Sara Lee profit beats estimates

CHICAGO (Reuters) - Sara Lee Corp. (SLE.N) reported a better-than-expected quarterly profit on Wednesday as price increases helped offset higher costs for wheat and other ingredients and boosted revenue.

But a 1.9 percent decline in sales volume led some analysts to worry that the higher prices might hurt the business.

"If your volume goes down and you're raising prices, it's not sustainable," D.A. Davidson & Co. analyst Timothy Ramey said.

Like many food companies, Sara Lee has had to raise prices as costs for ingredients such as coffee and wheat have climbed much more than expected.

"I don't think we ever anticipated the height that wheat has hit," Brenda Barnes, chairman and chief executive, said during a conference call with analysts.

Some of the volume decline the company saw stemmed from the price increases and some came from planned exits from some less profitable products.

Sara Lee shares were up 30 cents, or 1.9 percent, at $16.30 on the New York Stock Exchange.

The maker of Sara Lee baked goods, Hillshire Farm lunch meats and Jimmy Dean sausage said earnings rose to $117 million, or 16 cents a share, in the fourth quarter that ended June 30, from $8 million, or a penny a share, a year earlier.

Excluding one-time items, profit was 17 cents a share, beating the analysts' average forecast of 13 cents, according to Reuters Estimates.

Sales from continuing operations rose 7.7 percent to $3.2 billion. Excluding acquisitions, divestitures and the impact of currency fluctuations, sales rose 3.9 percent.

Sara Lee, which has undergone a major restructuring that included the divestiture of several business lines like the Hanesbrands Inc. (HBI.N) apparel business, has grappled with rising costs while trying to increase sales.

Analysts and investors are looking to see how the company performs now that the restructuring is finished.

"With a bevy of portfolio enhancement complete, Sara Lee must now grow earnings in line with food titans, who in our view are much better aligned with attractive consumer categories," Jonathan Feeney, an analyst at Wachovia, said in a research note. "Trading at 20 times the midpoint of its new core guidance, the risk/reward is still poor, in our view."

Sara Lee forecast fiscal 2008 earnings of 95 cents to $1.01 a share, including receipt of a contingency payment of 18 cents from the fiscal 1999 sale of its tobacco business. Analysts were expecting 93 cents, according to Reuters Estimates.

Excluding that payment, the company said it expected profit of 77 cents to 83 cents a share, compared with analysts' estimates of 82 cents.

Sara Lee's forecast includes a 3 percent increase in sales and a flat to 1 percent higher unit volume.

"We are going to see volume increases that are not as robust," Barnes said, adding that the company is trying to increase higher-margin sales and will exit some businesses.

The company's operating margin for the year was 7 percent, roughly the same rate as when the restructuring began in 2005.

Sara Lee had initially said it would increase operating margins to 12 percent by fiscal 2010. But last year it withdrew that target, saying it expected to get to that rate at some point in the future.

For fiscal 2008, the company forecast operating margins of 7.6 percent to 8 percent.

Through Tuesday, Sara Lee's shares had fallen 6 percent this year, compared with a 1 percent rise in the Standard & Poor's packaged foods index .15GSPFOOD.