Sara Lee to raise prices to cope with cost squeeze

PORTLAND, Ore. (AP) -- Sara Lee Corp. will raise prices further to cope with higher ingredient costs that squeezed its profit margins in its second quarter.

Sara Lee, like many packaged food makers, is struggling with higher prices for ingredients such as coffee beans, meat and wheat. The maker of frozen desserts, Hillshire Farms lunchmeat and Senseo coffee says the price it is pays for coffee alone is up 60 percent from last year.

The company, which recently announced plans to split in two, said Tuesday that its second-quarter net income more than doubled on the sale of its household and body-care business. But adjusted earnings fell and missed expectations, largely because of higher ingredient costs.

Sara Lee, based in Downers Grove, Ill., said it earned $880 million, or $1.37 per share, in the quarter, compared with $371 million, or 53 cents per share, a year ago.

Excluding the sale of part of its household and body care business and a tax benefit tied to sale of its North American fresh bakery business, earnings fell to 24 cents per share from 27 cents.

Analysts anticipated slightly higher earnings of 25 cents per share, according to data from FactSet.

Revenue for the period was nearly flat at $2.35 billion, short of analyst's $2.9 billion expectations.

Sara Lee leaders said they expect a stronger second half as price increases offset major increases in ingredient costs and it releases more new products.

Many food makers saw similar major cost increases in 2008 that then fell as demand slipped in the down economy. But those costs are rising again, threatening their profitability.

"I have to say that it does feel a bit like mountain climbing -- while you're climbing, you tend to focus on a peak in the distance, and only to find out that when you get there, there's another peak behind it," said Marcel Smits, Sara Lee's CEO.

The company has raised prices across nearly all of its products and said it will continue price increases the rest of the year. J.M. Smucker Co. also announced Tuesday that it was raising prices on Folgers and Dunkin Donuts coffee.

Sara Lee maintained its earnings guidance for the 2011 fiscal year, saying it still expects to earn 85 to 89 cents per share on an adjusted basis. Analysts have forecast 89 cents per share.

Sara Lee announced at the end of January that it would be splitting in two by early 2012.

Company leaders said Tuesday that the company could still be acquired before then.

Sara Lee will keep its name and current location with one company, which will concentrate on its North American retail and food service businesses.

The other company, which doesn't have a new name yet but is being called CoffeeCo, will keep the international bakery and beverage businesses. It could be based overseas.

Shares of Sara Lee rose 23 cents, or 1.4 percent, to close at $17.15 Tuesday.