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LOGIC Call Replay and Key Take-Aways

Yesterday we hosted a conference call on electronic cigarettes with Miguel Martin, President of LOGIC, a private e-cig manufacturer since 2010 with the #2 national brand in unit and dollar share for C-Stores in the United States, according to Nielsen.


Miguel joined LOGIC in July of last year and formerly worked for Altria for nearly 20 years.  The call is part of a series of talks we’ve held with industry experts (previous speakers included NJOY, Ballantyne Brands and Victory). On the call Miguel offered industry commentary that we found very valuable as we continue to assess the rapidly expanding e-cigarette category.


Click for the Replay Podcast

Click for LOGIC’s Presentation


Below we provide key callouts from Miguel’s prepared remarks and highlights from a very robust and insightful Q&A session. 



Key Callouts from Miguel’s Prepared Remarks

  • Regulatory Environment: regarding pending deeming regulation from the FDA on e-cigs, Miguel believes that other regulatory entities (including legislative) will have as much influence on the marketing and sale of e-cigs as the FDA.
  • He sees an active conversation at the local level (including from the cities of Chicago, LA, and NYC banning indoor usage; states discussing e-cigs and currently one state, Minnesota, taxing e-cigs like traditional cigarettes; and 40 Attorneys Generals and members of congress expressing interest in regulating e-cigs), yet he doesn’t view regulatory concerns as an impediment to the business.
  • Thoughtful and science based.
  • He’s in support of e-cigs being sold primarily at brick and mortar retail (not online), which has the ability to ensure age verification, unlike online.
  • Miguel believes that the FDA will over time work out issues on flavored e-cigs and advertising, and that flavors are poised to remain a low percentage of total sales (~ 10% to 12% of sales).
  • The FDA has submitted deeming regulations to OMB for review.  While it’s unclear to him when deeming regulations may be released, he expects there to be a 12 to 15 month window to discuss and challenge issues presented.   
  • Big Tobacco will dominate the e-cig category (with the balance sheets to support sales, marketing, and distribution), yet energy drinks offer a good example in the CPG world in which independent companies have been viable and even done well at the expense of the majors (ex. 5-Hour, Monster, and Red Bull).
  • Trade incentives for retailers selling e-cigs over traditional cigarettes is very compelling. Today, on average, if a retailer sells a pack of premium cigarettes they receive 13-15% of gross margin, for e-cigs, the figure can be as much as 3x that amount.
  • On retailer appeal, Miguel also adds that many retailers LOGIC works with are aggressively working to provide stand-alone sections of e-cigs (which in many cases feature the top 3-4 brands). This allows the retailer the ability to hedge the declining traditional cigarette market and bring in consumers at a higher margin.
  • Today there are over 320 e-cig manufacturers in the U.S. – he sees only a handful of manufacturers remaining successful no matter what happens with the majors and regulation.
  • He believes the strength of the battery (and most e-cigs today use a lithium-ion battery—similar to a cell phone battery—and sourced from China) is a key consideration in the e-cig’s performance and therefore the consumer’s experience, among other such factors as the e-liquid quality. He believes that larger batteries offer more power to deliver a consistent experience, and current battery technology for a smaller sized e-cig [smaller than LOGIC’s offering] show signs of under-delivering on consistent performance.  Therefore, he suggests that beyond larger e-cig units, tank and open models (typically with larger bodies than a typical and e-cig and larger batteries) are delivering superior quality to the user.
  • Believes rechargeable model (razor, razorblade) is the future of the industry (accounts for 50% of LOGIC’s business today and is expected to reach 70-80%). Consumer preference for rechargeable represents maturity of the industry, but also demonstrates a more significant value play (higher margin vs disposables).
  • On Price Point and Price Sensitivity, he notes that the two largest brands in the U.S. (blu and LOGIC) are premium products in the category, both at ~ $10/unit. He notes that neither product mimics the look of a traditional cigarette, which he thinks is an advantage (opposite of NJOY’s position) because the user can demonstrate to oneself and others (bartender, police officer, etc.) that he/she is not smoking.  He’s also seeing this trend in the tank/open style – it’s also not mistaken for a cigarette.
  • On brands, he sees a huge drop off in distribution after the top 3 brands (blu, LOGIC, NJOY).  His color from the retailers suggests they’re looking to sell 3-4 brands of e-cigs. He suggests that as MarkTen and Vuse enter the market, there will be both increased competition for shelf space, but also more shelf space dedicated to e-cigs (closer to 6 brands) given e-cigs have higher margin for retailers over cigarettes (LOGIC offers gross margin of 40%).
  • He dispels the belief that e-cigs are only highly attractive in high State Excise Tax (SET) markets, like metropolitan areas, as a value play. Miguel suggests that states such as those in the Southeast with lower SET are also highly attractive markets to e-cig manufacturers given the disproportionately high amount of smokers that can move into the category. 
  • Miguel sees a lot of people trading up on price for superior products.
  • One comment that surprised us from Miguel is a comment that the product quality/experience of a disposable is similar to that of rechargeable for LOGIC, and to his knowledge across the industry. This view differs from commentary we’ve received that both battery power and freshness of the e-liquid (given the lesser seal compared to cartomizer) is inferior to a rechargeable. Going forward we’ll look to put this question before other speakers.



