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Case Twentyone
Sara Lee Corporation: Retrenching to a N arrower Range of Businesses
Arthur A. Thompson
The University of Alabama
In February 2005 Brenda Barnes Sara Lee's newly appointed president and CEO, announced a bold and ambitious multiyear strategic plan to transform Sara Lee into a more tightly focused food, beverage, and household products company. The centerpiece of Barnes's transformation plan was the divestiture of weak-performing business units and product categories accounting for $8.2 billion in sales (40 percent of Sara Lee's annual revenues). While the dive titures would cut Sara Lee's revenues from $19.6 billion to about $11.4 billion, Barnes believed that Sara Lee would be better off concentrating its financial and managerial resources on a sm aller number 0 f business segments where market prospects were promising and Sara Lee's brands were well position d.' Once the
Copyright © 2007 by Arthur A. Thompson rights reserved. and John E. Gamble. All

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John E. Gamble
University of South Alabama
retrenchment initiatives were completed, the plan was to drive the company's growth via initiatives to boo t the sales, market shares, and profitability of the key remaining brands: Sara Lee breads and bakery product, Ball Park meats Douwe Egberts coffees, Hillshire Farm meats Jimmy Dean sausage, Kiwi shoe care products, Sanex personal care products Ambi Pur air fresheners, and Senseo single-serve coffee products. By focus ing on strong brand s with good growth potential, company executives estimated that Sara Lee's sales revenues would grow to $14 billion in fiscal. 2010 and that the company operating profit margin would increase to at least 12 percent (versus an 8.1 percent operating profit margin in fiscal 2004).2 The improved operating margin was expected to result from a combination of an increase

and Hygrade hoi dog brands) Henson-Kickernick Inc. a Dutch producer of canned goods Oxford Chemical Corporation E. a manufacturer of hosiery products (provided an entry inlo the men's basic sock business) Cllampion Products. a manufacturer of high-quality foundations and daywear Playtex Apparel lnc. Sara lee Corporation: Retrenching to a Narrower Range of Businesses 1962 "966 1968 C-343 1969 1971 1972 1978 1980 1982 1984 Jonker Fris. an apparel producer Canadelle.. a meat producer Erdal. SmithKline Beecham's European bath and body care brands Aoste. Kann's Sons Company. a manutaoturer of various meat. a producer of women's intimate apparel Aris Gloves (later renamed Aris Isotoner) HlIIshire Farm. Cafe Pilao. shoe. and ham (which included the Ball Park. the leading company in women's underwear in Argentina The Earthgrains Company. an apparel producer Country Set.. a manufacturer/marketer of men's and boys' underwear in Mexico BP Nutrition's Consumer Foods Group Giltex Hosiery Bessin Corporation The furniture care businesses of SC Johnson Wax A majority interest in Maglificio Bellia. a manufacturer of hot dogs. Sol y Oro. household. UK-based producer of intimate apparel brands Gossard and Berlei. an Italian intimate apparel manufacturer Brossard France SA. food. luncheon meats. a meat producer Rudy's Farm.S. the number two player in the U. and Chase & Sanborn coffee brands (acquired from Nestle·USA) Courtaulds Textiles. a. and leather products Nicholas Kiwi Limited.. the leading hosiery brand in France Adams-Millis Corporation. a producer of meats Bryan Foods. manufacturer of professional-quality knit athletic wear Van Nelle. a manufacturer/distributor 01frozen prepared desserts Douwe Egberts. a Dutch company active in coffee and lea Hygrade Food Products. a French manufact~rer of bakery products NutriMetics Cafe do Ponto Wechsler Coffee Chock full o'Nuts Continental Coffee Hills Bros. an international manufacturer and marketer of intimate apparel products Rinbros. MJB. a French meats company Lovable Italiana SpA. 989 1990 1991 1992 1993 '997 1998 1999 2000 2001 . a processor of mea1products Jimmy Dean Meats. an Australian-based manufacturer and marketer of personal. the number one coffee company in Brazil. a Dutch company that produced and marketed personal care products (later renamed Intradal) Chef Pierre. a meat products producer Electrolux. a producer of turkey-based products Dim SA. a Dutch coffee and grocery company Productos Cruz Verde." . SpA Selec! assets of Mark Cross Inc. bakery market A major European bakery company 1987 1988 .direct seller of vacuum cleaners Ganl. bacon. and car care products and home medicines Bil Mar Foods. a Spanish household products company Standard Meat Company.

