) delivered third-quarter 2013 adjusted earnings of 83 cents per
share, which beat the prior-year quarter's earnings of 72 cents
by 15.3% and the Zacks Consensus Estimate of 81 cents by
The rising market share of its brands, higher sales, lower
share count owing to share buyback activity, and continued
success of its electronic cigarette brand - blu e-Cigs - proved
to be Lorillard's strength in the third quarter of 2013.
Net sales in the reported quarter went up 10.0% year over year
to $1.8 billion on the back of strong sales of electronic
cigarettes and regular cigarettes. Revenues were way ahead of the
Zacks Consensus Estimate of $1.3 billion.
Net sales of the cigarette segment grew 7.1% to $1.76 billion
owing to improved cigarette unit sales volume and higher average
net cigarette selling prices. Total wholesale cigarette volumes
increased 3.5% to 10.43 billion units in the third quarter
including Puerto Rico and U.S. shipments.
In the reported quarter, Lorillard's domestic retail market
share climbed 0.5 share points to 14.9%, backed by strong gains
in the company's flagship brand - Newport - whose domestic retail
market share also increased 0.5 share points to 12.6%.
Lorillard's domestic retail share of the menthol market
increased 0.8 share points to 40.4% in the reported quarter,
owing to the continued strength of Newport Menthol in its core
geographies, strong presence in the emerging markets and success
of the new Newport Smooth Select brand in the second quarter of
Adjusted gross profit increased 9.4% to $654 million in the
quarter, owing to higher average net cigarette selling prices and
higher cigarette volumes. Adjusted operating income grew 11.5% to
$541 million in the quarter.
Lorillard formed this segment following the acquisition of the
blu eCigs brand on Apr 24, 2012. Net sales during the third
quarter were $63 million, higher than $57 million reported in the
prior quarter. The strong sales were driven by continued success
of the blu eCigs brand, which was supported by brand building
initiatives like television advertising campaign and the launch
of rechargeable kits.
Lorillard continued to aggressively expand e-cigarette
offerings throughout U.S. stores. In the third quarter, the
company was able to reach 127,000 retail stores. blu eCigs
enjoyed 49% market share in the U.S.
Adjusted gross profit was $15 million in the third quarter,
lower than $18 million in the prior quarter due to a delay in
shipping of new lower-priced on-the-go rechargeable packs during
On Oct 1, Lorillard signed an agreement to acquire all the
assets and operations of SKYCIG, a leading premium brand of
electronic cigarettes in the U.K. in order to expand in the wide
UK electronic cigarette market.
Per the deal, Lorillard will pay approximately 30 million
pounds in cash at the time of completion of the deal. In
addition, the deal includes a clause to pay an additional 30
million pounds in 2016 on the achievement of certain financial
The SKYCIG acquisition will further boost Lorillard's sales as
the e-cigarette segment is evolving rapidly. On the other hand,
SKYCIG is expected to gain from Lorillard's marketing,
regulatory, research and development expertise, which will help
the brand to further strengthen its foothold in the U.K.
Other Financial Updates
On Sep 10, Lorillard paid a quarterly dividend of 55 cents to
stockholders of record as of Aug 30, 2013.
During the quarter, the company repurchased approximately 5.7
million shares at a cost of $249 million under the $1 billion
share repurchase program. The company has $542 million worth of
shares remaining under its share buyback program.
We are impressed with the company's strong dominance in the
cigarette industry owing to its strong brands and high market
share. It is quite well placed in the electronic cigarette
industry as smokers are shifting their preference to electronic
cigarettes due to rising health concerns.
However, we note that cigarette volumes have been impacted by
a slowdown in the tobacco industry, increasing health
consciousness among consumers and significantly higher prices of
cigarettes. Moreover, the industry deals with increased
regulation on packaging (graphic warning labels) in some
international markets and heightened Food and Drug Administration
concerns about the effect of menthol and electronic cigarettes.
Lorillard holds a Zacks Rank #3 (Hold).
Consumer goods stocks that warrant a look include
Pinnacle Foods Inc
Green Mountain Coffee Roasters Inc
Altria Group Inc
), all of them holding a Zacks Rank #2 (Buy).
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