Earnings Preview: Reynolds American
RICHMOND, Va. (AP) — Reynolds American Inc., the second-biggest U.S. cigarette company, should give investors some insight into its premium Camel brand and its lower-priced Pall Mall brand when it releases its fourth-quarter and full-year results before the stock markets open Tuesday.
WHAT TO WATCH FOR: Americans are buying fewer cigarettes as they face rising taxes and greater smoking bans, health concerns and social stigma, prompting most tobacco companies to raise prices and cut costs to bolster profits. But the decline in cigarette volumes industrywide has led to heavy promotional activity by the nation's largest tobacco companies.
Winston-Salem, N.C.-based Reynolds American said those dynamics drove its cigarette volumes down nearly 7 percent to 17.4 billion cigarettes in the third quarter, compared with an estimated total industry volume decline of 2.7 percent.
Its R.J. Reynolds Tobacco Co. subsidiary sold 8 percent less of its Camel brand 1 percent more of the Pall Mall brand. Camel's market share remained flat at 8.5 percent of the U.S. market, while Pall Mall's market share grew 0.1 percentage points to 8.7 percent.
The company has promoted Pall Mall as a longer-lasting and more affordable cigarette as smokers weather the weak economy and high unemployment, and has said half the people who try the brand continue using it. Still Reynolds has faced pressure from its competitors looking to attract more smokers looking to save money.
Reynolds American also sells Natural American Spirit cigarettes, and Kodiak and Grizzly smokeless tobacco.
Analysts pay close attention to the company's smokeless tobacco products — a segment of the tobacco industry that's growing and becoming increasingly competitive as companies fight the decline in cigarette sales. Volume for its smokeless tobacco brands rose nearly 7 percent in the third quarter compared with a year ago. The company's smokeless tobacco brands had 32.2 percent of the U.S. retail market, which is tiny compared with cigarettes.
Investors also will be interested to hear about the company's progress on cigarette alternatives as part of its "total tobacco" strategy.
During the third quarter, the company started a test market in the Des Moines, Iowa, area of a nicotine gum under the Zonnic brand aimed at helping people stop smoking. In 2009, Reynolds bought a Swedish company Niconovum AB, which makes nicotine gum, pouches and spray products. The test market is the first of its products to be sold in the U.S.
It also has begun limited distribution of its first electronic cigarette under the Vuse brand. The battery-powered devices heat a liquid nicotine solution, creating vapor that users inhale.
Rival Altria Group Inc., the owner of the biggest U.S. cigarette maker, Philip Morris USA, was the first U.S. tobacco company to report its fourth-quarter results.
The Richmond, Va.-based company said Jan. 31 that when adjusted for trade inventory changes and an extra shipping day, its cigarette volumes fell 1 percent, compared with a total industry decline of 3 percent. Volumes for the top-selling Marlboro brand were essentially flat, discount cigarette brands like L&M saw gains and its other premium brands declined.
WHY IT MATTERS: Continued strength from Pall Mall could mean smokers are still switching to cheaper brands to save money, and those who tried the brand during the recession are remaining loyal. But if volumes of premium brands like Camel are rebounding, that could signal consumers are adjusting to higher prices on cigarettes following federal and state tax hikes.
WHAT'S EXPECTED: Analysts, on average, expect Reynolds American to report earnings of 73 cents per share on revenue of $2.06 billion, according to FactSet.
LAST YEAR'S QUARTER: Reynolds American reported adjusted earnings of 72 cents per share. Its revenue was $2.08 billion, excluding excise taxes.
Michael Felberbaum can be reached at http://www.twitter.com/MLFelberbaum .