KEL353

JAMES SHEIN

Sara Lee: A Tale of Another Turnaround

On the morning of February 10, 2005, Sara Lee employees were greeted at their desks by the
following announcement (see Exhibit 1):

Sara Lee Corporation Announces Bold Transformation Plan to Drive Long-Term

Growth and Performance

Sara Lee Corporation today announced a comprehensive transformation plan designed

to dramatically improve the company’s performance and better position Sara Lee for
long-term growth. C. Steven McMillan, chairman of Sara Lee Corporation, also
announced—in the context of this significant transformation plan—the election of Brenda
C. Barnes as the company’s chief executive officer, effective immediately.

• Integrated plan has three pillars: organizing business operations

around consumers, customers, and geographic markets; focusing the
portfolio; and increasing operational efficiency

• North American food and beverage businesses to be located with

corporate staff and headquartered in Chicago area

• Plan includes the disposition of approximately 40 percent of company’s

revenues, including its apparel, European packaged meats, and direct
selling businesses

“Our decision to fundamentally transform Sara Lee presents an ideal time for Brenda
Barnes to transition to her new role as chief executive officer. We recruited Brenda last
year to be my successor, and her contributions and leadership have exceeded all
expectations,” said McMillan. “Brenda has played a key leadership role in designing our
transformation plan and, for continuity and focus, it is appropriate that she lead its
execution from the outset. Also, to ensure a smooth transition, I will remain chairman
through the annual shareholders meeting in October. During these nine months, I will
focus on the divestitures included in our plan.”

©2008 by the Kellogg School of Management, Northwestern University. This case was prepared by Loredana Yamada ’96 under the
supervision of Professor James Shein and supported by earlier research by Heidi Fischer, Jennie Logan, Charlie Newman, and Sanga
Peerreddy. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of
primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call
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SARA LEE: A TALE OF ANOTHER TURNAROUND KEL353

Glory Days of Expansion and Acquisition

In 2006 Sara Lee Corporation had operations in more than forty countries, selling products in
more than 180 nations worldwide. The company was founded in 1939, when Nathan Cummings
acquired C. D. Kenny Company, a wholesale distributor of sugar, coffee, and tea in Baltimore.
By 1970 Cummings had supervised the purchase of more than ninety family-owned businesses,
doubling sales to $2 billion between 1967 and 1973, with total assets reaching $1 billion.1

In 1975, when John H. Bryan took over as chairman and chief executive, Sara Lee—then
called Consolidated Foods—was a $2.5 billion dollar conglomerate. Bryan quickly sold more
than fifty companies, most of which were smaller acquisitions made in the early 1970s, including
four furniture companies. Despite difficulties—poor performance of some nonfood companies led
to earnings losses in 1974 and 1975—Consolidated’s performance excelled by the end of the
1970s. Bryan continued to value nonfood sales, however. For the next ten years, nonfood
products continued to make up more than 50 percent of corporate income but only 30 percent of
total sales. Purchases during the 1980s continued the trend toward solidifying durable goods
production. In 1979 Consolidated gained control of Hanes Corporation, a family-owned
underwear manufacturer, through a hostile takeover. Eighty-nine percent of Consolidated’s
income came from domestic sources until the purchase in 1978 of Douwe Egberts, a Dutch
coffee, tea, and tobacco producer. By 1989, 30 percent of income came from abroad.2

Bryan initially wanted to have a diversified and decentralized company with the corporate
office responsible for financial control and strategic planning. He was looking to acquire brands
with leading market shares in new areas as well as easy-to-integrate larger companies with
established brands in Consolidated’s markets. Examples of the latter were Chef Pierre pies,
Superior Tea and Coffee Company, and Italian dry sausage product maker Gallo Salame, all of
which were bought in the late 1970s, and Jimmy Dean Meats, which was purchased in 1984.3
These acquisitions improved Consolidated’s pastry, coffee and tea, and meat market shares.

In 1985 Sara Lee Corporation became the official name of the company. With Bryan at the
helm, the company had grown to $9 billion in sales by 1987 and to $20 billion in worldwide sales
by 2000, with strong brands including Sara Lee, Kiwi, Hillshire Farm, Coach, and Playtex.4 This
left the company with a portfolio of different businesses that were operated autonomously from
one another. See Exhibit 2 for a list of brands.

Brands were not the only target at Sara Lee. Nathan Cummings was dedicated to playing a
meaningful role in community life and, in particular, to supporting cultural institutions. He and
his company collected an impressive number of works of art. When Consolidated Foods acquired
Bryan Foods in 1968, Cummings found a kindred spirit in John H. Bryan. Cummings personally
prepared Bryan to succeed him, sharing his corporate knowledge as well as his understanding of
charitable giving and a passion for the arts. Cummings took great pride in the reputation he had

1
Wikipedia, “Sara Lee,” http://en.wikipedia.org/wiki/Sara_Lee (accessed July 9, 2007).
2
Ibid.
3
Ibid.
4
Great American Business Leaders, “John H. Bryan, Jr.,” Harvard Business School, http://www.hbs.edu/leadership/database/
leaders/106.

