Updated from 5:11 p.m. EDT

Philip Morris

(MO) - Get Report

cut its full-year 2002 earnings guidance Thursday, citing lower-than-expected volume and higher promotional spending.

The shares were pummeled in the late session, falling close to 12% to $37.70 on Instinet.

The tobacco giant, which now expects just 3% to 5% growth in earnings per share this year, said weak economic conditions, sharp increases in state excise taxes and heightened consumer frugality contributed to the lower forecasts.

Analysts sponsored by Thomson/ Financial First Call had expected the company to post full-year earnings of $4.82 a share. Last year, Philip Morris earned $4.04 a share.

As for the third quarter, the company said it expects earnings per share to be up 8.6% to $1.26 a share, a penny above analysts' estimates.

Philip Morris also said the growth of cheap imports, an influx of illegally sold cigarettes, and volume growth of certain manufacturers has led to a reduction in market share. Retail market share in the U.S. sat at a low of 40.9% in July but inched up to 49.2% in mid-September.

"We believe industry dynamics should improve in 2003," said chairman and CEO Louis Camilleri, adding that the firm expects earnings per share to grow 8% to 10% next year.

Camilleri noted the firm raised its dividend by 10.3% in August, and said share repurchases will total more than $6 billion for the full year 2002.