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Why Did Altria’s Margins Expand in 1Q17?

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Aug. 18 2020, Updated 10:39 a.m. ET

1Q17 performance

During the quarter, Altria Group (MO) posted a gross margin and operating margin of 60.6% and 49%, respectively. In 1Q16, the company posted a gross margin and operating margin of 58.9% and 43.6%, respectively.

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Factors that expanded Altria’s margins in 1Q17

Due to higher pricing and lower resolution expenses, the cost of sales for 1Q17 fell from 41.1% in 1Q16 to 39.6% of the total net revenue. The fall caused Altria’s gross margins to expand.

During the quarter, the marketing, administration, and research expense fell from 11.1% of the total revenues to 10.4%. Asset impairment and exit costs fell from 2.5% to 0.1%. Productivity initiatives undertaken in January 2016 led to greater asset impairment expenses in 1Q16. All of these factors caused Altria’s operating margins to expand. However, some of the margin expansions were offset by the recall of smokeless products due to product tampering.

Peer comparisons

In 1Q17, Philip Morris International (PM) and Reynolds American (RAI) posted operating margins of 39.5% and 45.6%, respectively. In 1Q16, the companies posted operating margins of 40.7% and 45.2%, respectively.

Outlook

For the next four quarters, analysts expect Altria to post gross margins and EBIT margins of 61.4% and 50%, respectively. The company posted gross margins and EBIT margins of 60.4% and 46.8%, respectively, in the same quarters the previous year. Altria’s productivity initiatives are expected to save $300 million by the end of 2017.

In the next part, we’ll look at Altria’s 1Q17 earnings.

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