Q&A Highlights (slightly paraphrased for clarity and brevity)

How big is the flavored e-cig market (versus traditional and menthol) in the U.S.?  Miguel estimates that flavored products are 10-12% of sales and 6-8% of profitability. The #2 and #3 players (LOGIC and NJOY) both do not have flavored products, however #1 blu does (but only in rechargeables). In test markets, neither Reynolds (Vuse) nor Altria (MarkTen) has offered a flavored product, only a tobacco and menthol offering. He sees flavors in lower cost items/players, typically online sales, and says in many cases the flavor offerings are inflammatory: bubble gum, coffee, etc., which are red flags to the FDA. He believes that flavors will not have a long shelf life (FDA will look to ban). 


Are the actions taken by the cities of NYC, Chicago, and LA to treat e-cig as traditional cigs as it relates to banning use indoors unique to the fact that these are big cities, or indicative of a larger trend that could spread across the country?  Miguel believes it is typically easier to enact legislation at the city level, and it could be a strategy to then move to the states and then Federal government. There are states with e-cig bans (NJ, ND, UT, AR) but he points out that the FDA is taking a long thoughtful look at e-cigs, but there is still no specific research to make a determination (or support a credible claim) for or against an e-cig indoor ban. 


How do you see the sales mix across disposables versus rechargeables evolving for the industry over the next 1-5 years?   Miguel says that rechargeables account for about one-third of the overall industry and would expect in the next 18-24 months that the rechargeable business will continue to grow. He believes that the consumer will decide that they’re an e-cig user (exclusive or not) and the compelling economics of rechargeables will propel the category over disposables.  The retailers also benefit, customizer sales a higher profit for the same SKU space/footprint as a disposable.


With both Altria (Mark ten) and Reynolds (Vuse) rolling out e-cigs, does the increased competition help or hurt LOGIC?  What do you think of Vuse?  Difficult to understand what those brands will do on a national level (both RAI and MO are both in 2 state markets each in their e-cig roll-out). Seeing excessive amount of couponing and discounting, and investment in the retail stores in order to generate that trial. They obviously leverage their experience with their database of adult smokers, so it’s hard to say if they can do that nationally – put the same emphasis and resources towards e-cigs as they did in the test markets while managing their cigarette, cigar, etc. businesses. Also a question mark on the margin they can give to the retailers.