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KEL353 SARA LEE: A TALE OF ANOTHER TURNAROUND

built as a leader in corporate citizenship as well as for his business successes. He was convinced
that a corporate citizen needs to be dedicated to the cultural life of the community.5

Bryan started buying artwork in 1980, both to associate Sara Lee with quality and as a tribute
to Cummings. In a departure from the usual pattern of arts patronage, in June 1998 Sara Lee
donated its best Impressionist paintings and sculptures, about forty pieces worth about $100
million, to twenty museums in the United States. Bryan announced the unprecedented move at a
news conference at the Art Institute in Chicago. Thanks to the sizeable tax deduction, the cost to
the company was “very modest—a few million dollars,” he said.6

In May 2000 the company announced that C. Steven McMillan, then president and chief
operating officer, would assume the role of president and chief executive officer on July 1. While
John Bryan had built a conglomerate of different brands, McMillan wanted to divest non-core
assets and brands while focusing Sara Lee on its core categories: food, underwear, and household
products.7 McMillan’s boldness seemed to be what was needed. As an example of the tenacity of
his convictions and determination to pursue his goals, McMillan would often recount when, years
ago, in pep rallies with an auditorium full of door-to-door vacuum-cleaner salesmen, he would
wrestle with a 500-pound Siberian tiger. The tiger would bite his arm and pull him toward her,
and McMillan would put his head in her mouth. “If I was willing to stand up and do something
they thought was crazy, then maybe walking up and down the street knocking on doors wasn’t
such a frightening prospect after all,” he said.

More than three years later, McMillan’s plan was still to “take six months to decide which
businesses are worth hanging on to, squeezing more out of the strong brands and cutting costs.”
“We need to go back and prioritize even more aggressively where we are going to spend our
money,” he said on April 24, 2003. Some investors, however, questioned McMillan’s staying at
the helm. “The board needs to ask if the company is in the right businesses, or even whether this
is the right management to pull it through,” said a shareholder who had recently sold one-third of
his three million Sara Lee shares.8

As Sara Lee entered the early twenty-first century, management realized that the company
had serious structural problems and was badly in need of a turnaround.

The February 2005 “transformation” announcement represented the culmination of more than
ten years of sideways stock price performance (see Figure 1) coupled with dissatisfied customers.

5
Suzanne Sato, “Profiles of Arts Grantmakers: Sara Lee Corporation—Nobody Doesn’t Like Sara Lee,” Grantmakers in the Arts
Reader 13, no. 2 (Summer 2002).
6
Judith H. Dobrzynski, “Sara Lee Is Donating Impressionist Art to 20 U.S. Museums,” New York Times, June 3, 1998.
7
Julie Forster, “Sara Lee: Changing the Recipe—Again,” BusinessWeek, September 10, 2001.
8
Pallavi Gogoi, “Sara Lee: No Piece of Cake,” BusinessWeek, May 26, 2003.

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SARA LEE: A TALE OF ANOTHER TURNAROUND KEL353

Figure 1: Sara Lee Share Price Performance, 1996–2008

1997 restructuring 2000 restructuring 2005 restructuring

$25
$23
$21
$19
$17
$15
$13
$11
$9
$7
$5
05/13/96
08/15/96
11/18/96
02/24/97
05/29/97
09/02/97
12/04/97
03/12/98
06/16/98
09/18/98
12/22/98
03/30/99
07/02/99
10/06/99
01/10/00
04/14/00
07/24/00
10/27/00
02/02/01
05/09/01
08/13/01
11/20/01
02/28/02
06/04/02
09/06/02
12/10/02
03/18/03
06/20/03
09/24/03
12/29/03
04/02/04
07/09/04
10/12/04
01/14/05
04/21/05
07/26/05
10/27/05
02/02/06
05/09/06
08/11/06
11/14/06
02/22/07
05/29/07
08/30/07
12/04/07
Signs of Decline

Internal Signs of Decline

Sara Lee’s acquisition binge in the 1980s and 1990s left the company with a portfolio of
vastly different businesses operating independently of one another. Not only did this
decentralized management style result in redundant costs, but it also led to potential infighting
among competing brands. In addition, Sara Lee’s complex and confusing organizational structure
led to deteriorating relationships with its retailers, who had moved to category buying and were
increasingly demanding a single point of contact rather than separate contacts for each brand. For
years, food distributors, for example, had to deal with ten different salespeople at ten different
Sara Lee meat companies. “So if you are an Ahold or a Kroger or a Safeway, you’ve got to deal
with ten different organizations and multiple invoices,” said McMillan.9

Sara Lee’s reckless acquisition strategy also resulted in a highly bureaucratic and
decentralized management structure. Sara Lee considered itself very entrepreneurial in nature
since it had many small companies operating independently of one another, even though all had
the advantage of the resources of a large corporation. While this mentality proved successful for
other companies in the 1980s and 1990s, Sara Lee’s management teams at its various entities
were rumored to be constantly bickering with each other, with almost no cooperation expected or
extended among divisions. Managing a slew of distribution channels, customers, products, and
employees around the world eventually proved too much for Sara Lee to handle effectively.

9
Forster, “Sara Lee: Changing the Recipe—Again.”

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Another factor contributing to Sara Lee’s decline was the fact that management had lost
touch with consumer preferences, which strained the company’s relationships with its retail
customers. For example, the late 1990s ushered in a new era of health consciousness and
consumer demand for more nutritious snacks. Rather than investing in research and development
to create new products to meet consumers’ needs, Sara Lee continued making acquisitions in
other areas. By the time the company realized the opportunity this trend represented, its
competitors had already established themselves in the market, making it difficult for Sara Lee to
gain significant share.

Sara Lee also did a poor job of managing risk. In addition to management’s miscalculation of
the opportunity cost of initially staying out of the health food business, the company also had an
inadequate hedging strategy in place to control input costs. Skyrocketing commodity and energy
costs during the first part of the twenty-first century contributed to the company’s deteriorating
financial position.

