Reynolds American Inc
) delivered adjusted earnings of 86 cents per share in the third
quarter of fiscal year 2013, in line with the Zacks Consensus
Estimate. Earnings increased 8.9% from the prior-year quarter's
earnings of $0.79.
Adjusted earnings per share exclude a $0.02 impact due to
charges for Engle Progeny lawsuits, other tobacco-related
litigation, and implementation costs.
Earnings were on the upswing on the back of positive pricing
in moist snuff and cigarette segment and lower Master Settlement
Agreement (MSA) payment during the year.
The payment under MSA reduced as major tobacco players like
Reynolds recently won a case against six of the fifteen U.S.
states. The ruling stated that the tobacco players will not have
to pay the six states for health-care costs.
Revenues and Operating Margin
Reynolds' net sales in the reported quarter inched up 0.9%
year over year to $2.14 billion. Market share gains of almost all
the core brands like Camel, Pall Mall and Santa Fe aided sales
growth during the quarter. Quarterly net sales were in line with
the Zacks Consensus Estimate.
Adjusted operating income increased 5.8% to $808 million on
the back of lower cost of sales. Adjusted operating margin
inflated 1.7 percentage points (pp) to 37.8% during the
: Segment revenues declined 1.9% to $1.7 billion in the third
quarter due to lower demand triggered by ongoing weak economy,
high unemployment and a general shift of consumer preference
toward smokeless tobacco products and e-cigarettes.
Volumes declined 4.3% in the segment due to losses on
shipments. RJR Tobacco's market share declined 0.5 pp year over
year to 26.0% in the second quarter as market share gains in the
two core brands of Camel and Pall Mall were offset by decline in
other non core brands of the company.
Although volumes declined and tough industrial conditions
prevailed, the company's flagship brands of Camel and Pall Mall
showed considerable strength and reported substantial market
share gain during the quarter. While Camel's market share
increased by 0.4 pp to 8.9%, Pall Mall market share went up 0.3
pp to 8.9%.
Compared with the year-ago quarter, the segment's adjusted
operating income climbed 7.5% to $652 million, on the back of
positive pricing and lower MSA cost. Adjusted operating margin
inflated 3.3 pp to 37.5%.
: Segment revenues climbed 6.2% to $185 million in the third
quarter driven by volume growth and the market share gains
Volumes increased 7.1% in the quarter. The moist snuff market
share increased 1.2 pp year over year to 33.4% in the quarter
fuelled by modest gains of the Grizzly brand. Grizzly brand
volumes shot up by 8.3% while market share expanded 1.6 pp to
30.4%. Grizzly brand benefited from strong demand of Grizzly's
pouch styles and wintergreen offerings.
Adjusted operating income increased 5.5% to $106 million,
driven by higher moist snuff volume and positive pricing.
Adjusted operating margin remained flat year over year at 57.0%
backed by moist snuff volume gain.
Segment revenues increased 28.0% to $160 million in the third
quarter backed by higher volume.
Super premium brand Natural American Spirit's volume inflated
21.7% and market share expanded 0.3 pp to 1.5%.
Adjusted operating income increased 29.4% to $82 million,
driven by pricing and volume gains. Adjusted operating margin
rose 0.5 pp to 51%.
Other Financial Update
Reynolds American spent $150 million to purchase 3.0 million
shares under the company's $1.9 billion share repurchase
In the quarter, Reynolds' newly-formed subsidiary - RJ
Reynolds Vapor Company - re-engineered and developed a patented
vapor technology and a brand called Vuse brand under the
e-cigarette category. Reynolds expanded the distribution of two
varieties of the brand - Vuse Solo and Vuse System - in Colorado
in July 2013.
In Sep, 2013, Reynolds commenced the public offering of senior
notes worth $1.1 billion in two parts.
The first part of the notes offering, carrying an interest
rate of 4.9% and scheduled to mature in 2023, will raise $550.0
million. The second part of senior notes worth $550.0 million,
carrying an interest rate of 6.15%, will mature in 2043. In Oct,
2013 RAI entered into a new $1.4 billion revolving credit
Following the unimpressive third quarter results, Reynolds
American lowered its fiscal 2013 adjusted earnings guidance to a
range of $3.17 to 3.27 from previous expectation of $3.15 to
$3.30 per share.
Reynolds carries a Zacks Rank #3 (Hold). Other diversified
retailers worth considering include
Constellation Brands Inc.
Nu Skin Enterprises Inc.
Altria Group Inc.
). While Constellation Brand and Nu Skin carry a Zacks Rank #1
(Strong Buy), Altria carries a Zacks Rank #2 (Buy).
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NU SKIN ENTERP (NUS): Free Stock Analysis
REYNOLDS AMER (RAI): Free Stock Analysis
CONSTELLATN BRD (STZ): Free Stock Analysis
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