No E-Cigs For You! NYC Electronic Cigarette Ban Puts Vapors Out On the Streets

Yesterday, New York City’s city council voted overwhelmingly (43 to 8) to prohibit the use of e-cigs in indoor public areas where regular cigarettes are already banned. The Big Apple now joins New Jersey, North Dakota, Utah, and Arkansas which have already enacted similar bans in bars and restaurants. In recent weeks, we’ve also witnessed initial considerations on e-cig policy percolating in Chicago and Los Angeles.


NYC’s ban is set to take effect in four months, and follows the city’s recent decision to raise the age to buy traditional tobacco and e-cigs to 21 from 18, and raise the minimum price per pack of traditional cigs to $10.50 (set to take effect in APR/MAY 2014).


We view the vote as a marginal headwind to the industry.


In particular, the council’s focus was on fears that e-cigs could be a “gateway” to traditional cigarettes, outweighing “harm reduction” arguments. While we think that consumers intuitively understand that e-cigs offer a healthier alternative to traditional cigarettes (it’s the tar that kills you; the nicotine is simply an addictive agent), we think the industry stands to benefit as more science reveals the health benefits of an e-cig over a traditional cig.


Despite this obvious hit to the convenience of indoor smoking, we still see health considerations and a lower price point advantage driving the category as Big Tobacco’s focus on the category drives awareness, innovation and growth.


Just today, Philip Morris (PM) and Altria (MO) announced e-cig synergies across the two companies, effectively licensing and supplying (perhaps also manufacturing) each other’s brands across the globe. Note that both MO and PM have aspirations for nationwide e-cig distributions by mid-2014, MO under the brand MarkTen and PM with its yet to be disclosed brand.   


As we approach year-end, there remains an industry wide expectation that the FDA is set to imminently announce regulatory restrictions on electronic cigarettes. The exact timing? It’s still anyone’s guess. We believe the industry is bracing for regulation that could include:  


1) A ban of online commerce

2) Age verification standards at retail

3) Flavor limitations (beyond tobacco and menthol)

4) Health/safety certifications

5) Labeling and marketing requirements


We think regulation of e-cigs is positive for the industry so long as it does not, in particular, stifle innovation or price/tax as traditional cigarettes.


For a more comprehensive overview of the industry and regulation please see our recent report: “E-Cigs at the Thanksgiving Table”.


Bottom line: Despite increasing regulatory headwinds, we remain quite bullish on e-cigs.


Matthew Hedrick


NKE: Removing Nike From Investing Ideas

Takeaway: We are removing Nike from Investing Ideas.

Editor's note: Shares of Nike have risen almost 23% since Hedgeye Retail Sector Head Brian McGough added it to Investing Ideas on 7/26/13. The S&P 500 is up approximately 7.5% in that time. Please see below McGough's explanation why he is removing NKE from Investing Ideas.


NKE: Removing Nike From Investing Ideas - nike1


We liked this Nike quarter about as much as we like week-old sushi. 


Sure, the quarter definitely had some redeeming qualities, like a solid 13% futures growth rate, a beat on the gross margin line, and really encouraging signs out of Western Europe. But the reality is that the company put up a less than impressive 8% top line growth rate, and managed to translate that into a whopping 4% EPS growth rate.


It missed our estimate, and we were hardly aggressive in our assumptions.


Maybe we're being a  little hard on Nike, as it has earned its spot as the dominant brand in this space, but the reality is that the company has put together such a fantastic string of results for so long (and has the multiple to match), and putting up a mere 4% growth rate is so….Adidas. 


If Nike wants to maintain its standing as one of the preeminent global companies and brands, its going to have to push the envelope a bit more going forward. We wouldn't be buying it here, and might go the other way if it bounces.