External Signs of Decline

A recession in 2001 prompted a slowdown in several of Sara Lee’s key markets, the impact
of which was exacerbated by the lack of new and innovative products, which in turn led to a
significant loss in market share. At the same time, consolidation within the grocery and other
retail food channels gave Sara Lee’s customers increased pricing power.10 Sara Lee had no choice
but to succumb to the pressure and lower its prices as its competitors had done, or risk losing
even more market share. The combination of lower prices and rising commodity prices and
energy costs put pressure on gross margins and played a role in the company’s struggles.

Sara Lee also failed to recognize and respond to changes in consumer trends, which
negatively impacted some of the company’s key businesses. For example, Sara Lee spent $1.7
billion in the early 1990s to acquire several hosiery companies in France, Spain, Italy, and the
United Kingdom.11 This was seen as a logical move by the company to better establish itself as a
serious player in the apparel business. However, the company was slow to recognize a changing
fashion trend in the mid-1990s that would significantly hurt hosiery sales. Gone were the days of
women wearing suits and hosiery to work; in its place was business casual. As a result, the
demand for hosiery fell drastically and Sara Lee’s recently acquired businesses suffered. At the
time, hosiery represented 25 percent of apparel sales for Sara Lee, but the business’s decline
eventually resulted in divestitures and restructuring of the entire apparel division.12

In the wake of changing marketing dynamics, the late 1990s and early 2000s also saw an
increase in retailer consolidation. Many department stores—Sara Lee’s core customer for its
apparel business—were being swallowed by larger entities. In addition, the grocery channel
underwent drastic consolidation as companies such as Kroger and Albertson’s looked to become
dominant players in the industry. While many smaller stores retained their individual names, they
were now part of much larger conglomerates. These retailers controlled the majority of Sara
Lee’s sales and therefore wielded great buying power. Lastly, for years Wal-Mart had represented
more than 10 percent of Sara Lee’s overall sales, and the retailer giant was notorious for

10
Sara Lee 10-K FY 2006.
11
Wikipedia, “Sara Lee.”
12
Ibid.

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squeezing its suppliers. Due to the consolidation among its customers, Sara Lee suddenly found
itself at a disadvantage with little pricing power.

Previous Attempts at Turnarounds

In an effort to turn around its business, Sara Lee had tried restructuring before, once in 1997
and again in 2000. Both attempts had been in vain.

September 1997

In 1997 the company announced a $3 billion share repurchase to be financed with the sale of
manufacturing facilities. As part of a program called “deverticalization,” Sara Lee aimed to
reduce its degree of vertical integration, shifting from a manufacturing and sales orientation to
one focused foremost on marketing the firm’s top brands.

“This is not your typical restructuring,” said John Bryan. “We are not leveraging up, or
selling major businesses. We are getting rid of activities that can be sourced so easily today
elsewhere. It is increasingly obvious that the investment community does not like asset-intensive
companies.”13

The announcement moved the stock up $6; it was the last announcement to do so, as investors
started to focus on the numbers and results rather than promises.

In December 1998, after reports of illness, Sara Lee voluntarily recalled 35 million pounds of
hot dogs and deli meats that were possibly contaminated with listeria, a form of bacteria that
could be life-threatening. The contaminated meat was traced to a plant run by Sara Lee’s Bil Mar
Foods division. The contamination caused fifteen deaths, six miscarriages, and more than one
hundred illnesses. By 2001 Sara Lee had spent $5 million settling several civil lawsuits and also
had pled guilty to a misdemeanor charge of selling tainted meat, paying a $200,000 fine and
agreeing to spend $3 million on food-safety research. Sara Lee also completely renovated the Bil
Mar plant for a total expense of $25 million. The recall took a toll on the company’s credibility as
well as its sales and share price.14

The restructuring attempt had not succeeded at growing sales faster. In fact, Sara Lee’s
growth from fiscal 1996 to fiscal 2000 was just 2.2 percent. The company’s performance was
reflected in its stock price, which was crushed after the initial bump immediately following the
announcement of the restructuring. Under increasing pressure to deliver results and stock price
performance, Sara Lee decided to attempt a bolder restructuring in May 2000.

May 2000

In May 2000 Sara Lee announced a “reshaping.” The press release stated:

13
Jennifer Steinhauer, “Sara Lee Announces a Big Revamping, and Stock Climbs,” New York Times, September 16, 1997.
14
Wikipedia, “Sara Lee.”

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Business disposition plans announced today include initial public offerings and
subsequent dispositions for Coach, a leading global leather goods business, and
PYA/Monarch, the country’s fourth-largest, full-service foodservice distributor. In
addition, the company announced its intent to sell Champion, a global manufacturer and
marketer of high-quality athletic apparel, and the International Fabrics division of
Courtaulds. These businesses do not fit with Sara Lee’s renewed focus on branded
consumer packaged goods segments in which the company can enjoy leading category
positions around the world. These dispositions are designed to streamline the company’s
structure and create increased value for Sara Lee shareholders.

Sara Lee would also lay off almost 10 percent of its employees, totaling more than 13,000.

For a company that focused on food service, bakery items, and meats, the leather goods
company Coach was clearly a departure from its core businesses. Industry analysts had
questioned why Sara Lee had invested in companies such as Coach and Mark Cross leather goods
(which it shut down in 1997): these acquisitions were far outside the company’s core
competency. With different customer and distribution channels, Sara Lee was unable to create
any synergies across the non-core businesses, and the additional resources to keep these
peripheral companies in operation further contributed to the financial strain on the company.