The next 40 years were marked by a series of related and unrelated acquisitions in tabular form on page 349. Barnes. and marketing. was a board of direct rs member at Avon Products.everal divestitures to begin the process of sharpening Sara Lee's business focus: 1966 2000 Piggly Wiggly supermarket chains PYA/Monarch (sold to Royal Ahold's U. China. coffee. From November 1999 to March 2000. and the United Kingdom 2004 Filodoro. Sales reached $10 billion in 1988 $15 bi lIion in 1994. became president and CEO in 1975 <LI1d served as EO unLi12000. the New York Times Company. general management. Bryan was the chief architect of the company's acquisition strategy during 1975-2000 guiding both its diversification efforts and its emergence as a global corporation. the company's shares began trading on the New York Stock Exchange in 1946. she served as interim president and chief operating officer of Starwo d Hotels & . In 2000. But revenues peaked at the $20 billion level in 19981999 as management struggled to manage the company's broadly diversified and geographically catrered operations.C-34tJ· Crafting and Executing Strategy in the mix of more profitable and innovative valueadded products plus expected annual cost savings of between $575 and $800 million. In 1985 Con olidated Foods changed it name to Sara Lee Corporation. manufacturing. and Staples. Foodservice for nearly $1. During her 22-year career at PepsiCo. In 1956. McMillall launched strategic initiatives to narrow Sara Lee's focus on a smaller number of global branded consumer packaged goods segmentsFood and Beverage Intimates and Underwear and Household Products. However. age 50. Bryan was appointed chairman in 1976.8 billion in fiscal 2004). and repurchase shares of com rnon stock. pay substantial dividends to shareholders.5 and $2 billion by fiscal 2010 (versus total debt of $4. a ronnel" president of PepsiCo North America from 1996 to 1998 joined Sara Lee as president and chief operating officer in July 2004. sales. packaging.6 bi IIion) Champion Europe Coach The International of Courtaulds Fabrics division COMPANY BACK- GROUND Sara Lee Corporation originated in 1939 when Nathan Cummins acquired C. The international bakery businesses in France. Consolidated Foods acquired Kitchens of Sara Lee and also entered the re ail food business by acquiring 34 P. Bame . and $20 bi Ilion in 1998. and tea that had net sa les of $24 mill ion. John H. a position he held until 2001. At the time of her appointment. Bryan. In addition. McMillan orchestrated . Sara Lee executives believed that the retrenchment strategy would generate sufficient cash flows to pay the company's total debt down to between $1. Warner & Company in 1942 prompted a name change to Sprague Warner-Kenny Corporation and a hift in the headquarters location from Balti-more to Chicago. sales had reached $5 billion. the company's name was chang d to Consolidated Food Corporation to emphasize its diversified role in food processing. The purchase of Sprague. Kenny Company a small wholesale distributor of sugar. an Italian intimate apparel business Brenda C. C. SOme of the annual cost savings would be partially offset by spending an incremental $250 million annually on media advertising and promotion and on research and development. and distribution.iggly Wiggly supermarkets (later divested in 1966). Bryan remained chairman until he retired. Steven McMillan succeeded John Bryan as CEO and president of Sara Lee.S. at which time McMillan assumed the additional title. D. By 1980. a year later. In 1954. form r head of Bryan Meat (which the company acquired in 1968). Sears Roebuck. Barnes held a number of senior executive positions in operations. India.

