June 6, 2013 / 12:40 PM / 6 years ago

UPDATE 2-Peanut costs to weigh on Smucker's margins in first half

* 4th-quarter adjusted earnings/share $1.29 vs est $1.16

* Revenue slips 1 percent to $1.34 billion

* Sees full-year adj earnings/share of $5.65 to $5.75

* Analysts expect 2014 profit of $5.73/share

* Shares fall as much as 5 pct

By Aditi Shrivastava

June 6 (Reuters) - J.M. Smucker Co, maker of Folgers coffee and Jif peanut butter, forecast a full-year adjusted profit largely below market estimates as it failed to benefit from a drop in peanut prices because of long-term contracts signed at higher prices.

Smucker shares fell as much as 5 percent to $96.84 on the New York Stock Exchange on Thursday.

“While peanut costs will be lower versus the prior year, the cost/price relationships will negatively impact margins in the first half of the year,” Chief Financial Officer Mark Belgya said on a conference call with analysts.

The company said in January that it expected to benefit from a fall in peanut prices, allowing it to cut peanut butter prices by about 10 percent.

“We were expecting (unfavorable peanut butter prices) to begin to reverse early in the year,” Alexia Howard of Sanford C. Bernstein said.

Gross margins in the U.S. food business, which includes the Jif business, fell 1.2 percentage points in the fourth quarter ended April 30, while margins in its U.S. retail coffee business rose 4.5 percentage points on falling coffee bean prices.

Smucker, which reported a 13 percent rise in adjusted profit for the quarter, said it expected 2 percent growth in its U.S. retail coffee and food business for the year but this would be offset by lower sales in its international business.

But while Smucker did not benefit much from declining peanut costs, a drop in green coffee prices helped the company’s coffee business, which accounted for about 40 percent of revenue.

Sales the U.S. retail coffee business fell 1 percent but volume increased 6 percent, led by Folgers, Dunkin’ Donuts packaged coffee and K-Cups coffee pods.

Gross margins in the U.S. food business, which includes peanut butter, shrank by 1.2 percentage points in the fourth quarter ended April 30, while margins in the U.S. retail coffee business rose 4.5 percentage points as bean prices fell.

Smucker has been cutting prices of Folgers, its flagship coffee brand, and other packaged coffee products as prices of green coffee have declined over the past 18 months.

Arabica coffee futures hit $1.3405 per pound in mid-March, their lowest in nearly three years and down more than 55 percent from a 34-year high reached in May 2011.

Smucker, based in Orrville, Ohio, forecast a full-year adjusted profit of $5.65-$5.75 per share. Analysts on average were expecting of $5.73, according to Thomson Reuters I/B/E/S.

The company’s fourth-quarter net profit rose 25 percent to $130.3 million, or $1.22 per share. Adjusting for special project costs, it earned $1.29 per share, beating the average analyst estimate of $1.16 per share.

Overall revenue slipped about 1 percent to $1.34 billion, in line with analysts’ expectations.

Smucker shares were down just over 5 percent at $97.05 in early afternoon trading on Thursday.

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