Sara Lee also came up short because of its non-centralized approach. Most top retailers
employed category buyers responsible for dealing with manufacturers in all product and
marketing capacities. These buyers decided how much product to purchase for national chains,
when to give merchandising space to suppliers, and when to put products on promotion. In the
late 1990s, companies such as Procter & Gamble (P&G) moved to a highly centralized corporate
structure in which all brands had marketing and product supply teams responsible for dealing
with these buyers and getting products into their stores. As an example, one or two P&G team
members would be in contact with the hair care buyer from Wal-Mart. These P&G employees
were responsible for selling products and initiatives across all of P&G’s hair care lines.
Increasingly, buyers on the retailer side were dealing on a category level, and manufacturers had
to meet this customer need by organizing with a similar structure. This highly centralized and
categorical approach was in direct contrast to the way Sara Lee operated. As recently as 2000,
multiple Sara Lee salespeople were still calling on buyers, each on behalf of an individual brand.
This system caused inefficiencies in achieving both scale and merchandising space. As a result,
Sara Lee products were receiving less shelf space and thus, less market share.

Investors applauded McMillan’s cost-cutting efforts through layoffs and the elimination of
marginal or non-performing brands. By 2003 regional brands had been cut in half to about one
hundred.15 However, the company continued to underperform, and the stock price flatlined (see
Exhibit 3 through Exhibit 6). McMillan pointed to the recession to justify Sara Lee’s weak
performance, but the state of the economy could not account for the company’s lack of product
innovation as compared to its competitors.16

“What is frustrating is that Sara Lee, unlike a Procter & Gamble, hasn’t quite figured out how
to focus on key brands and drive growth,” said Robert G. Millen, co-portfolio manager at Jensen
Investment Management. Adding to the problem was the fact that big retail players such as Wal-
Mart increasingly called the shots with suppliers. “Wal-Mart stocks at best the two top brands,

15
Forster, “Sara Lee: Changing the Recipe—Again.”
16
Gogoi, “Sara Lee: No Piece of Cake.”

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SARA LEE: A TALE OF ANOTHER TURNAROUND KEL353

and if Sara Lee’s isn’t one of those, it’s out,” said Burt Flickinger III, managing partner at
consultant Strategic Resource Group.17

The Largest Acquisition Yet

In July 2001 Sara Lee purchased St. Louis-based EarthGrains for $1.9 billion plus the
assumption of $957 million in long-term debt. EarthGrains was the nation’s second largest
bakery, having annual revenues of $2.6 billion and specializing in fresh packaged bread and
refrigerated dough. Sara Lee paid a 55 percent premium. The purchase came right after losing the
acquisition of Bestfoods Baking Company for about $200 million to George Weston.

Morgan Stanley research stated that the key benefits to Sara Lee from buying EarthGrains
included the following opportunities:

• To consolidate a branded consumer business.

• To leverage the strong and clearly underleveraged Sara Lee brand into the baked goods
category. In particular, Sara Lee saw opportunities to brand EarthGrains’s existing
largely private-label refrigerated baked good business with the Sara Lee brand, and to
expand its existing premium Artesian bread and possibly fresh bagel businesses on a
national scale.
• To continue to expand EarthGrains’s U.S. and European footprint through additional
acquisitions.
• To leverage EarthGrains’s existing Direct Store Delivered (“DSD”) system, potentially
through the addition of selective Sara Lee coffee and meat products. The nature of DSD
systems—e.g., high fixed distribution costs—allowed for the opportunity for significant
earnings and cash flow growth through the incremental volume that could be provided
through the distribution of additional products.18

The year following the acquisition, however, EarthGrains returned less than $100 million in
operating profits.19 The cash spent was close to 20 percent of Sara Lee’s market cap, and it
contributed to eroding Sara Lee’s financial flexibility.

On March 5, 2003, chief financial officer Theo DeKool admitted that the purchase price of
EarthGrains looked expensive in hindsight. “It is fair to say this acquisition did not fully fulfill
our expectations in the first year,” he said.20

In March 2003 the bakery division was yet to be restructured. Richard Noll, chief operating
officer of the Sara Lee Bakery division, had announced the closing of some of its fifty-five fresh
bakeries and the elimination of some regional breads, with the intent of concentrating on its

17
Ibid.
18
Morgan Stanley Dean Witter research, July 2, 2001.
19
Mark Tatge, “Sara Lee Frays At Its Seams,” Forbes, August 4, 2004, http://www.forbes.com/2004/08/04/cz_mt_0804saralee.html.
20
“Sara Lee May Close More Bakeries,” Oakland Tribune, March 5, 2003.

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strongest brands as the competition was intensifying.21 The plans would help save $40 million to
$45 million a year.

“We’ve got to change our business model—from a traditional bakery business to a consumer
products business,” Noll said. “We have to have fewer facilities, and fewer regional and local
brands.” Since acquiring EarthGrains, Sara Lee had already announced it would shut down seven
bakeries and cut some seven hundred jobs. Rising costs and stiff competition in cheaper private-
brand bread was taking a toll on the bakery.

