updated 2/10/2005 7:04:40 PM ET 2005-02-11T00:04:40

Sara Lee Corp. is shedding bras and underwear, but keeping its cakes and deli meats.

The consumer products giant said Thursday it plans to sell or spin off divisions with about $8.2 billion in revenue, more than half of that from apparel brands like Playtex and Hanes underwear. It also named a new chief executive in a sweeping reorganization.

After years of tinkering with a product mix that includes more than 150 brands, from Jimmy Dean sausage to Champion sportswear, company officials said it will now home in on the meat and bakery items that are the core of the 66-year-old company.

Sara Lee named president and chief operating officer Brenda Barnes its new chief executive officer, replacing Steve McMillan, 59, who will remain chairman until October. McMillan said the company recruited Barnes, 50, last year as his successor.

The Chicago-based company said it would spin off its $4.5 billion U.S. apparel portfolio, which also includes Champion sportswear and L’eggs hosiery, into a new public company. That plan does not include its $1.8 billion European apparel unit, which the company is in the process of auctioning off.

The $8.2 billion in planned divestitures, most of which are expected over the next three years, represent about 40 percent of the company’s total sales.

Three new divisions
The plan will organize Sara Lee into three new divisions: North American retail, which will include its bakery, meats and Senseo coffee brand; North American food service, which serves restaurants and food distributors; and international, which will include food, beverage and household products such as Kiwi shoe polish and Sanex shower gels.

“We have a very clear vision of what Sara Lee will look like,” McMillan said Thursday on a conference call with analysts. “These (product) categories all have tremendous potential in our portfolio.”

Officials said the plan would cost about $1 billion in charges and cash expenditures over five years, but eventually could generate annual savings of between $575 million and $800 million. Money from the asset sales will be used to pay down debt and position the company for future acquisitions, Barnes said on the conference call.

Investors applauded the company’s plans Thursday, sending its shares up 95 cents, or 4 percent, to close at $23.92 on the on the New York Stock Exchange.

The company signaled last month that it would shake up its product lines after cutting its fiscal 2005 earnings outlook by 10 percent, citing higher raw material costs and a difficult European retail environment.

Analysts surprised
But analysts said Thursday they were surprised by the scope of the plan. Some said jettisoning the apparel business — with vastly different retail customers and distribution channels than its food and beverage lines — was overdue.

“The actions are much bolder than we anticipated,” said John McMillin, an analyst at Prudential Equity Group, in a note to investors. “What is left is a more manageable and higher margin company.”

Executing such a broad reorganization, however, poses some risks, said Wesley E. Moultrie, an analyst at Fitch Ratings.

“They have their work cut out, because what will be left is a large food company and a somewhat small household products company, both of which would need some reinvigoration,” Moultrie said. “But at least it will be a substantially smaller company with the cash to invest without being distracted with all these other businesses.”

Restructuring plans
The company also said it will sell a $1.1 billion meats business in Europe, a $450 million division that sells cosmetics and household products worldwide, and its retail coffee business, which includes the Chock full o’ Nuts and Hills Bros. brands.

Corporate staff from Sara Lee’s bakery headquarters in St. Louis and its meat division, based in Cincinnati, will be centralized in Chicago, the company said. Fewer than 300 employees work at the company’s downtown Chicago headquarters, spokeswoman Julie Ketay said.

Company officials say by 2010, Sara Lee will have roughly the same operational profits it does now despite 40 percent smaller revenue.

“I’m thoroughly convinced that the organizational changes we are making are the single most important pillar” of the restructuring, even more important than selling off the product lines, Barnes said.

Barnes spent 22 years at PepsiCo before being named president and CEO at PepsiCola North America in 1996. She quit in 1998 to be with her family, and later served as interim president and chief operating officer at Starwood Hotels & Resorts from November 1999 until March 2000.

The reorganization plan will not affect Sara Lee’s guidance for its fiscal year 2005, which ends July 2, the company said. On Thursday it reaffirmed a forecast it gave last month for earnings of 29 to 34 cents a share for the third quarter and $1.46 to $1.56 for the year.

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