Reynolds American Inc.’s (RAI) adjusted earnings of 77 cents per share in the fourth quarter of fiscal 2013 lagged the Zacks Consensus Estimate of 81 cents by 5.2% due to lower-than-expected volume. Earnings, however, increased 1.3% from the prior-year quarter’s earnings of 76 cents backed by higher cigarette and moist snuff pricing, and lower MSA expense.
The payment under MSA reduced as Reynolds recently won a case against 6 of the 15 U.S. states. The ruling stated that the tobacco players will not have to pay the 6 states for healthcare costs.
Adjusted earnings per share exclude a 23 cents impact due to charges for Engle Progeny lawsuits, other tobacco-related litigation, and non-cash trademark impairments.
Revenues and Operating Margin
Reynolds’ net sales in the quarter slipped 1.9% year over year to $2.03 billion as lower sales in RJR tobacco offset gains in other segments. Quarterly net sales also missed the Zacks Consensus Estimate of $2.05 million by 1%.
Adjusted operating income increased 4.1% to $595 million on the back of higher pricing and lower MSA expenses. Adjusted operating margin inflated 3.0 percentage points (pp) to 36.1% during the period.
Segment Details
RJR Tobacco: Segment revenues declined 4.8% to $1.6 billion in the fourth 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 7.0% in the segment due to losses on shipments. RJR Tobacco’s market share declined 0.3 pp year over year to 26.1% in the fourth 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 0.4 pp to 9.0%, Pall Mall market share went up 0.2 pp to 9.1%.
Compared with the year-ago quarter, the segment’s adjusted operating income climbed 4.1% to $595 million, on the back of positive pricing and lower MSA cost. Adjusted operating margin inflated 3.0 pp to 36.1%.
American Snuff: Segment revenues climbed 12.4% to $199 million in the fourth quarter driven by volume growth and market share gains
Volumes increased 8.2% in the quarter. The moist snuff market share increased 0.7 pp year over year to 33.3% fuelled by modest gains of the Grizzly brand. Grizzly brand volumes shot up 9.6% while market share expanded 1.0 pp to 30.3%. Grizzly brand benefited from strong demand for Grizzly’s pouch styles and wintergreen offerings.
Adjusted operating income increased 17.0% to $116 million, driven by higher moist snuff volume and positive pricing. Adjusted operating margin inflated 2.5 pp to 58.9%.
Santa Fe: Segment revenues increased 12.8% to $149 million in the quarter backed by higher volume.
Super premium brand Natural American Spirit’s volume inflated 15.1% and market share expanded 0.2 pp to 1.5% as it benefited from higher market share of its distinctive additive free natural tobacco styles.
Adjusted operating income increased 12.3% to $73 million, driven by pricing and volume gains. Adjusted operating margin remained flat at 49.1%
Fiscal Results
For fiscal 2013, adjusted earnings of $3.19 per share in the fourth quarter of fiscal year 2013, missed the Zacks Consensus Estimate of $3.23 by 1.2%. Earnings, however, increased 7.4% from the prior-year quarter’s earnings of $2.97.
Adjusted earnings per share exclude a 5 cents impact due to charges for Engle Progeny lawsuits, other tobacco-related litigation, and implementation costs.
Revenues and Operating Margin for Fiscal 2013
Reynolds’ net sales in fiscal 2013 slipped 0.8% year over year to $8.2 billion due to lower sales of RJR tobacco. Quarterly net sales missed the Zacks Consensus Estimate of $8.3 billion.
Other Financial Update
Reynolds American spent $150 million to purchase 3.0 million shares under the company’s $1.9 billion share repurchase program.
In the quarter, Reynolds hiked its dividend by 6.3% to 67 cents payable on Apr 1, 2014 to shareholders as of Mar 10, 2014
Guidance Issued
Reynolds American issued fiscal 2014 guidance. The company now expects earnings in the range of $3.30 to $3.45, up 3.5% to 8.2% from fiscal 2013 earnings of $3.19. Reynolds expects to increase its investment in its newly launched electronic cigarette brand Vuse and increase its distribution nationwide in fiscal 2014.
Reynolds carries a Zacks Rank #2 (Buy). Some other stocks worth considering in the retail sector include Constellation Brands Inc. (STZ), Lorillard Inc. (LO) and Green Mountain Coffee Roasters Inc. (GMCR). While Green Mountain and Constellation Brand carry a Zacks Rank #1 (Strong Buy), Lorillard carries a Zacks Rank #2.
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