Key retailers managed inventory levels down during the quarter.
Specific competitive activities and price points in certain of the company's categories were particularly aggressive, however, the company chose not to engage in these activities.
Gross profit decreased $8.7 million, or 2 percent, in the third quarter of 2012, compared to 2011, and decreased $12.4 million, excluding special project costs, primarily due to lower sales volume. During the third quarter of 2012, costs were higher for green coffee, edible oils, peanuts, and flour, compared to the third quarter of 2011. However, the net impact on gross profit resulting from the recognition of these higher costs and related pricing actions was mixed due to timing. The net impact of timing was favorable for peanut butter and more than offset the unfavorable impact for coffee. The net favorable impact of a $3.5 million change in unrealized mark-to-market adjustments on derivative contracts, primarily for coffee, in the third quarter of 2012, compared to 2011, also impacted gross profit. Gross margin contracted from 37.4 percent in the third quarter of 2011 to 32.6 percent in the third quarter of 2012, excluding special project costs.
The company expects that it will continue to recognize higher green coffee costs through its fourth quarter, compared to the prior year, although to a lesser degree than in the third quarter. Peanut costs are expected to be significantly higher in the fourth quarter than in the third quarter of 2012 as the inventory of lower-cost peanuts is depleted.
Selling, distribution, and administrative (SD&A) expenses in the third quarter of 2012 increased 5 percent, compared to the third quarter of 2011, but decreased as a percentage of net sales from 16.3 percent to 15.3 percent. Marketing expenses in the third quarter of 2012 increased 4 percent compared to the third quarter of 2011. Over the same period, selling and general and administrative expenses increased 12 percent and 7 percent, respectively, while distribution expenses decreased 3 percent. The addition of the Rowland Coffee and Sara Lee businesses represented over 70 percent of the overall increase in SD&A expenses. Higher amortization expense was recognized in the third quarter of 2012, compared to 2011, primarily related to the intangible assets associated with the Company's recent acquisitions.
Operating income decreased $12.6 million, or 6 percent, in the third quarter of 2012, compared to 2011. Excluding special project costs in both periods, operating income decreased $8.1 million, or 3 percent, and declined from 18.4 percent of net sales in 2011 to 15.9 percent in 2012. Both of these operating income measures include a $17.2 million impairment charge in 2011.
The U.S. retail coffee segment net sales increased 15 percent in the third quarter of 2012, compared to the third quarter of 2011, reflecting the net realization of price increases taken over the last 12 months. The acquisition of Rowland Coffee contributed approximately $28.5 million to segment net sales, representing 5 percentage points of the segment net sales increase. Segment volume decreased 11 percent for the third quarter of 2012, compared to the third quarter of 2011, excluding Rowland Coffee. Volume declined for the Folgers® brand in line with the overall segment in the third quarter of 2012, compared to 2011, and was primarily attributed to consumer response to higher price points on shelf and aggressive private label price points at key retailers. Dunkin’ Donuts® packaged coffee volume was up 4 percent. Contributing to favorable sales mix in the third quarter of 2012, net sales of Folgers Gourmet Selections® and Millstone® K-Cups®, increased $38.2 million, compared to the third quarter of 2011, and represented 7 percentage points of segment net sales growth, while contributing only 1 percentage point growth to volume.