Financial Planning
Sara Lee had been tax-structure driven for many years. The breakup of Sara Lee was ruled
out a number of times because of the potential loss of hundreds of millions of dollars in taxes due
to the change in the structure. In fact, in the past, Sara Lee had book tax rates as low as 15 to 16
percent and cash taxes of a few million dollars, nothing for a company of such size. Like many
other companies, Sara Lee chose to keep billions of dollars in cash overseas while having billions
in debt in the United States. In fact, the cash overseas could have been repatriated only after
incurring 30 to 40 percent in U.S. taxes because there was little to no tax credit available.

Some analysts argued that the easiest way to unlock Sara Lee’s depressed stock value would
be to break up the company into three separate entities. “That would be a massive undertaking,”
conceded Romitha Mally, research analyst at Goldman Sachs. McMillan responded by noting,
“It’s not like I haven’t considered a breakup analysis of Sara Lee. But among other things, such a
move could cost Sara Lee its low 18 percent tax rate, based on apparel operations in places like
South America.”22

Share repurchase programs, which had been used extensively over the past ten years, had
generated minimal results other than to be partially blamed for rating downgrades (see Exhibit
7). Since 2004 Sara Lee had repurchased about $1.6 billion worth of shares, which was a good
part of the $2 billion promised when the transformation was announced in February 2005. Since
2001 about $3 billion had been repurchased. This amount was in addition to the $3 billion share
repurchase announced in 1997. The share price had gone from a high of some $30 split-adjusted
in 1998 to about $13 as of March 2008. It had not passed $20 since 2005.

Into the Future

In February 2005 Brenda Barnes, the newly appointed CEO of Sara Lee, was facing the
daunting task of reversing years of stagnation and disappointed investors.

Today, Sara Lee is embarking on an aggressive, strategic plan that will transform the
entire enterprise into a tightly focused food, beverage, and household products company.
We are taking bold actions that will enable Sara Lee to compete more successfully in

21
Ibid.
22
Gogoi, “Sara Lee: No Piece of Cake.”

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today’s dynamic marketplace and thereby generate consistent, long-term topline growth
and bottomline profitability for our shareholders.

Would Barnes’s plan overcome all the issues that had led to where Sara Lee found itself
today? Barnes grabbed her plan and walked into the boardroom ready to hear challenges to her
strategy.

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Exhibit 1: The Transformation Plan

Press Release: Sara Lee Corporation Announces Bold Transformation Plan to Drive Long-Term
Growth and Performance—February 10, 2005
The company has built its transformation plan upon three pillars: organizing its business
operations around consumers, customers, and geographic markets; focusing its portfolio; and
increasing operational efficiency to fund growth.

“Today, Sara Lee is embarking on an aggressive, strategic plan that will transform the entire
enterprise into a tightly focused food, beverage, and household products company,” said Brenda
C. Barnes, president and chief executive officer of Sara Lee Corporation. “We are taking bold
actions that will enable Sara Lee to compete more successfully in today’s dynamic marketplace
and thereby generate consistent, long-term topline growth and bottomline profitability for our
shareholders.”

Sara Lee will reorganize its business operations around distinct consumers, customers, and
geographic markets in order to build functional excellence, increase strategic focus, simplify the
organization, and eliminate layers.

The company’s new organization structure, which is outlined below, will consist of three
lines of business:

• North American Retail will include the bakery, packaged meats, and Senseo coffee retail
businesses in North America. C. J. Fraleigh will lead this business, which represents $4.5
billion in sales. Fraleigh recently joined Sara Lee as chief customer and marketing officer
from General Motors, where he served as general manager for the GMC-Buick-Pontiac
division.
• North American Foodservice will include the bakery, coffee, and meats foodservice
businesses in North America. James Nolan, who is currently executive vice president of
U.S. operations for PepsiAmericas Inc., will join Sara Lee on Feb. 21 to lead what will be
a $2.2 billion business. The U.S. retail coffee operation (excluding Senseo) will report to
this line of business while it is being studied for divestiture.
• Sara Lee International will include the bakery and beverage businesses outside of North
America, the global household products business, as well as the European packaged
meats business while that business is being reviewed for divestiture. Adriaan Nuhn, who
currently is responsible for the global beverage and household products lines of business,
will lead Sara Lee International, which will represent $4.6 billion in sales.

The new reporting structure is effective July 3, 2005, the beginning of the company’s 2006
fiscal year.

In addition, Sara Lee is planning to locate its North American businesses with its corporate
staff at a single site to be determined in the Chicago area. Sara Lee International will be
headquartered in Utrecht, The Netherlands.

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Exhibit 1 (cont’d)

“By bringing our North American businesses together in the Chicago area, we will provide a
natural catalyst for sharing best practices and pursuing growth opportunities across the
businesses, as well as provide great opportunities for career growth and development for our
employees,” added Barnes.

In line with its new organization, the company will make some dramatic changes to its
portfolio. Last month, Sara Lee announced that it was formally exploring the sale of its $1.8
billion European apparel business. With today’s announcement, the company also is pursuing the
spin-off of the balance of its apparel business, Branded Apparel, Americas/Asia, into an
independent, publicly traded company.

“We are confident Branded Apparel has a tremendous future and will flourish in today’s
marketplace as an independent, publicly traded company,” said McMillan. “With some of the
most powerful brands in the industry, including Hanes, Champion, Playtex, Bali, and Just My
Size, we believe that spinning off the $4.5 billion apparel business into a stand-alone, Fortune
500 company will be beneficial to Sara Lee shareholders.”

