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Lorillard Excels in 1Q Earnings & Revs

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Cigarette maker Lorillard Inc. delivered first quarter 2013 adjusted earnings of 66 cents per share, which exceeded the prior-year quarterly earnings of 58 cents per share by 13.8%. The company’s earnings also exceeded the Zacks Consensus Estimate of 63 cents per share by 4.8%. The company’s electronic cigarette brand - blu e-Cigs - and continued increase in retail market share of cigarettes proved to be Lorillard’s strength in the first quarter of 2013. The company’s share buyback program also fueled earnings.

Net sales in the reported quarter went up 3.3% year over year to $1.58 billion on the back of increased sales of electronic cigarettes, partially offset by weak sales at the Cigarettes segment. Revenues surpassed the Zacks Consensus Estimate of $1.12 billion.

Segment Details

Cigarettes: Net sales of the cigarette segment declined 0.4% to $1.52 billion due to lower cigarette unit sales volume, partially offset by higher average net cigarette selling prices. Total wholesale cigarette volumes decreased 2.3% to 9.2 billion units in the first quarter including Puerto Rico and U.S. shipments.

In the reported quarter, Lorillard's domestic retail market share climbed 0.4 share points to 14.9%, whereas domestic retail market share of the company’s flagship brand Newport jumped 0.5 share points to 12.7%, driven by increased promotional activity for the new Newport Menthol launched in the core markets.

Adjusted operating profit increased 8% to $431 million in the quarter, owing to lower selling, general and administrative costs. 

Electronic Cigarettes: Lorillard formed this segment following the acquisition of the blu eCigs brand on Apr 24, 2012. The segment contributed $57 million to Lorillard's total net sales in the first quarter, driven by higher blu eCigs sales achieved from marketing and expanded retail distribution. In the first quarter, blu eCigs distribution expanded to more than 80,000 retail outlets and its domestic retail market share was over 40% of the electronic cigarettes market.

Adjusted operating income totaled $7 million.

Other Financial Update

On Mar 11, Lorillard paid a quarterly dividend of 55 cents to stockholders of record as of Mar 1, 2013. The dividend of 55 cents was increased from 52 cents.

Apart from this, Lorillard completed its $500 million share repurchase program at the end of Jan, 2013, announced earlier in Aug 2012, by repurchasing 2.8 million shares at a cost of $109 million. On Mar 8, 2013, Lorillard’s board approved a new share repurchase program of $500 million. During the first quarter of 2013, the company repurchased approximately 1 million shares at a cost of $40 million under the $500 million share repurchase program announced in Mar 2013. The company has $460 million worth of shares remaining in its share buyback program.

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 ahead. Currently, Lorillard has a Zacks Rank #3 (Hold).

Other stocks in the consumer staples sector worth a look are Flower Foods Inc (FLO - Free Report) , Kellogg Co (K - Free Report) and Altria Group Inc (MO - Free Report) . While Flower Foods carries a Zacks Rank #1 (Strong Buy), Kellogg and Altria hold a Zacks Rank #2 (Buy).

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