a U. (Sara Lee was continuing its efforts to find a buyer for the Sri Lanka operations. casual wear. NaturCare. a big fraction of Sara Lee Courtaulds was sold to PD Enterprise Ltd. House of Fuller. it is appropriate that she lead its execution from the outset. Retail Coffee-A $213 million business that marketed well-known Chock full o'Nuts. a global garment producer with nine Iacilitres that produced more than 120 million garments annually. House of Sara Lee. Not included in the divestiture plan was the sale of Sara Lee's fast-growing global coffee brand. and Swissgarde.. The U. Sara Lee sold the branded apparel portion of the European apparel business unit to an affiliate of Sun Capital Partners. Australia.' The sale included products being sold under such brands as Avroy Shlain. baby clothes. Sara Lee announced a definitive agreement LO sell its direct selling business to Tupperware Corporation for $557 million in cash.Sara Lee Corporation: Retrenching to a Narrower Range of Businesses C~345 Resorts. US. Nutrirnetics. skin care products. swim. it also included Sara Lee Courtaulds. underwear. which had sales of approximately $85 million .2 billion in sales in fiscal year 2005. the same day as the announcement of the plan to transform Sara Lee into an even more tightly focused company. to ensure a smooth transition. Also..5 million in late 2005. for about $115 million plus possible contingent payments based on future performance.5 • included in our plan. 2005. toiletries. and her contri buti on s and leadership have exceeded all expectation s. Italy. [he United Kingdom.and beachwear. Florida. the most significant of which was the defined benefit pension plans that were underfunded by $483 million at the end of2005_ European Nuts and Snacks-A business with approximately €88 million in annual • . household products. Senseo.S. During these nine months. and Unno in France. Abanderado. the deal with PD Enterprise did not include three Sara Lee Courtau!cls facilities in Sri Lanka. Brenda has played a key Icadcrshi p role in designing our transformation plan and.. the Sara Lee Courtaulds business had fiscal 2005 sales of about $560 million. a UK~based maker of private-label clothing for retailers. apparel. In November 2005. said: decision to fundamentally transform Sara Lee presents an ideal time for Brenda Barnes to transition to her new role as chief executive officer. The branded European apparel business had nearly $1. In August 2005. Brenda Barnes's appointment as president and CEO of Sara Lee was announced on February 10. McMillan.) Sara Lee received no material consideration as a result of the sale and remained liable for certain obligations of Sara Lee Courtaulds after the disposition. Wonderbra. Playtex. and socks. jackets and coats. MJB. private equity company. I win focus on the divestitures OUI fees plus several private-label coffees. Germany. and other products (Q consumers through a network of independent salespeople in 18 countries around the world. fragrances. based in Boca Raton.' SARA LEE'S RETRENCHMENT INITIATIVES The first phase of Brenda Barnes's transformation plan for Sara Lee was to exit seven businesses that had been targeted as nonstrategic: • Direct Selling-A $450 million business that sold cosmetics. including bras. and Chase & Sanborn cof- • European Apparel-A Sara Lee business unit that marketed such well-known brands as Dim. and Japan. r will remain chairman through the annual shareholders meeting in October." In May 2006. Spain. Nur Die. for continuity and focus. Nuvo Cosrneticos.. formal wear. nightwear. and much of Eastern Europe. the Philippines. 2005. We recruited Brenda last year to be my successor. most notably in Mexico. retail coffee business was sold to Italy-based Segafredo Zanetti Group for $82.S. in announcing Barnes's elevation to CEO. ending July 2. Hills Bros.

4 billion payment to Sara Lee and to fund its own operations. The operations of Sara Lee Branded Apparel consisted of producing and marketing 10 brands of apparel: Hanes." Sara Lee Branded Apparel-Sara Lee's strategy for exiting branded.500 people. Champion. Poland. Romania.of these brands were chiefly in North America. L'eggs.1 billion in sales in fiscal 2005. Wonderbra. the spin-off of Hanesbrands had some unique financial features.6 billion. Sara Lee shareholders received one share of Hanesbrands stock for every eight shares owned. and Portugal and included such brands such as Aoste Justin Bridou. The terms of the spin-off called for Hanesbrands to make a onetime "dividend" payment of $2. European The Spin-Off of Hanesbrands Sara Lee management's decision to exit the branded apparel business was driven principally by eroding sales and weak returns on its equity investment in branded apparel (Exhibit 2). The next section provides additional details about the Hanesbrands spin-off. apparel (2004 sales of $4. Hanesbrands borrowed $2. Playtex. Sara Lee completed the sale of this unit to Smithfield Foods for $575 million in cash. based in Smithfield. The spin-off was corn- pleted in September 2006 when Sara Lee distributed 100 percent of the common stock of Hanesbrands to Sara Lee shareholders. and Outer Banks (golf. Meat Snacks-A small unit with annual sales of $33 million in fiscal 2005 and $25 million in fiscal 2006.S. and employed approximately 4. Nobre. corporate. the Benelux. and Asia. and stylish sportswear). Smithfield Foods was the world's largest grower of hogs and producer of pork products and had subsidiarie in France. region. management determined that shareholders would be better served by spinning off the branded apparel business as a stand-alone company. The company's debt-to-equity ratio was extraordinarily high.ro • . Sara Lee sold its European nuts and snacks business in the Netherlands. Just My Size. and the United Kingdom that marketed meats under various brands. as shown in Exhibit 3.4 billion to Sara Lee immediately following the commencement of independent operations. Bali.1 U. Virginia. Belgium. thus saddling itself with a huge debt that prompted Standard & Poor's to assign the company a B+ credit rating (which put Hanesbrands in the bottom half of apparel companies from a credit rating standpoint). But in order to make the $2. But rather than sell the business. raising some questions about whether the interest expenses associated with the high debt would still leave Hanesbrands with sufficient funds and financial flexibility . Headquartered in Hoofddorp.1 • • sales in fiscal 2005 that marketed products under the Duyvis brand in the Netherlands and Belgium as well as the Benenuts brand in France. Sara Lee's European meats operation generated $1. including Krakus and Stefano's. Duofold (outdoor apparel). Exhibit 1 provides financial data relating to the divested businesses. Two top executives of Sara Lee B randed Apparel were named to head the new company. In June 2006. the Netherlands. and Imperial. shares were traded on the New York Stock Exchange under the symbol HBI. Cochonou.1 billion packagedmeats business in Europe tbathad respectable market positions in France. sales .5 billion) was to spin the entire business off as an independent company named Hanesbrands Inc. Hanesbrands began independent operations in September 2006 and organized it business around four product/geographic segments.C-346 Crafting and Executing Strategy . Latin America. However. This business was sold in June 2006 for $9 million. Barely There." Meats-A $1. Sara Lee management expected the retrenchment initiatives would generate combined net after-tax proceeds in excess of $3 billion. and France to PepsiCo for approximately $150 million in November 2005.

