Reynolds Lags Q1 Earnings, Keeps Outlook - Analyst Blog

Reynolds American Inc.'s RAI adjusted earnings of 72 cents per share in the first quarter of fiscal 2014 lagged the Zacks Consensus Estimate of 74 cents by 2.7% due to lower-than-expected volume. Earnings were flat with the prior-year quarter as lower cigarette volume and increased investment on the Vuse brand of e-cigarettes offset higher pricing of cigarette and moist snuff segments.

Adjusted earnings per share exclude a 5-cent impact due to charges for the Engle Progeny lawsuits, other tobacco-related litigation and non-cash trademark impairments.

Revenues and Operating Margin

Reynolds' net sales in the quarter went up 2.8% year over year to $1.93 billion backed by strong market share gains by all its brands. Quarterly net sales inched past the Zacks Consensus Estimate of $1.89 million by 2.1%.

Adjusted operating income slipped 3.6% to $665 million due to higher cost of sales incurred by the company during the quarter. Adjusted operating margin shrank 2.2 percentage points (pp) to 34.4% during the period.

Segment Details

RJR Tobacco: Segment revenues inched up only 0.3% to $1.6 billion in the first quarter. The slow growth can be attributed to lower demand triggered by the ongoing economic weakness, high unemployment and a general shift of consumer preference toward smokeless tobacco products and e-cigarettes.

Volumes declined 3.8% in the segment due to losses in shipments. RJR Tobacco's market share declined 0.1 pp year over year to 26.7% in the first quarter due to decline of market share in non core brands

Although volumes declined and tough industrial conditions prevailed, the Camel and Pall Mall brands reported substantial market share gain during the quarter. While Camel's market share increased 0.4 pp to 10.0%, Pall Mall market share went up 0.3 pp to 9.5%.

Compared with the year-ago quarter, the segment's adjusted operating income slipped 1.4% to $555 million, as higher marketing expenses offset higher pricing. Adjusted operating margin shrank 0.5 pp to 35.5%.

American Snuff: Segment revenues climbed 10.2% to $184 million in the first quarter driven by volume growth and market share gains.

Volumes increased 10.7% in the quarter. The moist snuff market share increased 0.8 pp year over year to 34.6% fueled by modest gains of the Grizzly brand. Grizzly brand volumes shot up 12.1% while market share increased 1.1 pp to 31.5%. The brand benefited from strong demand for Grizzly's pouch styles and wintergreen offerings.

Adjusted operating income increased 9.2% to $102 million, driven by higher moist snuff volume and positive pricing. Adjusted operating margin shrank 0.2 pp to 55.4%.

Santa Fe: Segment revenues increased 17.4% to $135 million in the quarter backed by higher volume.

The segment's super premium brand Natural American Spirit's volume inflated 10.7%, and market share went up 0.2 pp to 1.5%.

Adjusted operating income increased 24.9% to $65 million, driven by pricing and volume gains. Adjusted operating margin inflated 3.1 pp to 48.3%.

Other Financial Update

Reynolds American spent $145 million to purchase 2.9 million shares under its share repurchase program worth $2.2 billion.

On Feb 11, 2014, Reynolds hiked its dividend by 6.3% to 67 cents paid on Apr 1 2014 to shareholders as of Mar 10.

Reynolds expanded the distribution of its newly launched electronic cigarette Vuse in the quarter. Apart form Colorado, where it was first launched, Vuse is now available in Utah stores.

Guidance Maintained

Reynolds American maintained its fiscal 2014 guidance. The company expects earnings in the range of $3.30 to $3.45, up 3.5% to 8.2% from fiscal 2013 earnings of $3.19. The company expects to increase its investment in its newly launched e-cigarette brand Vuse and increase its distribution nationwide in fiscal 2014.

Reynolds American carries a Zacks Rank #4 (Sell). Other consumer staples sector that are performing well at the current level include Supervalu Inc. SVU,  McCormick & Company, Inc. MKC and Mondelez International Inc. MDLZ. All these stocks sport a Zacks Rank #2 (Buy).