Can you comment on the rise in tank/open style vaping devises versus traditional e-cigs and how is the FDA likely to view tanks?  There is evidence that tanks are growing, however the majority of national retailers do not carry them. While that might change, the reality is that adult smokers cannot find open tanks. It’s a much more complicated conversation that a clerk has to have with a consumer about what it is. Sadly there have been incidences of children ingesting e-liquid, so clearly there is a huge set of safety measures that must be put in place to better secure these products.  As for the FDA, Miguel doesn’t see vaporizers (tanks, etc.) being banned outright, but will fall under similar requirements to traditional e-cigs.  In his mind it’s clearly easier to regulate a close system and expects the FDA to struggle with how to assess the great options of constituents that can go into an open tank.


Who’s winning on the back shelf at a retailer?  Is it based on the shelf space or product quality?  Both, today we’re seeing retailers (especially large national ones) looking for 1) a manufacturer that will be viable in the future, 2) those that provide the greatest GP dollars (a combination of the gross margin and price of the product) and 3) those who will be most flexible and easy to work with. Good product and strong shelf space (visable and good SKU distribution) go hand in hand. 


On blu, 2013 sales kind of soft and down in Q4 2013. Do you owe this to increased competition or overall sluggishness in the category?  Thinks blu has done a good job and has a great product. Thinks that when you have such a spike in distribution, you will come off of that and they were in competition with a major manufacturer offering a buy one/get one free.  Most recent Nielsen numbers suggest that share has come back for blu and LOGIC.  Miguel still believes there’s still a lot of trialing in the industry, but people are continuing to coalesce around products they deem high quality. 


What do you make of Imperial Tobacco suing 11 American e-cigarette makers (including yourselves) in federal court for a range of patent infringements?   No comment on current litigation. The story is not a new one. Imperial bought patents from previous owner (Ruyan) and have continued with lawsuits.  It is interesting who they sued and didn’t sue, and we’ll just have to see how it plays out [Hedgeye Note: companies include LO, NJOY, VPCO, VMR, Ballantyne Brands, CB Distributors, Spark Industries, LOGIC, FIN, Victory, and DR Distributors].


We’ve seen LO purchase blu and SKYCIG and Altria purchase Green Smoke. Do you think Big Tobacco will continue to buy to grow, or fund expansion internally?  Big Tobacco has the great benefit of a lot of cash to bolt on existing brands and innovate within. What makes things a bit more difficult, beyond LOGIC and NJOY, there really aren’t any private players with national brand recognized and distribution, so it becomes a bit of a finite exercise on who Big Tobacco could look at. However there’s no historical evidence that you can buy your way to be successful. If that was the case Coca-Cola and Pepsi would just own the energy drink business. Also he believes that if there’s any time to buy an e-cig company that’s doing well, it’s now, given the rapid rise in the business [and valuation] around these potential targets. 


Does LOGIC have any plans to expand internationally?  Yes, active with partnerships around the world. While LOGIC has almost a quarter of the e-cig business as defined by Nielsen, the company has tons of white space west of the Mississippi.  Company has 45% of the Northeast market (as determined by Nielsen), and is bullish on all the white space in the U.S., which it sees as its main opportunity.


Do you worry about supply chain disruptions and quality control? Do you see facilities moving to the U.S. over time, or staying predominantly in China?  Miguel doesn’t worry. Sees dedicated partnership in China. Believes misnomer that products made in China are of lesser quality than those that could be made in the U.S. The question of U.S. manufacturing is being led by Reynolds. If that is deemed as an advantage (from regulatory or efficiency standpoint), then LOGIC will also consider it.


Call or email with questions,


Matt Hedrick

Retail Callouts (3/28): NKE, FINL, WMT, AMZN, PVH, GIII

Takeaway: Confusing FINL guide. Notable chg from NKE in athlete strategy. WMT’s Tesla truck. AMZN closer to streaming. PVH/GIII license. WMT vs Visa.



FINL - 4Q14 Earnings


At face value the print looks good. Comps, margins, and EPS all came in ahead of expectations. But the company guided EPS for the year to a high-single-digit to low-double-digit growth rate, with the Street sitting at +14.8%. That's not the end of the world, but the confusing element is that it guided comps +mid-single, which is slightly above the 3.8% rate the Street is modeling. This is a company that has burned people in the past with investment spending, so one would think we'd start to see some decent flow through this time around -- especially given the solid results we're seeing out of Foot Locker.  Separately, the SIGMA move was not a pretty one. Yes, it moved into  Quadrant 3 (worst place to be), but the bigger takeaway is how often it is in a negative inventory and margin position. 


