J.M. Smucker Co (SJM.N), which makes Folgers coffee, posted better-than-expected quarterly results and forecast strong growth for the rest of the year, as price cuts helped it win back customers who ditched its brands for cheaper alternatives.
Shares of the company rose 6 percent to an all-time high.
Smucker has been trying to strike a balance between passing on record high costs of raw materials to shoppers and keeping its market share.
It expects green coffee costs to drop in the coming quarters, easing some of the pressure on its coffee business which accounts for 62 percent of its total sales.
Volumes at the segment rose 5 percent in the quarter with Folgers increasing 4 percent and Dunkin' Donuts packaged coffee rising 11 percent.
"Strong indications that volumes are recovering and you have the hope that commodity inflation will be easing in the back half of the year," Morningstar Inc analyst Kenneth Perkins said.
"It looks like the back half could be favorable if things stay the way that they are now."
The company, also known for its Jif peanut butter, said costs of key raw materials such as peanuts and green coffee were higher in the quarter but it does not foresee the need to adjust pricing through fiscal 2013.
However, drought in the United States, the worst in more than 50 years, could have an impact that is not yet anticipated, Perkins said.
Kraft Foods Inc KFT.O, the maker of Maxwell House coffee, Cadbury chocolate and Oreo cookies, said earlier this month that it was impacted by the recent spike in corn costs due to the drought in the Midwest.
Corn features among the raw materials for Smucker but is not as heavily used in its products.
PRICE CUTS CRIMP MARGINS, BOOST DEMAND
Smucker cut prices of its coffee products twice since August 2011. Prior to that it had raised prices four times in a row — from May 2010 to May 2011.
But the price cuts have come at a cost — gross margins slipped to 34.6 percent in the quarter from 37.1 percent a year earlier. Profit margin at its U.S. retail coffee segment fell to 24.3 percent from 27.9 percent a year earlier.
The company, which reiterated its full-year profit forecast, has been raising prices of its other brands such as Jif and Crisco oils to offset price cuts at its flagship coffee brand.
Net income for the first quarter was $110.9 million, or $1.00 per share, compared with $111.5 million, or 98 cents per share, a year earlier. The number of outstanding shares fell by 3 percent during the quarter.
On an adjusted basis, the company earned $1.17 per share, beating analysts' consensus view of $1.00 per share, according to Thomson Reuters I/B/E/S.
Revenue rose 15 percent to $1.37 billion, also topping expectation of $1.30 billion.
Shares of the company, founded by Jerome Monroe Smucker in 1897, rose $4.77 to $83.69 on Friday morning on the New York Stock Exchange.
(Reporting by Arpita Mukherjee in Bangalore; Editing by Don Sebastian)