Higher inventories cut into Reynolds' profit

CHICAGO (MarketWatch) -- Higher inventories and the lack of a tax benefit cut into Reynolds American's second-quarter earnings, the company said Wednesday, even as it posted higher margins and market share gains for some premium cigarettes and smokeless tobacco lines. Before the start of trading, Reynolds said that it $325 million, or $1.10 a share, on the period, down 14% from $376 million, or $1.27 a share, in the year-ago quarter. The latest numbers include a charge of about $20 million from debt refinancing.
Revenue came in at $2.35 billion, a gain of 2.5%, as market share for its "growth brands" -- Camel, Kool and Pall Mall - hit 12.99%, an increase of 0.63 share points.
The average estimate of analysts polled by Thomson Financial had been for the company to earn $1.21 a share on revenue of $2.3 billion for the quarter.
Reported earnings were "down due to unusually high, undiscounted, volume at wholesale and extraordinary tax gains in the prior-year periods," the company said in its earnings release while "adjusted EPS was down for the quarter, but up 1.8% for the first half."
Operating income for its Conwood smokeless tobacco unit jumped almost 14%, boosted by higher volume, pricing and margins, the company said. Its second quarter operating margin hit 52.1%, up more than a point from a year ago, while its Grizzly brand gained almost two share points to hit 20.64%.
Looking out to the rest of the year, Reynolds raised the lower end of its profit target range and is now looking to earn $4.45 to $4.60 a share vs. a current Wall Street view of $4.54.
Separately, the company said it is increasing it quarterly cash dividend by 13.3% to 85 cents a share.
"The increase we're announcing today keeps us in line with our policy of returning about 75 percent of our current-year net income to shareholders in the form of dividends," said Susan Ivey, Reynolds' chief executive officer. "Our total shareholder return since RAI began trading as a public company three years ago exceeds 100 percent, far outpacing the return of the overall S&P 500." End of Story
William Spain is a MarketWatch staff writer in Chicago.