J.M. Smucker Co (SJM.N), the maker of Jif peanut butter and jams and jellies under the Dickinson's and Smucker brands, said it may have to cut prices on spreads to stay competitive.
Shares of the Orrville, Ohio-based company, which also makes Folgers coffee, fell as much as 4 percent.
Smucker and its competitors such as Starbucks Corp (SBUX.O) and Mondelez International Inc (MDLZ.O) -- formerly Kraft Foods -- have been trying to outdo each other by cutting prices without sacrificing margins and market share.
Smucker's food spread business fell short of its own expectations in the second quarter due to higher pricing in the promotional periods and strong competition. To compound its problems, peanut costs also rose in the quarter.
"We are implementing a number of short and longer-term tactics to improve our performance, including price reductions on selected items (in the spreads business)," Chief Operating Officer Vince Byrd said on a conference call.
While commodity costs fell, that benefit was negated by lower average selling prices across its products, leading analysts to question whether Smucker could hike prices without customers turning to alternatives.
"It's more and more difficult for them to potentially increase their prices without taking a hit from a competitive standpoint," said Morningstar Inc analyst Kenneth Perkins.
The company said it still expects sales to rise about 7 percent for the year ending April 2013. Analysts expect sales to rise 7.7 percent, according to Thomson Reuters I/B/E/S.
Smucker raised its adjusted profit outlook to between $5.12 and $5.22 per share for the full year. Analysts are expecting a profit of $5.19 per share.
Smucker managed to boost margins in the second quarter at its coffee business, its largest segment, helped by falling green coffee costs and price cuts. But it had to raise prices in its food business, which sells peanut butter and fruit spreads.
Sales in both the U.S. retail coffee business and the U.S. retail consumer business rose 1 percent. But the coffee business was driven by a 6 percent rise in volume, while consumer business volume fell by the same magnitude.
Fruit spread volumes fell 11 percent, while Jif brand volume fell 6 percent.
Net income rose to $148.8 million, or $1.36 per share, in the quarter from $127.2 million, or $1.12 per share, a year earlier. Adjusted profit was $1.45 per share.
Revenue rose 8 percent to $1.63 billion.
Analysts on average expected earnings of $1.45 per share on revenue of $1.63 billion.
Shares of the company were down 2.7 percent at $83.09 in early afternoon trading on the New York Stock Exchange.
(Reporting by Aditi Shrivastava in Bangalore; Editing by Joyjeet Das, Maju Samuel)