Retail Callouts (3/28): NKE, FINL, WMT, AMZN, PVH, GIII - chart3 3 28


NKE - Nike Showcases Johnny Manziel Pro Day Collection 



  • "Nike, which recently signed Johnny Manziel to an endorsement contract, is wasting no time cashing in. At Texas A&M's pro day on Thursday, Manziel elected to wear Nike full pads and helmet, a move that surprised scouts and the media since most players do not suit up with a helmet during these types of workouts. Nike tweeted out a link to buy all the items from the Manziel 'Pro Day Collection.'”


Retail Callouts (3/28): NKE, FINL, WMT, AMZN, PVH, GIII - chart1 3 28


Takeaway: Let's be clear about something, we still think that Manziel is a colossal blow-up risk.  But we give Nike a lot of credit on how they're handling this one. Their old MO was to endorse big athletes, stick them in ads and hope that it trickles down to mainstream product. But Nike has a full array of product associated with Manziel for Pro Day -- far from when he even will even see a snap in the NFL. This marks a fundamental change for how Nike is handling these endorsements. We still don't like the stock here. But like this development.


AMZN - Amazon Considers Streaming Media Service



  • "Amazon.com Inc. is considering an advertising-supported streaming television and music-video service, a departure from its strategy of linking video to its $99-a-year Prime subscription service, according to people close to the company."
  • "The proposed service, as Amazon has outlined it to potential partners, could launch in the coming months and could feature original and licensed content, these people said. As part of the service's development, Amazon has held talks with the creators of  'Betas,' a series about a Silicon Valley startup that Amazon co-produced last year, these people said."
  • "Amazon also plans to offer free music videos with advertising to people visiting its retail website, two of the people said. A search for Bruce Springsteen CDs, for example, might yield an option to watch the 'Born in the U.S.A.' video."
  • "An Amazon spokeswoman said, 'We're often experimenting with new things, but we have no plans to offer a free streaming media service.'"


Takeaway: The company denied these streaming rumors, but there's no disputing that the company is looking to create its own content. Let's put TV into perspective - over 65% of new shows get cancelled in their first season. NFLX defied the odds and struck gold with two hits. AMZN is 0 for 1 with Beta's and that trend probably continues.


WMT - This is what Walmart thinks tractor trailers of the future will look like



  • "This could be the truck of the future. At least, that may be the case for Walmart's massive fleet of 6,500 tractors that help supply its stores. It's called the Walmart Advanced Vehicle Experience (WAVE), and it's said to be 20 percent more aerodynamic than the company's current fleet. Walmart CEO Doug McMillion says it has a 'micro-turbine hybrid powertrain that can run on diesel, natural gas, biodiesel and probably other fuels still to be developed.' There's also a battery pack on board with limited electric range."
  • "As you might have guessed from the CEO's statement, the WAVE is merely a concept at this point. 'It may never make it to the road,' McMillion admits, though he adds that 'it will allow us to test new technologies and new approaches.'"


Retail Callouts (3/28): NKE, FINL, WMT, AMZN, PVH, GIII - chart2 3 28


Takeaway: The average 18-wheeler gets about 6 MPG. WMT truckers drive ~700mm miles per year. That’s about $500mm on diesel alone. If that average MPG number went to 18 that equates to about $320mm in cost savings. Pennies for WMT, but significant innovation for the industry if WMT can get the prototype off of the design room floor.


WMT - Wal-Mart Sues Visa Claiming Card Transaction Fee Fixing



  • "Wal-Mart Stores Inc. sued Visa for allegedly conspiring with banks to fix transaction fees, the latest salvo of a multiyear legal fight between retailers and card issuers."
  • "The world’s biggest retailer seeks at least $5 billion in damages for what it claims are violations of federal antitrust laws that could triple that sum."


