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

Associate

 

Fred Masotta

Analyst


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

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more