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Hungry? Check Your Mailbox

With Consumer Staples companies focused squarely on innovation to drive growth, we want to pass along promising (dare I say disruptive) snacking innovation: mail-order snacks. published a great article today outlining, the Netflix of snacking (its founders are former employees at Netflix U.K.), that will be entering U.S. mailboxes this January after five-years of sales in the U.K. The company has $70M of sales this year and has gotten the attention of Big Food: in fact, General Mills (GIS) launched its own mail-order version in November, named Nibblr.   


Similar to the innovation (and investor excitement) we’ve seen around electronic cigarettes for Big Tobacco this year, we see huge runway for mail-order snacking. Both Graze and Nibblr market along Health and Wellness trends, offering an assortment of nuts and lower calorie snacks that the customer can choose from (4 per box at $6), which we think stands to meet both the impulse buyer and those looking to regulate daily calorie intake across a variety of sweet, salty and savory options with an easy-to-use interface.  


We would expect to see Big Food jump into the game, including Kellogg (K), Mondelez (MDLZ), and Annie’s (BNNY).


Happy Grazing!


Matthew Hedrick


Putin’s Silver Spoon

Takeaway: Russian President Vladimir Putin pulls the Ukraine back under his wing.

This note was originally published December 18, 2013 at 13:55 in Macro

Yesterday Russian President Vladimir Putin announced an agreement to loan the Ukraine $15 Billion and reduce the cost of natural gas exports by one-third. Will this quell the weeks of protests against Ukrainian President Viktor Yanukovych’s government?


While publically there was no talk of the Ukraine joining Putin’s custom union (for trade) – which already includes Kazakhstan and Belarus and is a contentious issue for the “Western” protesters – make no mistake that with this agreement Russia has reconfirmed its dominance over the Ukraine, and with it won a key geopolitical victory. For the Ukraine, it spells years, if not decades, before real reform (political and economic) may be realized.


Putin’s Silver Spoon - poot


Our Position: Despite heavy foot power (protests) against President Yanukovych over the last four weeks, we do not expect dissent to topple government leadership that is orientated to the East (Russia). This view is built on several factors, including the unwillingness of the EU to fully commit to bringing the Ukraine into the EU, or conversely meet the sway of Putin to fold the Ukraine under its geographic empire.


What Russia can provide in funds (both directly and through gas subsidies) we don’t foresee the EU attempting to match, and this balance of payments should reinforce existing strong levels of political corruption (beyond just the President), supported by a sizable proportion of the populous that identifies with the East. Further, unlike during the Orange Revolution, there is no clear organized opposition (merely disparate dissenters), all of which suggests to us that while protests may continue, there’s low probability that Yanukovych’s rule is toppled (especially following the deal with Russia) and a high probability that the Ukraine maintains its alliance with the Kremlin for the foreseeable future.


Below we note historical background, critical developments, and analysis aided by sources in the region to contextualize the protests:

