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Cigarette maker Lorillard Inc. (LO - Analyst Report), delivered second-quarter 2013 adjusted earnings of 81 cents per share, which exceeded the prior-year quarter’s earnings of 73 cents by 11.0% and the Zacks Consensus Estimate of 80 cents by a penny.

The rising market shares of the company’s brands, tight cost control measures and success in the company’s electronic cigarette brand – Blu E-Cigs – proved to be Lorillard's strength in the second quarter of 2013.

Net sales in the reported quarter went up 4.2% year over year to $1.8 billion on the back of strong sales of electronic cigarettes. Revenues were way ahead of the Zacks Consensus Estimate of $1.3 billion.

Segment Details

Cigarettes: Net sales of the cigarette segment inched up 1.4% to $1.74 billion due to higher average net cigarette selling prices partly offset by lower cigarette unit sales volume. Total wholesale cigarette volumes decreased 1.7% to 10.44 units in the second quarter including Puerto Rico and U.S. shipments.

In the reported quarter, Lorillard's domestic retail market share climbed 0.6 share points to 14.9%, backed by strong gains of the company's flagship brand – Newport – whose domestic retail market share also increased 0.6 share points to 12.6%, driven by increased promotional activity for the Newport Menthol launched in the core markets.

Adjusted gross profit increased 6.2% to $649 million in the quarter, owing to higher average net cigarette selling prices. 

Electronic Cigarettes: Lorillard formed this segment following the acquisition of the Blu E-Cigs brand on Apr 24, 2012. Net sales during the second quarter were $57 million compared to $8 million in the comparable prior-year quarter.

The strong gains in sales were driven by higher Blu E-Cigs sales achieved from marketing and expanded retail distribution. In the second quarter, Blu E-Cigs retail market share was over 40% of the electronic cigarettes market.

Gross profit was $18 million compared to $1 million in the prior year. Gross profit gain was partly offset due to launch of new lower-priced on-the-go rechargeable pack during the quarter.

Other Financial Updates

On Jun 10, Lorillard paid a quarterly dividend of 55 cents to stockholders of record as of May 31, 2013.

Apart from this, Lorillard amended its existing $500 million share repurchase program and enhanced its share repurchase limit by another $500 million. During the quarter, the company repurchased approximately 3.9 million shares at a cost of $169 million under the $1 billion share repurchase program announced in Mar 2013. The company has $791 million worth of shares remaining under its share buyback program.

New Developments

The  Food and Drug Administration is expected to put a ban on menthol flavored cigarettes as it has noted that it is more lucrative to starters because of its smooth and cool taste. Hence, it will lead to a rise in smoking population in the nation. This is expected to affect LO’s sales negatively in the coming quarters.

Our Take

Overall, we are encouraged by the company's dominant share in the market with rising popularity of its premium brand Newport and value brand Maverick. Lorillard's Newport cigarette brand continued to gain popularity even with higher cigarette pricing amid overall slowdown in the cigarette industry. In addition, the rising demand for electronic cigarettes is expected to boost Blu E-Cigs sales, going forward.

Other Stocks to Consider

Lorillard carries a Zacks Rank #2 (Buy). Other diversified retailers worth considering include Flower Foods Inc. (FLO - Snapshot Report), Pilgrim’s Pride Corp (PPC - Snapshot Report) and Tyson Foods Inc. (TSN - Analyst Report). All these companies carry a Zacks Rank #2 (Buy).

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