To further strengthen the apparel management team, Richard A. Noll, current chief executive
officer of Sara Lee Bakery Group, will bring his significant apparel expertise to the apparel
organization as its president and chief operating officer. Noll will report to Lee A. Chaden, chief
executive officer of Sara Lee Branded Apparel.

Additional portfolio actions will include the sale of the following businesses:

• Meats Europe, a $1.1 billion packaged meats business in Europe, with popular European
brands such as Aoste and Imperial, which holds its largest positions in France and the
Benelux region.
• Direct Selling, a $450 million business that sells cosmetics, household products, apparel,
and other products to consumers through a network of independent salespeople in
countries around the world, most notably in Mexico, Australia, the Philippines, and
Japan.
• U.S. Retail Coffee, a $300 million business with well-known, regional retail coffee
brands such as Chock full o’Nuts, Hills Bros, MJB, and Chase & Sanborn; this potential
divestiture will not include the fast-growing Senseo brand.

These three divestitures, combined with the Branded Apparel spin-off and the sale of
European Apparel, represents $8.2 billion in sales, approximately 40 percent of the company
annual revenues.

“Under our transformation plan, we will concentrate our financial and management resources
on a smaller number of business segments where we are well-positioned for substantial growth.
As a result, Sara Lee will undergo a significant portfolio change, pursuing the disposition of our
businesses that do not fit with our strategic focus within the food, beverage, or household
products categories,” said Barnes.

The company intends to use the proceeds generated from these dispositions to fund
investment in its growth businesses and strengthen its balance sheet.

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Exhibit 1 (cont’d)

After nearly 25 years with Sara Lee, where he made significant contributions to the growth
and development of the company’s meats business, Robert S. Kopriva, current chief executive
officer of Sara Lee Foods, will retire in June, the end of the company’s fiscal year.

In addition, Sara Lee will reduce its cost structure across the entire enterprise to fund
consistent, long-term growth.
“Not only will Sara Lee continue the cost-reducing initiatives that we already have
underway—such as centralizing purchasing, supporting administrative needs through shared
services, and establishing a common technology platform—but we also will take further steps to
remove excess administrative costs and non-value-added activities across the company,” said
Barnes. “The organization of the company’s businesses by geography will eliminate the need for
several divisional headquarters locations and will further reduce administrative costs over time.”

FI NANCI A L I NFOR MATI O N

In addition to centralizing the North American businesses in the Chicago area, management
has concluded that certain additional steps are necessary to improve operational efficiency and
reduce the company’s cost structure. While all aspects of this plan have not been finalized,
management has concluded that over the next five years it will recognize a number of material
charges and expend a significant amount of cash to execute various actions. The composition of
these charges and cash expenditures as well as the assumptions used in estimating these amounts
are as follows:
• The company expects to reduce the number of brands utilized in its North American
Bakery business as well as to increase the research and development and marketing
spending behind a smaller group of large brands. The net book value of the trademarks
currently used in the North American Bakery operation is $327 million and a substantial
portion of this asset will be written off as customers are transitioned to the larger brands.
The exact amount and timing of the non-cash charge associated with these actions has not
yet been determined.
• Employee transition costs are estimated to be approximately $250 million. This estimate
is based upon a number of variables, including workforce reductions, employee attrition,
and recruitment costs.
• The cash costs to improve the company’s information technology systems and processes
are estimated to be $240 million. This is primarily related to the costs to implement SAP
in the North American operations and the continued consolidation of information
processing and technology. There are a number of variables that impact the cost of
installing and transitioning to new information systems. At this point, the company has
not estimated the timing and amount of the capital versus expense element of this
expenditure.
• The reduction of manufacturing capacity in the North American retail business is
estimated to result in non-cash charges of approximately $220 million. This estimate is
based upon historic costs associated with the closure of plants and reduction of
manufacturing capacity. At this time, specific facilities have not been identified for
closure and the final determination of this cost element will depend upon the net book
value of the facilities selected for closure and other variables.

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Exhibit 1 (cont’d)

The actual costs to be incurred in future years may be subject to a significant amount of
variability and the above estimates may change as plans are fully developed and finalized.

These costs are expected to generate substantial annual savings. By the completion of the
transformation project, the company expects savings in the range of between $575 million and
$800 million on an annualized basis. These savings will primarily be generated from the
following sources:

• $275 million to $325 million of margin improvement is expected from the

implementation of the Lean Enterprise model throughout the organization and innovation
driving improved product mix and margins
• The centralization of information technology, procurement, and services is expected to
result in savings in the range of $175 million to $250 million
• Infrastructure rationalization is expected to result in annual savings of $100 million to
$200 million when complete
• The consolidation of the North American food operations is expected to result in savings
of between $25 million and $35 million

These savings will be partially offset by an approximately $250 million increase in marketing
spending as well as research and development investment. The company’s target is to reach an
operating margin above 12 percent by fiscal 2010.

Separately, management expects that after all of our portfolio changes are complete, the
annualized tax rate over time will be between 29 percent and 31 percent.

Source: “Sara Lee Corporation Announces Bold Transformation Plan to Drive Long-Term Growth and Performance,” Business Wire,
February 10, 2005, http://findarticles.com/p/articles/mi_m0EIN/is_2005_Feb_10/ai_n9509711.

