Lorillard's Q3 net income falls 3% year-over-year to US$267M due in part to higher costs offsetting the sale of cigarettes at higher prices; revenue excluding excises taxes rose 4% to US$1.11B

Michelle Rivera

Michelle Rivera

Oct 24, 2011 – Associated Press

RICHMOND, Virginia , October 24, 2011 () – Cigarette maker Lorillard Inc.'s net income fell nearly 3 percent in the third quarter as higher costs offset selling more cigarettes at higher prices.

Earnings and revenue both fell short of expectations. Lorillard's stock fell nearly 5 percent in morning trading Monday.

The nation's third-biggest tobacco company and maker of Newport cigarettes said Monday it earned $267 million, or $1.94 per share, for the period ended Sept. 30, down from $274 million, or $1.81 per share, a year ago. The per-share figure was boosted by a lower number of shares outstanding.

Higher costs for promoting its non-menthol Newport cigarettes, introduced last November, Food and Drug Administration user fees, and other settlement costs dragged down its net income.

Lorillard, based in Greensboro, N.C., said revenue excluding excises taxes rose 4 percent to $1.11 billion.

Analysts polled by FactSet expected earnings of $2.03 per share on revenue of $1.14 billion. Lorillard's shares fell $5.68, or 4.9 percent, to $109.96 in morning trading.

General expenses increased $7 million in the quarter to $108 million, while its gross profit as a percentage of sales fell to 34.7 percent from 36.1 percent. It also experienced in increase in interest expenses of $5 million.

Lorillard Inc., based in Greensboro, N.C., sold about 3 percent more cigarettes on gains of 2.5 percent from Newport and 7 percent from its low-priced Maverick brand, while it estimates the industry as a whole sold 6.4 percent fewer cigarettes during the quarter.

U.S. tobacco companies cautioned last quarter that third-quarter cigarette volume comparisons and profitability would be hurt because wholesalers stocked up more than usual in that period last year. Lorillard said that adjusted for those changes, its cigarette shipments increased 7 percent during the quarter.

Lorillard's quarter "played out just as we expected," CEO Murray Kessler said in a conference call with investors. He said performance during the quarter was "masked by a significant comparative reduction" in inventory.

"Given the difficult macroeconomic environment that continued during the third quarter, we were happy to see such a strong performance on our premium brand," Kessler said. "From a consumer standpoint, we feel very bullish."

While many investors will focus on slowing volume growth in the quarter, Citi Investment Research's Vivien Azer said in a client note, "We are more focused on the underlying fundamentals of the business which look quite good to us."

High unemployment and rising cigarette prices and taxes have caused many smokers to smoke less and trade down to cheaper brands during the recession in a bid to save money. Lorillard's Maverick and Reynolds American Inc.'s Pall Mall have been among the beneficiaries.

Most tobacco companies have been raising prices and cutting costs to keep profits up as the recession and declining demand cut into cigarette sales. Tax increases, smoking bans, health concerns and social stigma also have made the cigarette business tougher.

Lorillard's retail market share increased 1.3 points during the quarter to 14.2 percent of the U.S. market. Newport's share of the menthol market grew slightly to 36.1 percent, while its top competitors have ramped up efforts to grab some of the growing menthol market.

The company said it repurchased 4 million shares during the quarter at a cost of $438 million.

Lorillard, the oldest continuously operating U.S. tobacco company, spun off from Loews Corp. in 2008.

It is the first of the country's top tobacco companies to report third-quarter results. No. 2 cigarette maker Reynolds American Inc. reports Tuesday and No. 1 Altria Group Inc. on Thursday.

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