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LO – blu E-cig Sales -35% Drag Results

LO’s Q2 results missed on the top and bottom lines (Revenue $1.30B vs consensus $1.34B and adjusted EPS $0.84 vs consensus $0.88).  Its e-cig business blu was the material drag on the quarter, with sales of $37M down -35.1% Y/Y and an operating loss of $23M (reported) or $17M (adjusted), showing underperformance accelerating over the last 3 straight quarters. 

LO – blu E-cig Sales -35% Drag Results - z. lo


What We Liked. LO showed why it’s an industry leader in the tobacco industry with continued strong performance from the Newport brand and menthol. In the quarter the company was able to take 6.0% in cigarette pricing (a large number, yet similar to its peers of RAI and MO in the quarter), and outperformed the industry on a volume basis, declining -3.4% (versus an estimated -5.5% for the industry).   On the positive side, total LO retail market share in the quarter increased 0.2 share points to 15%; Newport retail share rose 0.3 pp to 12.8%; and Newport’s share of the U.S. menthol market rose 0.2 pp to 37.1%.


What We Didn’t Like. Despite noticeable slowing trends in the traditional (“cig-alike”) e-cigarette category in measured channels over recent months, blu’s underperformance in the quarter is notably weak!  Yes the company spent $8M in the quarter to launch blu (UK), rebranding SKYCIG that it bought in October 2013, but given the increased competition from national e-cigarette launches from MO (MarkTen) and RAI (VUSE) in recent months, 2H is looking increasingly challenged for blu domestically, especially given what will be an highly promotional environment to encourage adoption.  


In the quarter blu lost 1.1 in share points, maintaining a domestic leading dollar market share in e-cigs of 40.9% (for the 13 weeks ending July 5, 2014 according Nielsen data), but we think that LO/RAI might just be pleased with its plan to sell blu to Imperial (for more on the RAI deal and divestiture to Imperial see Removing Long LO from Best Ideas List).


To say the least, blu has underperformed our expectations for a rebound in 1H 2014 after a weak Q4 2013. As we’ve written about, we attribute the weakness to strength in larger vaporizers (tank/pens/mods/open systems/etc) that are primarily being sold in non-measured channels like vape shops and online. Their appeal is driven on a superior vapor quality, battery life, and lower price versus cig-alike products, the format sold by Big Tobacco, including blu. We expect these consumer trends, along with increased competition within the category given the launches of VUSE and MarkTen to continue to pressure blu’s results.


We removed LO from the Hedgeye Best Ideas list on the long side on 7/15/14 following the announcement of RAI to acquire the company.

Of note is that LO opted not to hold a conference call on the quarter, likely related to the announcement of RAI’s intention to acquire the company.  


Howard Penney

Managing Director


Matt Hedrick



Fred Masotta


Retail Callouts (7/30): WMT, TGT, LULU, WWW, MW, UA, AMZN

Takeaway: WMT signs tech deal #14. Latest web traffic data crushing TGT. We take the other side of Barron’s being down on LULU LBO. WWW debt upgraded.



Wednesday (7/30)

KER - Earnings Call: 12:00pm

WFM - Earnings Call: 5:00pm


Thursday (7/31)

GIL - Earnings Call: 8:30am

SHOO - Earnings Call: 8:30am





WMT - Wal-Mart on the Prowl to Boost Web Expertise



  • "The retailer, which has become one of the most voracious dealmakers in tech, said Tuesday that it would buy social marketplace Luvocracy through its @WalmartLabs research and development arm.
  • "The deal marks the unit’s 14th acquisition and another signal that the world’s largest retailer plans to use all the tools at its disposal to boost its market share. Already about 245 million customers visit Wal-Mart’s 10,900 stores and its 10 Web sites each week."


Takeaway: Who would've thought that WalMart would end up as 'one of the most voracious dealmakers in tech? Don't be fooled, most of what WMT does in tech is to get better information and data to support growth in its physical stores. Nonetheless, WMT is winning the online battle against its top competitor, Target. The chart below shows the spread in internet traffic between the two -- specifically TGT traffic rank less WMT. In other words, over the past six months, there has been a dramatic shift in online share from Target to WalMart. That's what happens when your customer loses confidence in your ability to protect data.