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Exhibit 2: List of Selected Brands as of 2006

BAK ER Y BEVERAGES BOD Y CARE AND
HOUSEHOLD
• Bimbo • Butter-Nut Cappuccino
Air Care
• Bistro Collection • Bravo
• Caboclo • Ambi Pure
• Bon Gateaux
• Café Continental • Ty-D-Bol
• Bony
• Café do Ponto Body Care
• Chef Pierre
• Café Pilão • Badedas
• Colonial • Cafitesse
• Block & White
• CroustiPâte • Chat Noir
• Brylcreem
• EarthGrains • Douwe Egberts
• Duschdas
• IronKids • Harris
• Hornimans • Eskinol
• Madame Brioche
Martinez • Jacqmotte • Fissan

• Ortiz • Java Coast • Glysolid

• Justin Lloyd Jovan
• Rainbo •
• Kanis & Gunnink
• Sara Lee • Monsavon
• Kayo
• Silueta • Prodent
• Laurentis
• Proderm
• Maison du Café
• Marcilla • Radox
• Maryland Club • S3
• Merrild • Sanex
• Metropolitan • She
• Moccona
• Status
• Natreen
• Williams
• Natrena
• Paradise • Zendium

• Piazza d’Oro • Zwitsal

• Pickwick
• Prebica
• Prima
• Santora
• Seleto
• Senseo
• Soley
• Steamers
• Suntipt
• Superior
• Uniao
• Van Nelle

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Exhibit 2 (cont’d)
I N S E C T I CI DE S SHOE CARE MEATS
• Bloom • Bama • Ball Park
• Catch • Kiwi • Best’s Kosher
• Cruz+Verde • Tana • Bryan
• Cucal • Deli d’Italia
• Good Knight • Deli Perfect
• Hit • Emeril
• Jet • Galileo
• Polil • Gallo Salame
• Pyrel • Hillshire Farm
• Ridsect • Jimmy Dean
• Vapona • Kahn’s
• Kir
• Mr. Turkey
• R. B. Rice
• Rudy’s Farm
• Sara Lee
• State Fair
• West Virginia Brand
• Zwan
• Zwancito

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Exhibit 3: Income Statement ($ in millions except share data)

Fiscal Years
2001 2002 2003 2004 2005

Continuing operations—Net sales 16,632 17,628 17,888 19,119 19,254

Cost of sales 10,417 10,829 10,931 11,867 12,284

Cost of sales product line exit costs 26 (7)
Selling, general, and administrative expenses 4,597 5,236 5,334 5,653 5,524
Gain on disposal of Coach business (967)
Charges for (income from) exit activities and
528 177 (11) 48 93
business dispositions
Impairment charges 350
Contingent sale proceeds (119) (117)
Interest expense 270 304 276 271 290
Interest income (90) (96) (76) (88) (104)

Income from continuing operations before taxes 1,851 1,185 1,434 1,487 934

Income taxes 248 175 247 248 203

Income from continuing operations, net of taxes 1,603 1,010 1,187 1,239 731

Discontinued operations
Net (loss) income from discontinued operations 25 34 33 (12)

Gain on disposal of discontinued operations 638

Net income 2,266 1,010 1,221 1,272 719

Net income from continuing operations per share of

common stock
Basic $1.94 $1.27 $1.51 $1.57 $0.93

Diluted $1.87 $1.23 $1.46 $1.55 $0.92

Net income per share of common stock

Basic $2.75 $1.27 $1.55 $1.61 $0.91

Diluted $2.65 $1.23 $1.50 $1.59 $0.90

Source: Sara Lee 10-K, 2005 and 2003.

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Exhibit 4: Balance Sheet—Liabilities ($ in millions except share data)

Fiscal Years
Liabilities and stockholders equity 2001 2002 2003 2004 2005
Notes payable 101 468 140 84 258
Accounts payable 1,505 1,321 1,314 1,293 1,453
Accrued liabilities
Payroll and employee benefits 812 1,147 1,193 1,150 1,081
Advertising and promotion 343 469 439 531 521
Taxes other than payroll and income 84 102 111 119 116
Income taxes 423 122 22 247 160
Other 1,210 1,100 900 829 843
Current maturities of long-term debt 480 734 1,004 1,070 381
Liabilities of discontinued operations held for sale 46 87 155

Total current liabilities 4,958 5,463 5,169 5,410 4,968

Long-term debt 2,640 4,357 5,157 4,171 4,115

Pension obligation 38 220 1,178 870 858
Other liabilities 769 1,321 1,496 1,362 1,452
Liabilities of discontinued operations held for sale 18 7
Other liabilities
Minority interest in subsidiaries 625 632 356 74 81
ESOP convertible: Issued and outstanding 238 226 221

Unearned deferred compensation (223) (208) (182)

Common stock 8 8 8 8 8
Capital surplus 59 32 104 79
Retained earnings 2,635 3,168 3,787 4,437 4,408
Unearned stock (23) (10) (170) (155)
Accumulated other comprehensive loss (1,521) (1,470) (1,734) (1,394) (1,402)
Common stockholders equity 1,122 1,742 2,083 2,985 2,938

Total liabilities 10,167 13,753 15,496 14,879 14,412

Source: Sara Lee 10-K, 2005 and 2003.

