* Q3 adjusted EPS $0.47 tops Wall Street view by a penny
* Net revenue up 26 pct to $11.86 bln; below Street view
* Affirms 2010, 2011 profit, sales targets
* May lose Starbucks coffee distribution
* Shares down 1.9 pct after hours (Adds Starbucks statement)
By Martinne Geller
NEW YORK, Nov 4 (Reuters) - Kraft Foods Inc reported weaker-than-expected quarterly revenue, after price increases taken to offset rising ingredient costs hurt sales.
The maker of Maxwell House coffee, Velveeta cheese and Cadbury chocolate also may lose a sizable business selling packaged Starbucks coffee.
The world's largest coffee company said on Thursday it intends to end their 12-year-old deal to have more control over its distribution.
Kraft shares, which had closed up 0.7 percent in regular trading, fell 1.9 percent to $31.20 after hours on Thursday, despite reporting better-than-expected quarterly profit and affirming its outlook for this year and next.
Since Kraft and Starbucks have not yet hammered out the specifics, Kraft Chief Financial Officer Tim McLevish told analysts it was too early to quantify any impact from losing the business, which he said generates about $500 million in sales a year.
Kraft said in a statement that if Starbucks decides to end the deal, it would be required to pay Kraft the fair market value of the business plus, in certain instances, a premium.
Starbucks responded, saying Kraft's comments "mischaracterize the nature of the agreement between our companies, including the term of the agreement."
In the fiscal third quarter, Kraft's net revenue rose 26 percent to $11.86 billion, due mostly to the $18.4 billion purchase of Britain's Cadbury, which added Cadbury chocolate, Trident gum and Halls lozenges to its portfolio.
Analysts on average were expecting $12.01 billion, according to Thomson Reuters I/B/E/S.
Stifel Nicolaus analyst Christopher Growe said the sales performance could keep Kraft shares range-bound.
"Softer sales growth will likely not allow for much upside from this level in our view," Growe said in a research note. He affirmed his "Buy" rating on the shares.
Excluding Kraft's acquired brands, revenue rose 2.5 percent, with higher prices accounting for nearly all of the increase. Improvements in sales volume and mix of products sold contributed only 0.2 percent growth to sales.
PRICE HIKES
Around the world, consumers are often most likely to cut back on more discretionary categories of food, like gum, candy and cookies, Kraft Chief Executive Irene Rosenfeld said in an interview.
"The consumer, in the case of biscuits, is reducing her variety," she said. "Whereas she might have had three or four different types of biscuits in her pantry at any given time, today she only has one or two."
Recent price increases have not helped.
Kraft has either raised prices or announced price increases on 40 percent of its North American products and more than half of its European products to offset costs for ingredients such as dairy, coffee and cocoa, which have jumped as much as 30 percent, or much higher than the company was expecting.
Rosenfeld said gross margins were hurt in the third quarter as the price increases did not fully make up for the spike in costs, but said the gap should lessen in the future.
"There's no question, as we take pricing, there is a consumer response. It takes a while to adjust to new price levels, but we see nothing in the marketplace that would suggest that it's going to be an issue for us as we go forward," Rosenfeld told analysts.
Kraft, North America's largest packaged food company, did not give a 2011 forecast for cost inflation.
The company said it still expects 2010 combined organic net revenue growth of 3 percent to 4 percent and operating earnings of at least $2 per share. For 2011, it expects net revenue growth of at least 5 percent and earnings growth in the mid-teen percent range.
In the third quarter, Kraft's net income was $754 million, or 43 cents per share, down from $824 million, or 55 cents per share, a year earlier.
Excluding one-time costs, earnings were 47 cents per share. On that basis, analysts on average were expecting 46 cents per share, according to Thomson Reuters I/B/E/S. (Editing by Gary Hill, Carol Bishopric and Muralikumar Anantharaman)