Retail Callouts (7/30): WMT, TGT, LULU, WWW, MW, UA, AMZN - chart1 7 30


LULU - Barron's Nixes Potential for Lululemon LBO



Takeaway:  When we added LULU to our Best Ideas List as a Long in June, we noted that the activist path being taken by Wilson would likely fail in its initial goal to regain control of the company, but that an LBO was highly unlikely. But in our note from earlier this month (link below) we pulled a 180 on the LBO component. The IRR makes sense right here, right now, as long as Wilson contributes his shares to the partnership and becomes a de facto creditor to the financial buyer. That would take leverage levels down to a level that's extremely manageable.



WWW - Moody's upgrades Wolverine World Wide's CFR to Ba2, upgrades senior unsecured notes to Ba3



  • "Approximately $375 million of rated debt affected"
  • "'The upgrade reflects Wolverine's continued meaningful reduction in debt with net debt falling below $900 million at the end of the second quarter of 2014, its lowest level since the October 2012 acquisition of the Performance+Lifestyle Group (PLG)' said Moody's Vice President Scott Tuhy. He added 'Wolverine has now substantially integrated the PLG acquisition and we expect the Company will maintain stable to moderately growing earnings across its large portfolio of brands as a whole for the near to intermediate term.'"


Takeaway: Not a major deal, given this is only about a third of WWW's debt. But given that WWW is perhaps the most hated stock in retail (seriously -- it's sentiment scores are worse than JCP, and on par with SHLD and RSH), any positive change in debt rating is notable.

Retail Callouts (7/30): WMT, TGT, LULU, WWW, MW, UA, AMZN - Chart2 7 30




TGT - Target clarifies national grocery price matching policy



  • "Target Canada is clarifying a major policy change on price matching, the retailer told CBC News Tuesday."
  • "Starting Tuesday, consumers can present digital flyers from selected online Canadian retailers and Target will match that price, confirms Lisa Gibson, spokesperson for Target Canada."
  • "Those retailers include Walmart.ca, Bestbuy.ca, Futureshop.ca, ToysRUs.ca, BabiesRUs.ca, CanadianTire.ca, Sears.ca and Amazon.ca."
  • "Target will also match any other retailers advertising in the local area. That means consumers can present a digital copy of a local ad or a digital copy of one of the selected online retailers. Target will meet or beat that price."


MW - MW Aims to Be U.S.' Top Men's Wear Retailer



  • "The Men’s Wearhouse Inc. has lofty ambitions — to become the largest seller of men’s apparel in the United States — but Wall Street has some doubts about the plan."
  • "Currently at number three behind Macy’s Inc. and Kohl’s Corp., the retailer is projecting sales of $3.7 billion by the end of 2017 as it works to absorb its former rival and latest conquest, Jos. A. Bank Clothiers Inc. Together, the companies had sales of $2.6 billion in 2013."


Fast Retailing - Uniqlo Opening First Chicago Store



  • "Uniqlo isn’t entering the Midwest quietly."
  • "Its first store in the region will be a 60,000-square-foot flagship at 830 North Michigan Avenue in Chicago, the Japanese retailer’s second largest store in the U.S. The Chicago unit is set to open in fall 2015 in the heart of the city’s downtown and part of the Magnificent Mile, where neighbors will include Topshop and H&M."


LB - World's 2nd Largest Victoria's Secret Flagship to Replace Montreal Chapters Bookstore



  • "The world's second largest Victoria's Secret location will replace Montreal's Chapters bookstore on busy Saint Catherine Street West. The 35,000+ square foot flagship will be located directly across the street from La Senza, owned by Victoria Secret's parent company."


AMZN, Flipkart - Amazon Invests $2 Billion in India to Challenge Flipkart



  • "Amazon.com Inc. (AMZN), the world’s largest online retailer, announced plans to invest $2 billion in its Indian operations just hours after local rival Flipkart Online Services Pvt. secured $1 billion from investors."
  • "The spending will support Amazon’s growth with India on pace to become the fastest market to reach $1 billion of gross sales, the company said in an e-mailed statement today."


RSH - Moody’s: RadioShack may run out of cash



  • "Financial woes continue for RadioShack, which was recently notified it is in danger of being delisted by the New York Stock Exchange. According to a new report from Moody’s Investor Service, RadioShack is likely to run out cash by the end of October 2015."


