Cigarette maker Lorillard Inc. (LO - Analyst Report) reported adjusted earnings of 93 cents per share in the fourth quarter of 2014, up 13.4% from the prior-year quarter. Higher cigarette sales and the impact of share repurchases in prior quarters led to earnings growth in the reported quarter. Earnings beat the Zacks Consensus Estimate of 92 cents by 1.1%.
Lorillard - Quarterly EPS | FindTheBest
Net sales in the reported quarter grew 1.4% year over year to $1.768 billion due to an increase in net sales of cigarettes, partially offset by a decline in net sales of electronic cigarettes. Revenues comprehensively beat the Zacks Consensus Estimate of $1.285 billion by 37.6%.
Gross profit improved 10.3% to $727 million in the quarter driven by higher margins in the cigarette segment. Adjusted operating income grew 12.8% to $590 million, driven by operating efficiencies at the cigarette segment.
Full-Year Results
In 2014, adjusted earnings of $3.36 per share lagged the Zacks Consensus Estimate by a cent, but increased 7.7% year over year. Net sales grew 0.6% year over year to $6.990 billion. Revenues comprehensively beat the Zacks Consensus Estimate of $5.051 billion by 38.4%.
Segment Details
Cigarettes: Despite lower cigarette unit sales volumes, the company managed to increase its cigarette sales by 2.4% year over year to $1.7 billion. The increase was driven by a 4.7% increase in average net cigarette selling prices.
Total wholesale cigarette volumes declined 0.9% to 9.76 billion units in the fourth quarter including Puerto Rico and U.S. shipments. Excluding Puerto Rico and U.S. shipments, total wholesale cigarette volumes declined 1% to 9.65 billion in the quarter. We note that the cigarette volume decline rate was narrower than the sequential quarter, owing to an improving economy and lower fuel prices.
In the reported quarter, Lorillard's domestic retail market share climbed 0.3 share point to 15.2%, backed by strong gains in the company's flagship brand – Newport. Its domestic retail market share also increased 0.3 share point to 13.0%. Newport’s market share was driven by continued strengthening of Newport Menthol in its core geographies, continued success in expansion markets and improved volumes after the launch of Newport Non-Menthol.
Lorillard's domestic retail share of the menthol market increased 0.1 share point to 40.2% in the reported quarter.
Adjusted gross profit increased 11% to $714 million, driven by higher cigarette sales. Adjusted operating profit increased 16% to $610 million, owing to higher gross profit and lower selling, general and administrative expenses.
Electronic Cigarettes: Segment net sales during the fourth quarter declined 27.8% to $39 million. The decline was due to lower sales of blu eCigs in the U.S., reflecting a decrease in unit volume. Sales also declined due to greater competition from rivals Altria Group Inc (MO - Analyst Report) and Reynolds American Inc (RAI - Analyst Report), who recently rolled out their respective e-cigarettes brands – MarkTen and Vuse – nationwide, supported by aggressive introductory "free trial" and other promotional programs.
Thankfully, the decline in segment sales was narrower than the prior quarter due to the launch of the new blu PLUS+ rechargeable kit nationwide during the fourth quarter.
The company’s brand blu (formerly known as Skycig, a leading premium brand of electronic cigarettes in the UK which was acquired in Oct 2013) generated only $2 million in sales in the fourth quarter. However, net sales are expected to increase significantly during 2015 as a result of continued marketing of blu and expanded retail distribution.
During the fourth quarter, blu (U.K) entered into an agreement with Fontem Ventures B.V. ("Fontem"), Imperial Tobacco Group's electronic cigarette operating subsidiary. Per the deal, Fontem will act as the exclusive distributor of blu electronic cigarette products, including blu starter kits, disposable e-cigarettes, personal vaporizers and e-liquids in the United Kingdom.
Adjusted gross profit declined significantly by 87.5% to $2 million in the fourth quarter due to lower segment sales. Adjusted operating loss was $20 million in the reported quarter compared with a loss of $3 million in the fourth quarter of 2013. This was due to higher selling, general and administrative costs and a decline in gross profit.
Merger Update
On Jul 15, Lorillard and peer Reynolds American entered into an agreement per which Reynolds agreed to take over Lorillard for $27.4 billion, including assumption of net debt.
In connection with the transaction, Reynolds also announced that it has reached an agreement with Imperial Tobacco Group PLC, the fourth-largest international tobacco company. Per the agreement, Imperial agreed to purchase the Kool, Salem, Winston, Maverick and blu eCigs brands and other assets and liabilities from Reynolds and Lorillard for $7.1 billion in cash.
The shareholders of both the companies approved the merger in Jan 2015. The companies now await the approval of the Federal Trade Commission. Lorillard is tethered to menthol cigarettes. It would be able to diversify with Reynolds American's traditional tobacco brands such as Camel and American Spirit, if the $27.4 billion Reynolds-Lorillard deal materializes.
In addition, both companies are likely to see significant cost synergies and should be able to shed a great deal of overlapping costs. However, the combined entity might pose a threat to its peer Altria Group, which manufactures Marlboro cigarettes and commands more than 40% market share in the U.S. The companies expect the transactions to close in the first half of 2015.
Lorillard carries a Zacks Rank #3 (Hold). A better-ranked stock in the consumer staple sector is Supervalu, Inc. (SVU - Analyst Report), which sports a Zacks Rank #1 (Strong Buy).
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