  • Protests Beyond Just A Trade Agreement. While Yanukovych’s decision last month (21 NOV) to reject a trade deal with the EU (that had been in the works for a number of years) sparked the largest protest since the Orange Revolution in 2004, the dissent is rooted in opposition to years of crony capitalism, centered around a small group of oligarchs and government heads profiting from the state at the hands of the population.
  • The Orange Revolution Failed. The 2004 Orange Revolution ushered in great hope for the ideals of the West: democracy and reform in the spirit of the EU institution, but the Revolution failed.  Yulia Tymoshenko, with her camera-friendly crown of blond locks, and Viktor Yushchenko, with his discolored and uneven face after being poisoned by the opposition in 2004, were strong faces and voices of the Orange Revolution. The protests led to the defeat of Yanukovych in a forced second run-off election that ushered in Yushchenko as President and Tymoshenko as his Prime Minister in early 2005. While their leadership brought great “hope” that the country could have its Berlin Wall or Solidarity moment, their stars faded quickly (along with hope of real reform) under the weight of a corrupt state.  
  • Tables Turned. By 2010, Yanukovych won back the Presidency. By this time, Tymoshenko was surrounded by controversy and suspicion over gas contracts that she arranged with Russia in 2009: allegedly she agreed to inflated gas prices (which hurt the nation and led to shutdowns) in return for political favors and personal profit. Even Yushchenko testified against her in 2011 and Yanukovych sentenced her to a 7 year term in 2011 – a position the EU decries as “unjust” without substantiating with refuting evidence. Yanukovych’s rule since his reelection has been marked by the further consolidation of power and wealth, going so far as to take out certain leading businessmen (and oligarchs), redistributing assets and leadership positions to an inner circle of family members and a close cadre of “extended” family.
  • Economic Plight. The economy has unraveled under Yanukovych. GDP has gone from its last high of +5% at the end of 2011 to -1.3% as of Q3 2013. Pressing is an underfunded government (deficit around -8.5% of GDP) with plunging foreign reserves.  The country is estimated to have $17 Billion of debt payments due in the next two years, hence the importance of a bridge loan from Russia/EU. The government’s mismanagement of the economy has also included a lack of infrastructure spending and investment, equating to the erosion of living standards, while chasing away foreign investment on fears of sovereign default.   
  • No Opposition Leadership over Divided Kiev. Recent demonstrations illustrate that unlike the Orange Revolution, there’s no united leadership in the opposition parties. The contenders are made up of: Arseny Yatseniuk (leads the party formerly headed by Tymoshenko), Vitaly Klitschko (a boxing champion that heads the Udar “punch” party), and Oleh Tyagnibok (a right-wing nationalist).  All of them claim to have not seen the protests coming.
  • Ukraine and Kiev Remain Divided. A country with a population of 46 million, the western half of the country aligns itself politically with the West (Europe) and has the highest concentration of native Ukrainian speakers, whereas the eastern half aligns itself with the East (Russia) and primarily speaks Russian as a first language.  Kiev, the capital and largest city, is located centrally to the north, and is itself a very divided city both politically and linguistically. The recent demonstrations suggest that protesters have numbered anywhere between 100K to 600K, but the city remains divided. Reports suggest the protests have a grass roots organization “feel” that lack strong polarizing leadership and have been mostly met by non violence from the government/police, with no recorded deaths.  While the protests have been taking place, as recently as December 3rd, Yanukovych’s government survived a no-confidence vote.
  • Russian Interests. Russia is looking out for its national security interests first and foremost and using its stranglehold on natural gas as a bargaining chip. If Ukraine is under the influence of the EU, Russia is vulnerable to the south. Ukraine also represents an important natural gas transit country for flows to Europe, and a Ukraine under Russian influence helps to solidify Putin’s desires for a trading union. Given that Putin has done nothing to diversify his own economy in the last 12 years, he’s left with few options to exert his political clout beyond straight arming former Soviet satellite countries into his sphere of influence.
  • EU Interests. For the EU, the Ukraine is of less importance from a security perspective, unless it is looking to invade Russia (unlikely). Like Turkey, the Ukraine is geographically at the fringe of Europe. Given the experiences of the Eurozone ‘crisis’ and tail of slow growth alongside political indecision (there are now 28 separate parliaments and 18 Eurozone countries), we do not envisage the EU yearning to add a historically highly corrupt government to its roster.  
  • Russia Terms. To plug the country’s balance of payments deficit (for an estimated 18-24 months) Ukraine will issue $15 billion of Eurobonds which Russia will purchase from its National Wellbeing Fund containing $88.1 billion – the first tranche of $3 billion is expected as soon as year-end. In addition, the discount given to the Ukraine on natural gas, from current prices of around $400 per thousand cubic meters (tcm) to $268.50 tcm, is worth another $3 billion in subsidy. While Yanukovych did not sign off on entering Putin’s custom union (which Kazakhstan and Belarus have joined and which reeks of attempts to get the old Soviet gang back together), expect that this deal didn’t come without terms. Besides the national security piece that Russia receives, our guess is Putin will run the Ukraine’s PR campaign – he will decide if and when the Ukraine should enter his custom’s union.

