LO Bulls—Volumes Miss But Outperforming the Industry

We remain bullish on LO over the medium term despite disappointing Q4 cigarette volume results (-1% vs the consensus’ estimate of +1.8%) and sequential slowing sales trends of its e-cig Blu business.  We however continue to expect LO’s profitability to be driven behind its category leadership in menthol and strong Newport brand loyalty, with continued outperformance on volume results versus the industry alongside competitive pricing.

 

What we Like:


In Q4 cigarette sales (excluding excise) were up +3.6% or +1.4% (including excise) with pricing partially offsetting volume declines.  In the quarter, LO’s -1% volume performance compared to the industry’s decline of -6.2% and on the year was up +0.5% vs -4% for the industry, outperformance that we expect to continue in 2014 as the industry braces for volume declines in the -3% to -4% range.

 

In the quarter Newport increased its domestic retail market share of 0.8 share points to 12.7%, and grew its domestic retail share of the menthol market to 39.9%, an increase of 1.6 share points compared to the fourth quarter of 2012. Newport’s market share gains continue to be strengthened by Newport menthol in its core geographies. Full-year for Newport volume was up +0.6%

 

What We Didn’t Like:


Slowing e-cigs trends remain a concern (more below) however we expect Blu to maintain its category leadership and offset losses with the strength of Newport menthol. 

 

Our Levels:


From a quantitative standpoint LO broke its intermediate term TREND line of $48.68 today. We’d be long term TAIL buyers of the stock closer to its support line of $45.09, or around 4% to 5% lower than its current price. While we see slightly more challenging Q1 gross margin and operating profit comparisons in Q1, Q2 moderates and both Q1 and Q2 have much easier sales comps. We'll look to its presentation next week at CAGNY (2/18 at 5:30pm EST) to get a better sense of its FY outlook. 

 

LO Bulls—Volumes Miss But Outperforming the Industry - vvv. lo

 

 

Update on E-Cigs:


Blu’s Q4 operating income was a net loss of -9MM on sales results that disappointed at $54MM versus $63MM last quarter and market share that dipped to 48% from 49% in Q3. CEO Murray Kessler chalked up the results as somewhat expected given the inventory build associated with adding 30K new stores (now at a peak of 130k stores nationally) selling at a lower price to encourage trialing and adoption of its new rechargeable unit.

 

Below is E-cig Q&A commentary from Kessler:

  • Outlook 2013 vs 2014: LO had a leading 47% market share of total e-cig industry sales of $1 billion (including internet sales) in 2013. Kessler says he’s bullish that the increase of competition (MO and RAI rolling out offerings in test markets late last year) will “lift all boats” in 2014. He remains committed to sell Blu at a break-even (or loss) over the next few years to win share and band loyalty to support what he says is the greatest harm reduction offering ever presented to smokers. He sees the continued expansion of new rechargeable kits flowing against dollar revenues in Q1 as well, and that e-cigs had about 1% negative impact on cigarette volume in 2013, which could rise slightly in 2014.
  • On Purchase Behavior: He’s encouraged by incidence of repeat purchasing which he expects to grow as earlier e-cig versions were not as good as what’s on the market now and the strategy remains growing the higher margin rechargeable business (razor/razorblade model). Blu’s cartridges account for 30% of sales.
  • On slight slowdown of e-cig category and what is driving it: says slowdown is the nature of a new category and lots of distribution building. He also said that things like vape shops and internet sales are creating a lot of sales that are not being measured/counted.
  • On indoor bans: Kessler sees the bans (most recently in NYC and Chicago) as draconian, however not impacting results as the measures don’t take effect until the April/mid-year time frame. He is unclear how the FDA will act, but said you’re starting to get knee-jerk reactions from the state and municipal level as regulation from the FDA is taking longer than previously expected. 
  • On deeming regulation: Kessler is unclear on the timing of regulation and says if you tax it like traditional tobacco, prevent marketing, and ban indoor use people will go back to traditional tobacco, which is completely backwards thinking in terms of public health.
  • On SKYCIG and international expansion: optimizing portfolio and rolling out in the UK before expanding to other European markets. Will be transitioning SKYCIG brand to Blu and wants to make Blu a global brand. Having purchased SKYCIG it is optimistic it can accelerate its international roll-out by mid-year, versus a much longer runway of 1-2 years had it decide to go at distribution alone without the SKYCIG acquisition.  

Matt Hedrick


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more