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Exhibit 5: Balance Sheet—Assets ($ in millions except share data)

Fiscal Years
Assets 2001 2002 2003 2004 2005
Cash and equivalents 548 298 1,004 655 545
Trade accounts receivable 1,538 1,831 1,787 1,848 2,040

Finished goods 1,715 1,619 1,767 1,879 1,889

Work in process 454 411 405 397 345
Materials and supplies 413 479 480 452 460
Total inventories 2,582 2,509 2,652 2,728 2,694

Other current assets 321 341 359 380 379

Assets of discontinued operations held for sale 94 7 110 125 153

Total current assets 5,083 4,986 5,912 5,736 5,811

Other noncurrent assets 264 192 281 143 121

Deferred tax asset 453 281 310

Land 98 176 195 148 147

Buildings and improvements 1,646 1,744 1,895 2,030 2,133
Machinery and equipment 2,891 4,299 4,872 5,045 5,065
Construction in progress 266 320 289 282 224
Total property 4,901 6,539 7,251 7,505 7,569
Accumulated depreciation 2,755 3,384 3,939 4,269 4,427
Property, net 2,146 3,155 3,312 3,236 3,142

Trademarks and other identifiable intangibles, net 1,145 2,106 2,058 1,977 1,679
Goodwill 1,529 3,314 3,331 3,354 3,202
Assets of discontinued operations held for sale 149 152 147

Total assets 10,167 13,753 15,496 14,879 14,412

Source: Sara Lee 10-K, 2005 and 2003.

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Exhibit 6: Cash Flow Statement ($ in millions)

Fiscal Years
2001 2002 2003 2004 2005
OPERATING ACTIVITIES
Income from continuing operations 1,603 1,010 1,187 1,239 731
Less: Cash received from contingent sale proceeds (119) (117)
Depreciation 392 471 525 554 563
Amortization of intangibles 207 111 136 166 174
Impairment charge 350
Gain on disposal of Coach business (967)
Net (loss) gain on business dispositions 500 101 (16) 14 (68)
Increase in deferred taxes 88 21 5 138 79
Other (62) 7 42 156 58
(Increase) decrease in trade accounts receivable 42 93 94 (42) (196)
Decrease (increase) in inventories 25 304 (23) (50) 23
(Increase) decrease in other current assets (11) 7 (17) 44 (2)
(Decrease) increase in accounts payable (133) (417) (126) 46 (4)
(Decrease) in accrued liabilities (164) 27 (173) (277)
Net cash from operating activities from continuing operations 1,520 1,735 1,807 1,973 1,314
Operating cash flows from discontinued operations (24) 17 69 36
Net cash from operating activities 1,496 1,735 1,824 2,042 1,350

INVESTMENT ACTIVITIES
Purchases of property and equipment (532) (669) (746) (530) (538)
Acquisitions of businesses and investments (300) (1,930) (10) (2)
Dispositions of businesses and investments 1,819 23 137 86
Sales of assets 65 113 81 90 104
Cash received from contingent sale proceeds 119 117
Other 13 (12) 1
Net cash used in investment activities 1,065 (2,475) (674) (184) (233)

FINANCING ACTIVITIES
Issuances of common stock 104 109 98 139 161
Purchases of common stock (643) (138) (305) (350) (396)
Redemption of preferred stock (250)
Borrowings of long-term debt 1,023 1,362 1,773 1 339
Repayments of long-term debt (390) (503) (995) (1,288) (1,033)
Short-term borrowings (repayments), net (1,914) 124 (359) (19) 178
Payments of dividends (486) (484) (497) (714) (464)
Net cash used in financing activities (2,306) 470 (535) (2,231) (1,215)

Effect of changes in foreign exchange rates on cash (21) 20 65 35 (7)

(Decrease) increase in cash and equivalents 234 (250) 680 (338) (105)
Less: Cash and equivalents of discontinued operations (3) (14) (19)

Cash and equivalents at beginning of year 314 548 327 1,007 669
Cash and equivalents at end of year 548 298 1,004 655 545

Source: Sara Lee 10-K, 2005 and 2003.

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Exhibit 7: Sara Lee’s Credit Ratings

Credit Rating for Senior Unsecured Obligations

Year S&P Moody’s FitchRatings
Jun-03 A+ A3 A
Jul-04 A+ A3 A
Aug-05 BBB+ A3 BBB+
Jul-06 BBB+ Baa1 BBB+

Credit Rating for Short-Term Borrowings

Year S&P Moody’s FitchRatings
Jun-03 A-1 P-2 P-1
Jul-04 A-1 P-2 F-1
Aug-05 A-2 P-2 F-2
Jul-06 A-2 P-2 F-2

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References
Deutsche Bank Report, Sara Lee. January 10, 2007.

Growe, Christopher. AG Edwards Report; Sara Lee. May 18, 2007.

Hillshire Farms. http://www.gomeat.com.

Jargon, Julie. “Brenda’s End Game: Will Sara Lee Exist?” Chicago Business.
http://chicagobusiness.com/cgi-bin/article.pl?article_id=25798. May 15, 2006. (Accessed
July 9, 2007.)

Larson, Eric. Piper Jaffray Reports; Sara Lee. February 8, 2007.

Sara Lee. http://www.saralee.com.

Spethmann, Betsy. “Sara Lee Leans on New Products.” Promo Magazine.

http://promomagazine.com/news/saralee_newproducts_022706/index.html. February 27,
2006. (Accessed July 9, 2007.)

Tan, Kopin. “Some Don’t Like Sara Lee.” Smart Money. http://www.smartmoney.com/barrons/
index.cfm?story=20060626. June 26, 2006. (Accessed July 9, 2007.)

Wikipedia. “Sara Lee.” http://en.wikipedia.org/wiki/Sara_Lee. (Accessed July 9, 2007.)

Wikipedia. “Kraft Foods.” http://en.wikipedia.org/wiki/Kraft_foods. (Accessed July 23, 2007.)

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