PETM - Jana Urges PetSmart to Pursue Sale Instead of Taking on Debt



  • "PetSmart Inc. activist investor Jana Partners LLC, ratcheting up its campaign against the pet-care chain, urged the retailer to put itself up for sale before “short-circuiting” its prospects by taking on debt."
  • "PetSmart has been considering changes to its capital structure with an eye to returning more money to shareholders."


CROX - Crocs names Reebok exec VP of North America retail



  • "Claire Fahie-Conley, VP of U.S. retail for Reebok, has been appointed Crocs' VP of retail for North America. In this role, Fahie-Conley will be responsible for overseeing all aspects of the retail footprint in North America, including the entire fleet of full-price and outlet stores."
  • "Prior to joining Crocs, Fahie-Conley spent 20 years at Reebok."


UA - Under Armour signs multi-year partnership with Patrick



  • "Under Armour has signed two-time First-Team NFL All-Pro cornerback Patrick Peterson to a multi-year partnership. Selected to the Pro Bowl in each of his first three seasons, Peterson is an elite playmaker with game-changing speed and has established himself as one of the top young players in the NFL."



WTW: Thoughts Into the Print (2Q14)

Takeaway: WTW's issues are secular, and it doesn't have many options to work with. We're riding the short through the print, and keeping it on.


  1. POTENTIAL UPSIDE, DOESN’T MATTER: WTW could sneak out a small top-line beat; our Google Trackers suggest y/y declines in demand moderated somewhat into 2Q14, but not by any material margin.  Short Interest remain elevated, while the sell-side has turned on the name.  So any potential upside could lead to another short-squeeze, but would likely be limited (WTW lost all its gains from the 1Q14 print).  We would fade any upside into the print; remember 2014 will be one of its worst years on record in terms of revenue growth dating back to at least 2005, marked by its weakest winter selling season since at least 2007 (that includes the Great Recession).  There isn't a value play here.
  2. WHAT WE’RE KEYING IN ON: The entire model is driven off its winter selling season and the seasonal attrition rates thereafter.  The attrition rate in 2Q14 will give us a glimpse of what is required in terms of a 1Q15 selling season in order to achieve consensus estimates.  The only thing that would save WTW (in terms of its 2015 prospects) is a marked reduction in seasonal attrition.  As it stands now, WTW would require one of its best winter selling seasons on record to achieve 2015 revenue estimates, and that will not happen without a serious investment in marketing expense (see below)
  3. HEADS THEY LOSE, TAILS THEY LOSE: We believe WTW’s issues are secular.  It’s not the existence of these free apps, it’s rising access to these apps that's the bigger issue.  Member acquisition costs have risen substantially alongside the rise in smartphone penetration.  WTW is in a precarious position of trying to revive its business, which will require investment (particularly in marketing), while trying to preserve profitability on a highly fixed-cost business model in order to service its debt; WTW’s interest coverage ratio is roughly 2.5x.    



WTW: Thoughts Into the Print (2Q14) - WTW   Tracker vs. Attendence

WTW: Thoughts Into the Print (2Q14) - WTW   Selling Seasons 1Q14

WTW: Thoughts Into the Print (2Q14) - WTW   Annual Attrition 2013

WTW: Thoughts Into the Print (2Q14) - Smartphone penetration 3Q13

WTW: Thoughts Into the Print (2Q14) - WTW   Revenue vs. marketing

WTW: Thoughts Into the Print (2Q14) - WTW   Member Acquisition Costs 1Q14




Let us know if you have any questions, or would like to discuss in more detail.


