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High-priced coffee stocks to haunt Smucker a bit longer yet

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JM Smucker, having revealed a dent to profits from inventories of high-priced coffee bought last year, said that it had more of these stocks to work through yet, leaving margins facing some pressure into the autumn.

Shares in the group, the top US roaster, which owns the Folger's and Keurig coffee brands, fell by nearly 4% on Thursday after it unveiled that efforts to pass on in higher prices elevated coffee costs had prompted a sharp drop in sales volumes in the February-to-April quarter.

While the Smucker retail coffee division will see "both net sales and segment profit growth" for the new financial year, which started last month, this will take time to kick in.

"We recognise in the first [May-to-July] quarter we're going to be challenged because we still have some high-cost coffee," Smucker's chief executive Richard Smucker told investors.

"So our margins in the first quarter aren't going to be where we'd like them to be."

Cheap beans feed through

The extent of the margin pressure raised some comment from JP Morgan analyst Ken Goldman, who flagged previous guidance from Smucker of roughly four months in changes market prices affecting the group's margins.

"Coffee has been very cheap since pretty early this year. It's been over four months," Mr Goldman said.

However, Mr Smucker looked to the second half of the group's financial year, which ends in April 2016, for some more forgiving margins, as the impact of cheaper green beans feeds through.

"Our raw material costs are coming back in line," he said.

"Most of the gain is going to come in the last half of the [financial] year.

"It took us about 18 months to get where we are. It will probably take us12 months to get back."

Price "misstep"

He added that "our pricing on the retail shelf is getting much better," in reference to a price hike that hurt sales last year, and that the group acknowledged as a "misstep".

Vince Byrd, the Smucker chief executive, said that "we expect to recognise lower green coffee costs as we proceed through the year, which we have begun passing through to our customers and consumers in the form of lower promoted price points on the Folgers mainstream offerings".


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