Lorillard Inc. (LO) delivered better-than-expected fourth-quarter and fiscal year 2011 adjusted earnings of $2.20 and $7.88 per share, beating the Zacks Consensus Estimate of $1.96 and $7.65 per share, respectively. The results also exceeded the prior-year quarterly earnings by 26.4% and prior-year earnings by 16.2%.

The adjusted earnings exclude the favorable impact on tobacco settlement expense of $25 million. However, the adjusted results include the benefit of the company’s share repurchase program which resulted in lower outstanding shares and thus contributed 22 cents and 63 cents per share to the increase in the earnings of fourth quarter and fiscal year 2011, respectively.

Including the benefit of the share repurchase program and the impact of tobacco settlement costs, Lorillard’s earnings increased 33.3% to $2.32 per share in the fourth quarter of 2011, while it increased 17.8% to $7.99 per share in the fiscal year 2011.

Quarter in Detail

Net sales for the reported quarter increased 8.9% year over year to $1.618 billion, exceeding the Zacks Consensus Estimate of $1.090 billion. Net sales in fiscal 2011 hiked 9.0% to $6.466 billion, exceeding the Zacks Consensus Estimate of $4.421 billion.

Increased net sales figures in 2011 were attributable to higher unit sales volume and higher average prices, partially offset by higher sales promotion costs, which were primarily driven by the introduction of Newport Non-Menthol.

Total wholesale shipment volume of Lorillard increased 5.6% to 10.0 billion units in the fourth quarter, including Puerto Rico and U.S. Possessions, while total domestic wholesale shipments, excluding Puerto Rico and U.S. Possessions also rose 5.5%. In fiscal 2011, total wholesale shipment volume of Lorillard, including Puerto Rico and U.S. Possessions, also increased 6.9% to 40.7 billion units; while total domestic wholesale shipments, excluding Puerto Rico and U.S. Possessions increased 6.9%.

Domestic wholesale shipments for Lorillard’s Newport increased 4.3% year over year in the fourth-quarter, while it increased 6.1% in fiscal year 2011. The company’s domestic wholesale shipments for Maverick also increased 15.8% in the fourth quarter of 2011, while it increased 16.0% in fiscal 2011.

However, total cigarette industry’s domestic wholesale shipments plummeted approximately 2.7% in the fourth-quarter of 2011, while it declined about 3.5% in the year 2011.

Lorillard’s domestic retail market share climbed 0.8 share points in the reported quarter to a market share of 14.0%, while Newport’s domestic retail market share escalated 0.6 share points to 11.7% in the fourth-quarter of 2011. In fiscal 2011, the domestic retail market share also soared 1.2 share points to 14.1%.

Gross profit increased 14.0% to $613 million in the fourth quarter, while gross margin jumped 170 basis points (bps) to 37.9% compared with 36.2% in the fourth-quarter of 2010, reflecting the increase in net sales and average net sales prices, partially offset by higher adjusted costs related to the State Settlement Agreements and higher Food and Drug Administration user fees. In fiscal 2011, gross profits increased 9.2% to $2.318 billion, while margins remained flat at 35.8%.

Selling, general and administrative costs increased 2.9% to $108 million in the fourth-quarter of 2011, while it increased 13.3% in 2011 to $451 million compared to 2010.

Capital Structure

Lorillard ended the year with cash and cash equivalents of $1.634 billion and long-term debt of $2.595 billion at the end of December 31, 2011.

During the fourth-quarter of 2011, Lorillard’s Board approved a 19% increase in its quarterly dividend on its stock from $1.30 per share to $1.55 per share. The dividend will be payable on March 9, 2012 to stockholders of record as of March 1, 2012.

In addition, Lorillard repurchased 3.3 million shares in the quarter at a cost of $366 million, under the $750 million share repurchase program announced on August 12, 2011.

Lorillard, which competes with Philip Morris Inc. (PM), currently has a Zacks #3 Rank that implies a short-term Hold rating on the stock. Over the long term, we provide a Neutral outlook.

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