Leading cigarette maker
Reynolds American Inc.
) delivered adjusted earnings of 84 cents per share in the second
quarter of fiscal year 2013 that were ahead of Zacks Consensus
Estimate of 83 cents by a penny. Earnings were up 6.3% from the
Adjusted earnings per share exclude a 2 cents impact 2013
Master Settlement Agreement (MSA) payment, 1 cent charge related
to implementation costs and 1 cent charge related to tobacco
Earnings were on the upswing on the back of positive pricing
in moist snuff and cigarette segment and higher profit in RJR
Tobacco, American Snuff and Santa Fe segments.
Revenues and Operating Margin
Reynolds' net sales in the reported quarter inched up 0.1%
year over year to $2.2 billion backed by solid market share gains
by the key brands of the company. Quarterly net sales, however,
were in line with the Zacks Consensus Estimate.
Adjusted operating income increased 7.5% to $800 million on
the back of strict cost controls. Adjusted operating margin
inflated 2.4 percentage points to 36.6% during the period.
: This is Reynolds' largest operating segment, comprising
operations of R. J. Reynolds Tobacco Company, a subsidiary of
Reynolds American and the second-largest U.S. tobacco firm. It
includes popular cigarette brands like Camel, Winston, Kool,
Doral, Salem and Pall Mall.
Segment revenue declined 2.2% to $1.8 billion in the second
quarter due to lower demand triggered by ongoing weak economy,
high unemployment and a general shift of consumer preference
towards smokeless tobacco products and e cigarettes.
Volumes declined 6.0% in the segment due to losses on
shipments. RJR Tobacco's market share declined 0.3 percentage
points year over year to 26.0% in the second quarter.
Despite tough industrial conditions, the company's flagship
brands of Camel and Pall Mall showed considerable strength and
reported higher year over year market share.
Compared with the year-ago quarter, the segment's adjusted
operating income climbed 9.8% to $662 million, on the back of
positive pricing. Adjusted operating margin inflated 3.9
percentage points to 36.9%.
: This segment comprises operations of American Snuff Company, a
wholly-owned subsidiary of Reynolds American and the nation's
second-largest manufacturer of smokeless tobacco products. It
sells some of the largest selling moist snuff brands like Grizzly
and Kodiak. Segment revenue soared 12.7% to $194 million in the
second quarter backed by higher gains in moist volume.
Volumes increased 9.4% in the segment from the prior-year
quarter. The moist snuff market share increased 0.7 percentage
point year-over-year to 33.1% in the quarter fuelled by modest
gains of the grizzly brand. Grizzly brand volumes shot up by
10.6% while market share expanded 1.0 percentage points to 30.0%,
benefiting from the higher share in the pouch market.
Adjusted operating income increased 15.3% to $109 million,
driven by volume and market share gains for the popular Grizzly
brand. Adjusted operating margin increased 1.1 pp year over year
to 56.5% backed by moist snuff volume gain.
This segment comprises operations of Santa Fe Natural Tobacco
Company, a wholly-owned subsidiary of Reynolds American and
manufactures Natural American Spirit cigarettes and other
additive-free tobacco products. Segment revenue increased 14.7%
to $148 million in the second quarter backed by higher
Super premium brand Natural American Spirit's volume inflated
14.6% and market share expanded 0.3 pp to 1.4%.
Adjusted operating income increased 14.0% to $73 million,
driven by pricing and volume gains for its Natural American
Spirit. Adjusted operating margin remained flat year-over-year at
Other Financial Update
Reynolds American exited the second quarter with a cash and
cash equivalent of $1.7 billion, compared with $2.8 billion in
the prior quarter.
Long term debt
in the quarter remained flat at $5.02 billion sequentially.
Reynolds American spent $150 million to purchase 3.1 million
shares under the company's $1.8 billion share repurchase
During the quarter, RAI's newly formed subsidiary - RJ
Reynolds Vapor Company - has re-engineered and developed a
patented vapor technology and a brand called Vuse brand in the
e-cigarette category. RAI launched the brand in two varieties -
Vuse Solo and Vuse System - in Colorado in Jun 2013.
Following the second quarter results, Reynolds American
reaffirmed its fiscal 2013 adjusted earnings guidance in the
range of $3.15 to $3.30 per share. The guidance reflects strong
momentum of the operations of all the segments of the company.
The Zacks Consensus Estimate stands at $3.23 per share.
The regulatory watchdog Food and Drug Administration is
expected to put a ban on the menthol flavored cigarettes as it
has noted that it is more lucrative to starters because of its
smooth and cool taste. Hence it will trigger a rise in smoking
population in the nation. This is expected to affect RAI's sales
negatively in the coming quarters.
Reynolds carries a Zacks Rank #3 (Hold). Other diversified
retailers worth considering include
Flower Foods Inc.
Tyson Foods Inc.
) all carrying a Zacks Rank #2 (Buy).
FLOWERS FOODS (FLO): Free Stock Analysis
LORILLARD CO (LO): Free Stock Analysis Report
REYNOLDS AMER (RAI): Free Stock Analysis
TYSON FOODS A (TSN): Free Stock Analysis
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