Conclusion - Tipping East. The Ukraine remains a state uncomfortable with addressing its own sovereignty, preferring to be aligned. In our analysis, the Kremlin remains Yanukovych’s preferable partner over the EU given 1) Putin’s ability to quickly write a check (to cover the government’s liabilities), 2) his reelection aspirations for 2015 and ability to “win” cheaper, uninterrupted heat for the nation, 3) the cultural affinity to the East, including a significant percentage of the population that identifies with Russian rule and to some extent nostalgically yearns for a return to the Soviet days, 4) the likely harsher terms the EU and international organization could offer in exchange for loan packages, and 5) the lukewarm reception of the EU to fold the Ukraine into the EU.


If we look to the market for its risk assessment, as expected following yesterday’s deal Ukrainian CDS and sovereign credit yields dropped in a hurry. What’s interesting, however, comes from the second chart below that shows Ukraine’s 5YR Sovereign CDS pulled back on a historical basis (to its maximum based on Bloomberg data). Here it’s clear that while risk was being priced up into the event (1st chart), the absolute level is a moon shot from all-time highs in March 2009, a period when Western European nations had to negotiate with Russia over gas shut-down to their countries that was being pumped through the Ukraine. What this signals to us is that the EU community will only get its hands dirty in the interests of Ukraine when it stands to clearly and personally receive benefit. The “failures” of these protests for change and the muted response from the EU suggest to us that the Ukraine is far from what could be tipping point levels. Russia will remain its puppet master.


Putin’s Silver Spoon - hed1


Putin’s Silver Spoon - 2. ukraine


Matthew Hedrick



We’re not quite there for FY2014 but we’re getting close.



We have increased our 2014 FY EPS from $1.65 to a likely Street high $1.90 on the back of significant cost cutting.  Not surprisingly, our net yield (constant-currency) projection declines from +1.4% to +0.3%, due to continued Caribbean uncertainty and adverse FX impact.


Lower yield guidance was expected but the cost outlook was indeed a pleasant and major surprise.  The management reorganization paid dividends much sooner than expected.  Already, new management is driving cost synergies and efficiencies in the fuel, operations, and procurement areas under new CEO Arnold Donald. 


With 2014 net cruise costs ex fuel now expected to be only ‘slightly higher’ vs +3-4% earlier and 2014 fuel metric per ton guidance of $650 (fuel efficiency: +4%), we believe EPS was boosted by 15-20 cents in each category. 


While the cost side of the business is heading in the right direction, yield expectations came in slightly below already lowered Street numbers.  We mentioned in our preview ‘THOUGHTS AHEAD OF CCL F4Q’ that mgmt may give conservative flat net yield (constant-currency) guidance.  The demand environment (pricing and bookings) in the Caribbean has been weak while Europe is mixed ahead of Wave.  But that does not matter much right now as Wave will dictate how 2014 will shape out.


Here are other takeaways from the earnings release/call:


1)  Onboard and other yield outperformed in F4Q - Will onboard begin to drive yields in 2014 with ticket yields under pressure?  Onboard guidance for FY 2014 (‘little higher than +1%’) was roughly in-line with us.


CCL: $2 ON THE HORIZON? - ccc1


2)  Lower fuel price per ALBD - The divergence in brent oil vs bunker in recent times and a favorable hedging strategy may have played a role.


CCL: $2 ON THE HORIZON? - ccc2


3)  Europe is mixed

  • Costa strength offsetting other brands
  • Northern Europe behind booking curve, trying to catch up

4)  Watch out for FQ2/FQ3 capacity growth in the Caribbean (CCL, RCL, NCLH, MSC)

  • 1Q: 3%
  • 2Q: 19%
  • 3Q: 22%
  • 4Q: 13%


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