Hesham Shaaban, CFA



Thomas Tobin


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Keith's Macro Notebook 7/30: VIX INDUSTRIALS USD

LEISURE LETTER (07/30/2014)



  • July 30: 
    • MGAM 2Q call:
    • MAR 2Q call 10am : , pw: 59383825
  • July 31:
    • HST 2Q call 10am:
    • BEL (OEH) 2Q call 10am: , pw: 68627603
    • H 2Q call 11:30am:  , pw: 21721745.
    • BYD 2Q call 5pm:  , pw: 2654057
  • Aug 1:
    • HLT 2Q 10am: , pw: 67361605
  • Aug 5:
    • BEE 2Q 10am: , pw: 73605986
    • RHP 2Q 10am:
    • MGM 2Q 11am: , pw: 1985444
  • Aug 6:
    • HT 2Q 9 am:
  • Aug 7:
    • MPEL 2Q 8:30am: , pw: MPEL
  • Aug 8:
    • DRH 2Q 10am: , pw: 153358818
    • SHO 2Q 12n:


27:HK Galaxy – On Tuesday, more than 500 Galaxy hotel and casino workers signed and delivered a petition to Galaxy's corporate office requesting/demanding an increase in salaries.

Takeaway: This labor discord follows a similar move from casino dealers and floor workers at Sand China Limited.  Both labor protests are supported by the Macau Gaming Industry Frontline Workers union.


577:HK Louis XIII – received approval from the Macau government for its building plans for a boutique casino hotel on the Cotai-Coloane border. Louis XIII will include 66 gaming tables (50 premium mass and 16 VIP) and 236 hotel rooms and villas all of which are at least 2,000 square feet (186 sq. m.) or larger.  The property, scheduled to open in mid-2016, will also include a 38-seat L’Ambroisie restaurant.  At present, the company believes it has sufficient funding to complete the project based on the April 2014 loan facility of up to HKD3.05 billion with a mainland Chinese bank and the HKD3.2 billion gross raised in its initial sale of shares in February 2013.  Louis XIII will operate under an SJM subconcession.

Takeaway: The first and only destination casino and hotel reserved for "by invitation only" guests. This probably means management got the wink wink that they will be allocated tables.


ISLE – Jim Perry, a former CEO of Isle of Capri Casinos, has resigned as a board member from ISLE.  Until recently, Mr. Perry was Executive Chairman of ISLE's Board of Directors. 

Takeaway: Pretty quick news after Perry stepped down as Chairman.




NCLH – introduced an all-inclusive program at $899 per person.  This could potentially double agent commissions on 7-day cruise trips.  The all-inclusive package includes the Ultimate Dining package, the Ultimate Beverage package, shore excursion credit of up to $200 per person, pre-paid daily service charges, a 250-minute Internet package per person, 20 photos of any size, chocolate-covered strawberries, a bottle of wine, one bingo session, and up to 12 bottles of water.  The promotion, which starts August 4 and runs through August 29, is valid for all sailings in 2015 except Pride of America cruises.


CCL (SeaTrade)  Holland America Line brought back 'Explore 4' savings program with benefits including a free Signature Beverage Package and free Pinnacle Grill dinner for passengers booking an ocean-view or higher category stateroom, free or reduced cruise fares for third and fourth guests in the same stateroom on select sailings and 50% reduced deposits.


RCL (TTG Digital) –  Royal Caribbean has announced a new agent incentive, giving away a £250 Jamie’s Italian restaurant voucher every day throughout August.  The incentive is designed to celebrate the launch of the line’s new all-inclusive campaign, with guests who book a cruise between August 1 and September 30 on applicable sailings enjoying free select drinks packages, soda packages for kids and free gratuities.


Hapag-Lloyd  As an introductory offer for all international guests, Hapag-Lloyd Cruises has announced an ‘on-board beverage credit’ of up to €200 for alcoholic and non-alcoholic drinks.  The credit will be graded according to the length of the cruise.  It will apply to all new bookings on board luxury ship Europa 2 and expedition ship Hanseatic, starting August 1, 2014 and applies to cruises operating after October 1, 2014.



PENN - COO Jay Snowden purchased 9,920 shares at an average price of $10.32/share and an additional 2,580 shares at $10.45/share. Mr. Snowden now owns 21,306 shares.


LHO - CFO Bruce A. Riggins sold 11,000 shares on Monday, July 28 at an average price of $36.13 per share and now owns 36,020 shares.


RHP - CEO, President & Chairman Colin Reed acquired the final 23,193 shares at $16.47/share sold the same shares at $49.007/share on July 28 from his stock option award compensation. This was the final transaction related to both his stock options and the 10b5-1 trading plan.  Mr. Reed now owns 790,017 shares and units as well as an additional 225,793 shares via family trusts and partnerships.


