UPDATE:Lorillard 4Q Profit Up 7%; Volume, Market Share Improve

Lorillard Inc.'s (LO) fourth-quarter profit rose 7% as the cigarette-maker posted volume growth and market-share gains for its Newport menthol and non-menthol cigarettes, as well as discount brands.

Shares rose 2.5% to $76.89 in early trading as earnings and revenue came in ahead of analyst expectations.

The results from the third-largest U.S. cigarette maker follow improved earnings from larger rivals Altria Group Inc. (MO) and Reynolds American Inc. (RAI). While higher margins offset cigarette volume declines for those companies, Lorillard's domestic volume rose 4.6% in the quarter, boosted by higher shipments of Newport and discount-brand Maverick. Industry-wide volumes fell 4.7%.

Lorillard market share rose 1.2 points to 13.2% in the period.

Despite its strong results, Lorillard faces risks going forward. A task force under the U.S. Food and Drug Administration has been probing the health effects of menthol and will issue a non-binding recommendation to the agency in late March. Though analysts don't expect the task force to recommend an all-out ban, the uncertainty has kept Lorillard's shares under pressure for months. The company derives the vast majority of revenue from its Newport brand and controls more than one-third of the country's menthol market. Lorillard's shares are off 14% in the last three months, while Altria is down 8% and Reynolds American has lost 4.8%.

Lorillard late last year launched a non-menthol Newport, Newport Red, and said it's been performing well so far. That line contributed 0.5 points as Newport gained 0.8 points to hold 11.2% of the domestic cigarette market.

"We are encouraged with what we see so far" for Newport Red, Lorillard President, Chairman and Chief Executive Murray Kessler said in a conference call.

Lorillard reported a profit of $259 million, or $1.74 a share, up from $242 million, or $1.52 a share, a year earlier. The increase included an 11-cent benefit from its share repurchase program, and some incremental gains from a lower tax rate.

Net sales rose 7.8% to $1.49 billion and were up 9.4% excluding excise taxes.

Analysts polled by Thomson Reuters most recently expected earnings of $1.67 a share on $1 billion in sales, excluding excise taxes.

Gross margin, excluding excise taxes, increased to 36.2% from 34.9%.

Newport shipments edged up 2.2%, while its smaller discount lines Old Gold and Maverick gained 27.1% and 25.2%, respectively.

Kessler said Lorillard is "well into the process" of its strategic review, and will share details of its findings and plans in coming months. "Our core business has running room," Kessler said, with opportunities for organic growth and geographic expansion. He said the company "is not in need of a course correction" as its growth should continue to outpace that of the industry at large.

-By Melissa Korn and Matt Jarzemsky, Dow Jones Newswires; 212-416-2271; melissa.korn@dowjones.com

--Drew FitzGerald contributed to this story

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