12.3x multiple on CY2012 EPS estimate of $1.30. This represents a 10-16% discount to where the packaged food group is currently trading on our CY2011 estimates. Risks to the forecasts and valuation include higher-than-expected commodity costs, weaker-than-expected sales volume, greater-than-expected competition, potential antitrust obstacles to the body care sale, and uncertainty about who will be named CEO. SLE is trading lower at $15.12