WYN - EVP and Chief HR Officer, Mary Falvey sold 22,233 shares on July 25, 2014 at average price $78.0634 per share and now owns 51,291 shares as well as 57,810 restricted stock units granted under the Wyndham Worldwide Corp 2006 Equity & Incentive Plan.


RCL - Director William L. Kimsey sold 10,075 shares of stock on Monday, July 28th at an average price of $63.00 and now directly owns 13,037 shares of the company’s stock.


Macau Package Tours and Hotel Occupancy Rate for June 2014 DSEC

Visitor arrivals in package tour increased by 15% YoY to 908,000 in June 2014. Visitors from Mainland China totaled 723,000, up 17%, with 244,000 coming from Guangdong Province.  Visitors from Taiwan (59,000), Hong Kong (36,000) and the Republic of Korea (27,000) recorded year-on-year increase; besides, visitors from Japan (16,000) surged by 81%.  There were 99 hotels and guesthouses operating at the end of June 2014, providing 28,000 guest rooms, down by 1% YoY; 5-star hotels accounted for 66% of the total supply, with 18,000 rooms.  The average length of stay of guests held stable as June 2013, at 1.3 nights.

Takeaway:  Hotel visitors remain steady


Macau ETGs, slots or tables – A Macau Professor, Zeng Zhonglu of the Gaming Teaching and Research Center at Macao Polytechnic Institute, suggested Macau gaming operators may wish (need) to consider using more hybrid, electronic table games which feature more seats (player stations) as a means to challenge the table cap limit. He also indicated such devices should be counted as slot machines.

Takeaway: Table caps versus ETGs.  It only makes sense to us that  electronic/hybrid games must play a great role on gaming floors. 

Colorado Racino Expansion – This November, Coloradans will vote on a State referendum to allow racinos in Mesa, Pueblo and Arapahoe counties. If the referendum passes, one casino with 2,500 slots would be allowed in each of the three counties.


Mohegan Sun Commentary – during the financial review call, the group offered a number of interesting comments we thought we'd share with our clients

  • Competitors have become less rational. Foxwoods has increased free I slot play by 44 percent, while Mohegan increased its free slot play 3.7 percent. Etess said marketing
  • July EBITDA is up very nicely from last year.
  • Massachusetts repeal referendum. Polling shows the referendum to repeal casinos will not succeed.
  • REITs. Emergence of the REIT structure in gaming is good for Mohegan Sun as Mohegan could be a good operator for a REIT-owned casino. It fits into Mohegan’s asset-light strategy.

Takeaway:  More evidence of a better July performance


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


Takeaway: The MBA Purchase Applications Index sits at 172 3QTD, down 4.2% QoQ and the lowest quarterly reading since 1996.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.


*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point. 


A LOWER LOW FOR 3Q14 MORTGAGE DEMAND - Compendium 073014


Today's Focus: MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended July 24. 


* A whole lotto not much sequentially as a -4% decline in refi activity and a +0.2% increase in the Purchase Index drove a -2.2% decline the composite index.


* So, where we care on the Purchase demand side, we remain just north of the YTD (and 10Y) lows recorded during peak weather distortion in February.  We are currently tracking -12% YoY and -4.2% QoQ.


* Rates on the 30Y FRM remained unchanged for a 3rd consecutive week at 4.33% and continue to hold near TTM lows.


Big picture, the tide of housing data remains red and this morning's Purchase Apps +0.2% w/w print doesn't change that. We remain bearish on the housing complex until the slope of HPI deceleration inflects. 



Why You Should Care:

We flagged the chart below last week, but as a reminder, it's our contention that HPI continues to decelerate through the end of 2014 and potentially well into 1H15. Historically, HPI trends and inflections have correlated strongly with the movement in housing-related equities. Consider the chart below, which shows the YoY rate of growth in HPI in green and the price of the ITB exchange traded fund for homebuilders. 


Hpi vs itb normal






A LOWER LOW FOR 3Q14 MORTGAGE DEMAND - Purchase LT w Summary stats 


A LOWER LOW FOR 3Q14 MORTGAGE DEMAND - Composite LT w Summary stats 






About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 



The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.



Joshua Steiner, CFA


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