The owner of Marlboro cigarettes, Reynolds American Inc. (RAI) has announced that it will layoff over 540 employees (salaried as well as working on hourly basis) by the end of 2014. This measure is undertaken to meet crumbling earnings on the back of reduced cigarette demand in the country.
Management said that the decision followed a business analysis conducted by the company after Reynolds’ share of U.S. cigarette sales fell 1.1% year over year to 27% in the recently concluded fourth quarter, which was due to 7.4% dip in shipments.
Reynolds’ fourth-quarter cigarette volume was down by 7.1%, owing to the introduction of heavily promoted competitive line extensions and its decision to move away from the company’s private label brands. The fiscal year saw a volume decline of 5.1% — higher than the industry average of 3.5%.
As of December 31, 2011, the company had 5400 employees on its list. Reynolds said that majority of the employee departures will be on a voluntary basis. It also assured that the eliminations will be partly offset by newer appointments for some positions.
Management said that by trimming 10% of its workforce, the company plans to save about $25 million by the end of 2012 and $70 million annually in 2015. However, the company will have to shoulder severance, benefits and workforce reduction related costs worth $110 million.
Reynolds’ decision to trim its workforce follows its rival and leader in tobacco industry Altria Group Inc.’s (MO) decision to cut its cigarette-related salaried workforce by about 15% late last year.
The tobacco companies are facing difficult times around the world. Governments around the world are imposing restrictions on tobacco companies to reduce smoking in the respective countries. Thus, as a result the rate of decline in cigarette consumption across the world is mounting.
The Food and Drug Administration (FDA) in America has passed a ruling that will compel the tobacco companies to use frightening labels on the cigarette packets to keep potential customers away from smoking. Governmental actions that outlaw the use of tobacco products, along with the diminishing social acceptance of smoking, will adversely impact the company’s volume in many markets going ahead.
However, the tobacco industry – that is consistently showing resilience to the economic headwinds – is increasingly attracting the investors. With a modest market capital, we think that Reynolds has strong potential to return high value to shareholders as its board of directors announced a 5.7% hike in dividend.
Currently Reynolds holds a Zacks #3 Rank (short-term Hold rating). On a long-term basis, we maintain an Outperform recommendation on the stock.
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