Fiscal Years 2004-2006 ($ in millions) Fiscal years 2()()4. Fiscal Years 2004-2006 (a) Sales and Income of Divested Businesses.Sara Lee Corporation: Retrenching to a Narrower Range of Businesses C-347 Exhibit 1 Financial Data for Sara Lee's Divested Businesses.114 $2.0 70 (Continued) .5 "115.0 82. retail coffee European European branded apparel nuts and snacks $ 3 (1 ) (1 ) Sara Lee Courtaulds U.698 $ 447 206 1. retail coffee European European branded apparel nuts and snacks Gain on Sale $327 Tax Benefit (Charge) After-Tax Gain s 557.184 64 558 30 1. meat snacks European Pretax meats (loss) of divested businesses Total net sales income Direct selling U.595 $ 14 $ 55 (39) (302) 7 (1 ) $ 55 (2) 67 12 14 (1) 101 (46) (186) 8 (69) Sara Lee Courtaulds meat snacks meats (loss) of divested businesses European (14) Total pretax income After-tax income $ __ J~D (350) 54 (39) (153) 3 90 $ (19a) $ (12) (33) (296) $ 246 $ 34 68 7 26 86 (loss) Direct selling U. meat snacks European meats income (loss) the Sales of the Divested Total after-tax (b) Proceeds (7l) (9) $ (256) Businesses ($ in millions) ~ ____@ $ (362) $ 221 Realized from Pretax Direct selling U.675 Sara Lee Courtaulds U. 2005 Net sales of divested Direct selling U. retail coffee European European branded apparel nuts and snacks businesses $ 202 122 641 54 437 25 $ 4.S..0 5 45 66 $(107) (2) $220 3 86 41 4 "150.176 $3.S.S. .276 66 536 33 1. retail coffee European European U$ branded apparel nuts and snacks 1.S.S.S.73 213 1.111 $3.

383 1. ••• The actual amount realized from the sales of these businesses was closer to 51.734 35.320 93.665 3. JUly 3.0 $1.014 42.252 $4.026 1.200 53.715 1. and various company press releases announCing the sale and disposition of the businesses.448 2004 $4.488 Income from operations Interest expense Interest income Income before income taxes tneome tax expense Net income Balance Sheet Data (benefit) s 339.075 2.054 6.440 $ 289.832 2.824 s tax liabilities Other noncurrent Total noncurrent liabilities liabilities Total Sara Lee equity investment Source: Hanesbrands fiscal 2006 10·K report. Sources: Company 2006 1O-K report.140 37. data regarding the gains from the sale is from company press release on November 7.087.237.C-348 Crafting and Executing Strategy Exhibit 1 Continued Sale Price Sara lee Courtaulds No material consideration" Pretax Gain on Sale 22 1 42 $508 Tax Benefit (Charge) After-Tax Gain 22 u.402.485.552 674.223.654 46.730 t2.580 468.237.758 7. Fiscal Years Fiscal Years Ending June 29.509 (13.282 1.600 26.0 575.840 3.449 139.154 $4. general and administrative expenses Charges activities for (income from) exit of Income Data 2003 $4.134 $4.332 1. June 28.816 $ 3.480 35.187 49.642.2006 reporting results for lirst quarter of fiscal 2007.516 127.614 44.000 121.466 425.598 49.146.573 10.872 (48.827 $ 322.961 $ 449.245 (46.799 $4.5*" (1) ____Q) $ (67) 40 $441 • This unit was divested in early fiscal 2007.493 $ 298.064.833 (101) 433.964 27.998) 400. 56.s. .660 59.753) 479.915.500 1.797.278. July 2.602.244 (21.987 $3.2.285 37.741 3.540.007 2006 $4.920.188 7.559 $2.362 Cash and cash equivalents Total assets Noncurrent Noncurrent obligations Noncurrent liabilities: capital lease deferred $ 106.509 $ 1.334 1.171 40.. July'f.571 1.053.200 $ 218.251 $2.171 10.205 2.280) 345.250 $4. p.• Sara Lee retained liabiHty for unfunded pension benefits of $483 million at Sara Lee Courtaulds and made payments of approximately $93 million to remedy its liability during 2006.506 1.669.092.683.786 5.051.397) 547.762.112 1.472.154 6.010.460. meat European Totals snacks meats" 9..599 32.549 27.411 (12.065 (14. Exhibit 2 Performance of Hanesbrands 2002-2006 ($ in thousands) Prior to Spin-Off by Sara Lee.978 359. 2002 Statements Net sales Cost of sales Gross profit Selling.3 billion after taking into account the payments made to remedy unfunded pension liabilities at Sara Lee Courtaulds and other costs Incurred in discontinuing the operations of all these businesses.683 3.080.075 (8.659.795) 416.29.370 - .680) 2005 $ 4.631) 550.934 $2.987.126.891.488.971 $1.560 $ 428. 28.632.

