(Adds details on beef demand and China; updates shares)
May 6 (Reuters) - Tyson Foods Inc reported weaker-than-expected quarterly profit as shoppers and restaurants switched to cheaper chicken from beef, and cut its full-year sales forecast, sending shares down 4.5 percent.
Still, executives at Tyson, the largest U.S. meat processor, stuck by their outlook for higher adjusted profit this year, saying results should improve over the balance of the fiscal year due to lower feed costs and robust chicken demand, which is pushing up prices per pound.
Chicken volumes rose just 0.1 percent in the second quarter ended March 30, but beef volumes fell 3.9 percent, pork was down 2.2 percent and packaged foods dipped 0.8 percent, it said on Monday.
Gross margins declined to 4.85 percent from 6.47 percent a year earlier.
"Our beef segment suffered margin compression as consumers opted for the relative value of chicken," Chief Executive Donnie Smith said in a statement.
The priciest beef products took the biggest hit, particularly premium cuts and Angus varieties, executives said on a conference call with reporters.
The company and its competitors are still feeling the effects of the worst drought in 50 years last year in the U.S. Midwest that pushed up feed costs and reduced cattle supplies.
Tyson stock was off 4.5 percent, or $1.12, to $23.82, while rival Smithfield Foods Inc fell 0.5 percent, or 14 cents, to $25.48.
"The key question in our mind is can strength in chicken (and sequentially lower grain costs) more than offset challenges in other divisions?" KeyBanc Capital Markets analyst Akshay Jagdale said in a client note.
SALES FORECAST TRIMMED
Tyson trimmed its fiscal 2013 sales forecast to $34.5 billion from $35 billion after second-quarter net income fell 43 percent to $95 million, or 26 cents per share.
On an adjusted basis, the company earned 36 cents per share,
9 cents short of analysts' average estimate, as complied by Thomson Reuters I/B/E/S.
Quarterly sales were up nearly 2 percent to $8.42 billion, but also missed analysts' estimate of $8.58 billion.
Agribusiness group Cargill Inc, another big beef producer, said last month its quarterly earnings fell 42 percent as the lingering effects of the U.S. drought affected both its meat and grain operations.
Tyson said its international operations have improved significantly from a year ago, driven by strength in Mexico and Brazil.
And, while the new bird flu outbreak in China has devastated demand, Tyson expects to eventually benefit as shoppers and restaurants reject small independent producers and seek out suppliers with better food safety records. Tyson uses modern chicken houses and tightly controls access to the facilities by humans and machines, it said.
Executives said the company "completely controls" the sourcing of chicken feed there.
Late last year, Chinese consumers began avoiding U.S. chains such as Yum Brands Inc's KFC and McDonald's Corp after local government investigations found chemical residue in chicken supplied by some local producers. The chemical residue was believed to be linked to the animals' diets. (Reporting by Lisa Baertlein in Los Angeles and Arpita Mukherjee in Bangalore; Editing by Supriya Kurane and Jeffrey Benkoe)