Cigarette maker Lorillard 1Q profit falls

Cigarette maker Lorillard Inc. said Wednesday its net income fell 10 percent in the first quarter as higher prices couldn't offset a decline in the number of cigarettes sold. The nation's third-biggest tobacco company also announced that it has acquired electronic cigarette maker Blu Ecigs for $135 million, part of an industrywide push to diversify beyond the traditional cigarette business. Lorillard, based in Greensboro, N.C., earned $223 million, or $1.70 per share, for the period ended March 31, down from $248 million, or $1.71 per share, a year ago. A 10-percent drop in the number of outstanding shares helped buoy the per-share results for the recent quarter.

Adjusted earnings were $1.74 per share. Revenue excluding excise taxes was essentially flat at $1.06 billion. Analysts polled by FactSet, on average, were expecting earnings of $1.99 per share on revenue of $1.13 billion. The company's fundamental performance remained strong, although it was masked by "significant changes in wholesale inventory," CEO Murray Kessler said in a conference call. Lorillard said the number of cigarettes it sold fell about 3 percent to 9.44 billion cigarettes. Newport, its biggest brand, fell 4 percent, while low-priced Maverick cigarettes rose about 10 percent. The company estimates that the industry as a whole sold about 4 percent fewer cigarettes during the quarter. 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 brands have been among the beneficiaries.

 Lorillard's retail market share increased 0.4 points during the quarter to an all-time high of 14.5 percent of the U.S. market. Newport's share of the menthol market grew 0.5 points to 36.8 percent, while its top competitors have ramped up efforts to grab some of the growing menthol market. The company said promotion of non-menthol Newports, the Maverick brand's growth and Newport's geographic expansion drove market share gains. 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.

 With Wednesday's announcement of its acquisition of Blu Ecigs, Lorillard joins several other tobacco companies that have announced similar initiatives to seek cigarette alternatives as demand declines. Lorillard said Blu Ecigs, based in Charlotte, N.C., will remain a separate operating company. Electronic cigarettes are battery-powered plastic and metal devices that heat a liquid nicotine solution in a disposable cartridge, creating vapor that users inhale. Users call the practice "vaping" rather than smoking. Some e-cigarettes are made to look like a real cigarette with a tiny light on the tip that glows like the real thing. E-cigarettes devotees tout them as a way to break addiction to real cigarettes.

They insist the devices address both the nicotine addiction and the behavioral aspects of smoking - the holding of the cigarette, the puffing, exhaling something that looks like smoke and the hand motion - without the more than 4,000 chemicals found in cigarettes. Kessler said Blu Ecigs are "the perfect adjacency for us to participate in the smokeless market, but in a Lorillard way."

 The company also said it completed its $750 million share buyback during the quarter, repurchasing about 1.6 million shares at a cost of $188 million. Reynolds American, the nation's second-biggest tobacco company and maker of Camel, Pall Mall and Natural American Spirit brand cigarettes, said Tuesday its first-quarter profit fell 29 percent as restructuring charges and a 5 percent decline in the number of cigarettes sold more than offset the effect of higher prices and productivity improvements. Altria Group Inc., owner of the nation's largest tobacco company, Marlboro maker Philip Morris USA, is set to report Thursday.