Sara Lee Plays With Commodities Reporting

Sara Lee (SLE) reported strong Q1 results. Sales up approximately 9.6% and operating income up approximately 20.5%. This of course is excellent news and shows operating leverage. As sales go up more money flows to the bottom line. Here are a few storm clouds to consider. In their own “Forward Looking Statement” they alert investors that possibly the relationship with Wal-Mart their single largest customer could change. Specifically if Wal-Mart changes their inventory levels this may cause Sara Lee to back up somewhat. They also mention that in these difficult times many of their sales are on credit terms. Some retailers are not going to make it and therefore they may lose money and find sales diminished in the future. I at this point cannot identify on Sara Lee’s statements how they account for doubtful accounts.

They do mention they have lost $35 million in mark to market commodities contracts. Sara Lee being a food company buys a lot of commodities. Commodities have dropped in value. Sara Lee is sucking wind on a lot of positions. They have announced changes as to how they will account for commodities losses. Read this quote from the press release

“As of the first quarter of fiscal 2009, the corporation includes these mark-to-market gains and losses in general corporate expenses until such time that the exposure being hedged affects the earnings of the business segment. At that time, the cumulative gain or loss previously recorded in general corporate expenses for the derivative instrument will be reclassified into the business segment’s results. “

Sounds like a shell game to me. At the very best this is apples and oranges