Takeaway: WMT has a serious bone to pick with Visa. The company backed out of the $7.25bil class-action settlement agreed upon in December to pursue this new litigation.




Neiman-Marcus - Neiman eyes Hudson Yards for 1st NYC store



  • "Neiman Marcus is poised to enter New York...The...department store is nearing a deal to open a flagship store at Hudson Yards, the mega-development under construction on Manhattan’s West Side, The Post has learned."
  • "Neiman is negotiating with developer Related Cos. to anchor the Hudson Yards’ 1 million-square-foot retail complex, slated to open in 2018, with multilevel store that could span upwards of 200,000 square feet, according to sources briefed on the talks."


GIII, PVH - G-III Apparel Group Announces License for G.H. Bass Men's Sportswear



  • "G-III Apparel Group, Ltd. announced today that it has entered into a multi-year license agreement with PVH Corp. under which PVH will design, market, and distribute better men's sportswear for G-III's G.H. Bass & Co. brand, primarily for department store customers throughout North America. The collection will launch for Fall 2014."


WMT - 500.com Limited Enters into Strategic Cooperation Agreement with Yhd.com



  • "500.com Limited a leading online sports lottery service provider in China, today announced that it has signed a strategic cooperation agreement with Yhd.com, a leading B2C e-commerce platform for food, beverages and imported food products in China which is owned by Wal-Mart Group, to begin offering the Company's sports lottery products through Yhd.com's extensive e-commerce platform."

PODCAST: Implications of Rising Inflation



In this morning’s Q&A session with subscribers, Hedgeye CEO Keith McCullough discusses the investing and economic implications of #InflationAccelerating and continuing dollar debasement.


Subscribe to Hedgeye.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%

Another Day of #InflationAccelerating

Client Talking Points


There is no “Candy Crush” in the Denmark index (up +1.3% this morning to +14.6% year-to-date). European stocks are having an outstanding week relative to the USA social media bubble. Just look at the DAX which is up +1% and back above its TREND line of 9377. Italy continues to rip, too. It’s up +1.2% this morning at +13% YTD.


As the 50-day moving monkeys freak out about Gold (up +7.8% year-to-date versus the Dow down -1.8%), the CRB Index (19 commodities) closed up another +0.9% yesterday to +8.5% YTD. It’s all very #InflationAccelerating.


The 2.69% yield agrees with us that inflation slows US growth. While Gold may have some short-term mean reversion issues (after being up +15% year-to-date a few weeks ago) being long #GrowthSlowing in long-bond terms has been great this week. The 10-year TREND resistance of 2.81% is firmly intact. Incidentally, the SPX risk range is 1842 – 1878.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


Utilities $XLU +7.9% remains the best sector as inflation slows growth and forces yield chasing @KeithMcCullough


"Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man."  –  Ronald Reagan


Foreign buyers are snapping up homes in London , distorting prices and forcing policymakers to levy new taxes in an attempt to control the market. Nearly 70% of newly built properties in prime areas of central London were bought by foreign nationals between 2011 and 2013, according to realtor Knight Frank. (CNN)

False Positives

“Beware of false knowledge; it is more dangerous than ignorance.”

 -George Bernard Shaw


Every effective stock market operator knows that investment analysis is at best an imperfect science.  The mosaic theory is an apt description because with the absence of a silver bullet (knowing the results of a drug test before everyone else as an example), an investment analyst’s best tool is his or her ability to collect more data than his or her peers and to then use that data to reach a more informed conclusion.


Even then, in the absence of perfect information, many outcomes are flawed.   In fact, many analysts are guilty of making what is called a Type 1 error, or a false positive.   False positives lead analysts to conclude that a relationship exists when in fact it does not.  In medicine, this might occur when a test shows a patient has a disease, when they don’t.


