Here are some key takeaways from a research note that was originally sent to subscribers on April 25, 2014 by Hedgeye Consumer Staples analyst Matt Hedrick. Follow Consumer Staples on Twitter @HedgeyeStaples.
- Lorillard reported Q1 2014 results on 4/24 that were lukewarm, missing Street estimates on the top and bottom lines, however the stock closed up on the day.
- Our long-term bullish outlook remains unchanged and built on 1) The strength and profitability of its advantaged menthol portfolio; 2) Our belief in the limited menthol regulatory risk over the longer term; and 3) Upside growth in its blu e-cigarette business that commands leading share in the United States.
- LO had impressive price/mix of +5.8% to offset total cigarette volume decline of -2.9% (outperforming the total industry at -4.0%). Total LO retail market share in the quarter rose 30 basis points to 15.2%, its highest level ever and its first quarter above 15%, and Newport’s share grew 40bps to 13% while LO’s share of the menthol market was flat year-over-year at 40.7%, but improved 80bps sequentially.
- blu E-Cigs: Net sales for blu declined -10.5% y/y to $51 million, versus flattening growth across the entire category (slowing to +10% in the quarter). The loss was a contribution of lower prices of its rechargeable kits and a pipeline inventory build versus the previous year quarter. LO announced a $10-20MM spend over next 6 to 9 months to rebrand the U.K.’s SKYCIG as blu and continue to support incremental brand building for blu in the U.S. In the U.K. as in the U.S., the longer term strategy of the e-cig business is clearly not selling blu at break-even or a loss, however in the near term the company is willing to take the charge and investment now to win long term brand loyalty in a category with huge growth potential -- we support this strategy.