The decrease in net income reflected increased interest expense. . down . Exhibit 4 shows the impact of the $2. Playtex. down 3 percent from the comparable period in fiscal 2006. and eliminate the medical plan for retirees aged 65 and older as a result of recently expanded Medicare coverage. Sara Lee supposedly opted to get more cash out of the Hanesbrands spin-off.· CMampion. Just My Size. Hanesbrands' stock price. which began trading at around $22 per share in early September 2006. Just My Size Hanes.25 billion. •• Hanesbrands had a license agreement to sell men's underwear and kids' underwear under the Polo Ralph Lauren label.aurerr" Hanes. and a higher income tax rate. 2006 Product/Geographic Segments Innerwear Primary Products Intimate apparel. Rinbros. hosierv and casual wear Hanes. Barely There. Champion. Exhibit 5 compares Sara Lee's financial situation at the end of fiscal 2004 (just prior to the transformation plan) with that at the end of fiscal 2006 (when the divestitures and the Hanesbrands spin-off were completed).:eggs. socks. and South Africa . HOSiery Aclivewear. Champion. reduced operating profit.4 billion payment to Sara Lee on Hanesbrands' balance sheet.10 To make up for the shortfall. such as T-shirts. had trended upward to the $25-$27 range as of February 2007.Sara Lee Corporation: Retrenching to a Narrower Range of Businesses C-349 Exhibit 3 Hanesbrands' Lineup of Products and Brands. In its first six months. Hanesbrands reported that sales for the first six months of fiscal 2007 were $2. anes. Wonderbra Hanes.6 million in the first two quarters of fiscal 2006. In February 2007. strong cash flows from operations allowed the company to pay down long-term debt by more than $106 million and make a voluntary $48 million contribution to reduce the underfunded liability fOr qualified pension plans to $173 million. such as performance T-shirts and shorts Casual wear. A Business Week reporter speculated that the reason for the unusually outsized dividend payment to Sara Lee was that the proceeds Sara Lee realized from the sales of the divested units (Exhibit l ) fell far short of the hoped-for $3 billion that was an integral part of the retrenchment strategy and restructuring announced by CEO Brenda Barnes in February 2005. L. Bali Outerwear Hosiery International • Terms of 1I1eFebruary 2006 sale 01 Sara Lee's European branded apparel business prevented Hanesorands from seiling Wonderbra and Playtex branded products in the European Union. Net income for the six-month period was $74. move to an access-only plan for early retirees by the end of 2007. it also notified retirees and employees that the company would phase out premium subsidies for early retiree medical coverage. Just My Size H Hanes. men's underwear. Source: Company 10·K report for fiscal 2006. kids' underwear. invest in revitalizing its brands and growing its business. However. OlJlerbanks. panties and bodywear Men's underwear and kids' underwear Socks Activewear.1 million. Bali. intimate apparel. Wonderbra/ Playtex.7 percent from $188. Polo Ralph t. Champion Hanes. such as bras. Hanesbrands announced the closure of four plants and three distribution centers as part of a plan to create a lower-cost gLobal supply chain.. Just My Size.60. several other European countries.

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