False Positives - 55


As Europe contemplates another round of extreme monetary policy to offset perceived deflationary pressures, it does beg the question of whether there is a relationship between a monetary policy and a tightening economy.  Certainly, many supporters of former Fed Chairman Bernanke point to the fact that the economy recovered under him as evidence that his implementation of the most extreme monetary policy in the history of central banking was the reason for this recovery.


Conversely, though, the question remains whether the economy has recovered at all because of QE or even commensurately with the QE that has been implemented.  As former Dallas Fed President Bob McTeer recently wrote in Forbes:


“The hoarding of excess reserves limited the money creation or “printing” that took place despite the Fed’s massive purchases of securities and expansion of its balance sheet. That’s why the dire consequences predicted never came to pass. However, it is also the reason that the Fed’s purchases never stimulated the economy as much as hoped.”


In reality if you print dollars and don’t allow them to be spent, then you are really only debauching the currency by increasing the denominator.  Certainly this a policy that is good for the inflation trade, especially relating to those commodities priced in U.S. dollars


Back to the Global Macro Grind...


As Portugal’s bonds fall below the 4% yield for the first time in almost ever, one has to wonder if there isn’t a bit of a false positive emerging in the European peripheral sovereign debt markers.   Currently the 10-year yields of Portugal, Italy and Spain stand at 3.99%, 3.27%, and 3.20%, respectively.  Certainly these yields are still wide versus German bunds, but are these yields, on absolute basis, truly reflective of the underlying creditworthiness of those economies?


Take Spain as an example. This morning the Spanish central bank is projecting the Spanish economy will grow by 1.2%.   Given that this is below par economic growth, it is likely that Spanish unemployment stays above 25%.   This morning consumer prices were also reported to have fallen at an annual rate of -0.2%, which is the first decline in consumer prices in four years in Spain and indicative that consumers in Spain aren’t really spending (recent retail sales data show the same).


Clearly, on the margin, the economies in the periphery in Europe have improved, but if you are a buyer of Italian or Spanish 10-year bonds at 3.2%-ish, you need to put on the big boy analytical pants and decide if for that yield, the risk is commensurate.  At a 10% dividend yield, Linn Energy ($LINE) might be a good relative bet . . . actually I take that back, we’d continue to stay the heck away from LINE and much of the MLP complex !!!


My colleague Christian Drake, our U.S. focused economic analyst, wrote a note yesterday that he titled, “INFLECTIONS OR FALSE POSITIVES? CLAIMS, CONSUMPTION & CAPEX” where he addressed some of the myriad of U.S. economic data out recently:

  • #ItsNot2013:  Growth estimates globally continue to get marked down.  Slowing topline (GDP) and compressing margins (rising inflation) is not the stuff of market multiple expansion or macro P&L dynamics to remain lazy long of.
  • RISING INEQUALITY:  Corporate Profits - measured as the % of National Income or GDP -  made another new high in 4Q13.  The other side of that, of course, is a lower low in labor’s share of income.  Latent risks can remain latent, however.
  • CAPEX RESURGENCE?  General acknowledgement that assets are aging and businesses have under-invested isn’t a catalyst.
  • PAY-ME-NOW:  Productively continues to grow at a positive spread to unit costs and investors continue to reward the ‘pay-me-now’ corporate capital strategy. 
  • DURABLE DISAPPOINTMENT:  New Orders for Capital Goods non-Defense Ex-Air have been negative on a month-over-month basis for four of the last six months.
  • INITIAL JOBLESS CLAIMS:  A positive week of data…finally.  The next few weeks of data should be important

His conclusion, which is highlighted in the Chart of the Day below, is that although the U.S. economic data is part positive and part negative, GDP estimates continue to fall.  Ultimately the direction of GDP change is what matters.


But that all said, as you head into the weekend I would leave you with words of Mark Twain:


“All generalizations are false, including this one.”


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.64-2.75%

SPX 1 

VIX 13.85-15.81 

USD 79.35-80.39 

Gold 1 

Copper 2.91-3.06 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


False Positives - chartday


False Positives - Virtual Portfolio

Early Look

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