Lorillard Inc. Earnings: Higher Prices, Lower Volumes, Sinking E-Cig Share

No reason for investors to feel blue as Lorillard's electronic cigarette continues to hold valuable real estate in the industry, but it has been significantly reduced. Photo: Flickr via Lindsay Fox.

Third-largest U.S. tobacco company Lorillard (LO.DL) on Thursday reported third-quarter earnings that cleared the smoke on three things: revenue inched up despite continuing declines in cigarette volumes because the company pushed through price hikes, while the national rollout of competing electronic cigarette brands stole large swaths of its market share. 

Lorillard, which is preparing for its merger with Reynolds American (RAI), a deal that is scheduled to be completed in the first half of 2015 barring any antitrust hurdles that can't be overcome, said wholesale cigarette unit volume dropped 2.1% in the quarter compared to an estimated 2.3% drop for the industry as a whole.

Part of the falloff resulted from a $1 per pack excise tax that Puerto Rico imposed on cigarettes as it tried to shore up its ailing finances. When the island is excluded, the company's volume decline was 1.9%.

The overall picture shows the cigarette maker continuing to outperform its peers, though losing less in the quarter than its rivals is cold comfort for the company. While Lorillard has posted quarterly gains at various times, the tobacco industry is seeing its pie shrinking and has been in a secular decline for years.

Data: Lorillard quarterly SEC filings.

Such divergence is often evident in its menthol brand Newport, which typically shows volume gains, but in the third quarter fell 1.4% from 2013. Still, it remains the category's dominant brand, with a 12.8% share of the domestic retail market (up from 12.6% a year ago), but its share of the menthol market slipped to 40.2% from 40.4% a year ago.

Such share losses were also on display in the e-cig market, where Lorillard's leading blu eCig brand slid from owning almost half the industry a year ago to under 30% in the third quarter as Reynolds and Altria (MO 0.12%) debuted their own e-cig brands nationally.

That 20 percentage point loss of share, while significant, is still probably better than what might have been expected considering its rivals' heightened promotional efforts to introduce their e-cigs to consumers. As Lorillard noted, Reynolds and Altria engaged in substantial discounting of their products to attract customers, yet nearly three out of 10 customers still bought a blu.

Data: Lorillard quarterly SEC filings.

Still, the brand only generated $1 million in net sales in the third quarter, and e-cigs generally realized only $38 million total, down 40% from last year. That's also only $1 million more than the segment generated in the second quarter, but blu's take plummeted 75% from the $4 million it made then.

Of course, as part of the Reynolds merger, Lorillard will sell blu eCig to Imperial Tobacco (IMBB.Y -0.22%), along with several other brands. The 30% market share in the quarter could be a source of relief for its investors, who might have fretted that competitors' products would undermine the e-cig brand's standing, but they may have other concerns anyway, such as the rise of vaping systems, which have gained popularity at the expense of e-cigs.

Lorillard has introduced a vape pen of its own, blu Plus, which it says gives a smoker the best of both e-cigs and vapor systems while providing more battery life and vapor delivery. But as with competing vapor systems, it comes at a lower price point, which means Lorillard (or Imperial, really) won't reap as much profit as it did when blu was the leading e-cig on the block.

You won't see Lorillard's stock react much to earnings announcements one way or the other because of the merger offer on the table. The quarterly reports now essentially signals how Reynolds American might perform once the deal goes through.