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RAI—Balancing Profitability and Market Share On Weak Cig Volume

Neutral Outlook on RAI

Reynolds American reported Q4 EPS of $0.77 that missed consensus of $0.81 and revenues of $2.04B that came in slightly below the Street at $2.07B. It announced a dividend increase of 6.3% and FY 2014 EPS guidance $3.30-$3.45. The stock is trading down over -2% intraday.


In the quarter sales were down -1.9% versus the previous-year quarter and EPS up +1.3%. The company was able to take pricing across cigarettes and moist-snuff to make up for cigarette volume declines that outpaced the industry average.  


Cigarette volume was down a full -7.0% in the quarter (versus the industry average of -4.0%) and fell -6.2% for the full year (vs the industry average of -4.2%); the company cited the decline was due to a slow macro environment and migration to non-combustible tobacco. This volume result compares to the company’s guidance last quarter that its FY volumes would track closer to -4%.


Strong brand results came from Camel that grew Q4 market share by 0.4 pp to 9.0%; Camel SNUS that continues to hold about 80% of the category; and Pall Mall that grew market share 0.2 pp to 9.1%. American Snuff’s Grizzly brand also continued to show strong performance, increasing operating income 17.0% on the quarter and 12.1% on the year and boosting its Q4 operating margin 2.5% to 58.9%; and Santa Fe’s performance grew operating income 12.3% in the quarter and 17.9% on the year.


The company expects cigarette volume to moderate in 2014 to around -3.5%, and it’s unclear if e-cigs will be driving the improvement in cigarette volume loss.  We expect 2014 to be a big year of investment for the company behind its e-cig VUSE as it plans to roll-out nationally (more below) and for it to heavily discount and promote the product to compete with MO’s e-cig offering and play catch-up to LO’s Blu, among the Big Tobacco players.  Recent category weakness remains a concern, which was partially confirmed by a much more cautious outlook on the category from CEO Daan Delen today.


We’re currently neutral on the stock. Our preferred play is long Lorillard (LO) and short Philip Morris (PM).



On E-Cigs

E-cigs were once again a focal point of the call: the company began the call discussing its e-cig business under the brand VUSE and the majority of analysts’ questions in the Q&A were about e-cigs.


RAI launched its made-in-America e-cig in its first test market of Colorado in July 2013 and recently expanded to its second market in Utah. The company maintained its plan to have national distribution by mid-year, however took a more critical and cautious tone on the e-cig category, suggesting that expansion will depend on growth in the category. CEO Delen said that for now while trialing is high for the category, repeat purchasing and adopting is very lower, and had no concrete answer for why the e-cig category has recently slowed.  He said consumer trends were based on current products that did not meet smokers’ expectations, and that VUSE is poised to buck that trend.


VUSE’s results in CO: Category volume has tripled since its launch with mix driven by 80% cartridges (razorblade) vs 20% disposables. The company believes that higher long-term margins can be achieved by cartridges.


On a national rollout: The company is confident with its strategy citing its industry-leading trademark and distribution network, the self-imposed restrictions it has in place (including no self service with its products placed on the back bar so it can assure age verified sales).

  • As we look to a national rollout, we’d expect heavy discounting and promotion to encourage trialing (similar story with Altria’s e-cig MarkTen under a similar timeline) to suggest selling at a loss or at best breakeven for this year (alongside the potential for heavy price competition). 

On the recent growth pick-up in the tank or open-ended system: Delen confirmed the growth pick-up and said it will be interesting to see what happens from a regulatory point of view, noting that in an open-ended system people can put any types of liquids in, whereas VUSE is a closed system that shuts down if the consumer tries to tamper with it/add liquid.


On M&A to expand its e-cig business: CEO Delen deflected the question and suggested that he is confident VUSE is a differentiated and experienced brand that can compete in the marketplace. [Note: the recent M&A activity has included MO’s acquisition of Green smoke for $110M on February 3, 2014; LO’s acquisition of SKYCIG for £30M in October 2013; and LO’s original purchase of Blu in April 2012 for $135M].


Call or email with questions,


Matt Hedrick

Gold Loves the Mother of All Doves

Takeaway: Dollar Down + Rates Down = Heaven for Gold.

Is it time for Janet "Mother of All Doves" Yellen to abandon the Fed's dual mandate and just target rates? The Dollar definitely thinks so. It's down again this week after losing -0.8% of its value last week. Meanwhile, commodity #InflationAcclerating continues to front-run the probability of a devaluation.


Gold Loves the Mother of All Doves - doll9


Sure, it might be good for a low-volume pop in stocks. But it's horrible news for US consumption growth.


Here's a simple formula: Dollar Down + Rates Down = Heaven for Gold.


That’s why we are bullish on Gold (see our full research note recapping why from yesterday). What was once TREND resistance of $1272 in our model for Gold is now support. 


We will keep adding to the "Gold-Bond" asset allocation move if Yellen targets rates.


Gold Loves the Mother of All Doves - drake 


Incidentally, do you know who else got away with targeting rates? #Japan. 2013’s Hedgeye TREND support for the 10-year US Treasury yield is now resistance at 2.80%.


Maybe she wants a 0.6% JGB-style 10-year?

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Tory Burch Makes Move Into Men's

Takeaway: We wouldn't want to have to compete against Tory Burch.

COH - Tory Burch Said Planning Move Into Men's

  • "Burch has lured Jeffrey Uhl away from Coach Inc., where he was a key member of the team that grew the brand’s men’s business to sales that are currently approaching $700 million. Once on board at Burch, Uhl is said to be taking on both women’s and men’s accessories. He is expected to start in a few weeks."
  • "A spokeswoman for Burch declined comment Monday, as did Uhl. But sources said Burch could launch men’s accessories as soon as next year."

Tory Burch Makes Move Into Men's - toryburch


Key Takeaway from Hedgeye Retail Analyst Brian McGough 

Let me start off by saying that Tory Burch is the real deal in retail. She is the female equivalent of Ralph Lauren. Now, Coach's (COH) Jeffrey Uhl may have become expendable when Keith Warren was brought in from Louis Vuitton. But shaking up leadership in a key growth category at a time when COH needs a good story doesn't look good to outside eyes. The reality here is that Men's has become a key point of emphasis for a number of upscale companies like Coach. This latest news of Tory Burch joining the fold makes it that much more competitive. Bottom line? We wouldn't want to have to compete against Tory Burch…she gets it. The upscale Men's space just got a lot more heated. 

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BNNY – Stock Hammered on Input Cost Inflation. Buy it?

BNNY is getting tattooed after releasing its fiscal Q3 2014 results last night after the close. It reported Q3 EPS of $0.17 that missed consensus estimates by a penny and lowered its full year EPS guidance to $0.92 to $0.93 versus prior guidance of $0.97 to $1.01, citing higher input cost inflation ahead.


In what was otherwise a strong top-line with adjusted net sales in the quarter up 21.7% (Meals grew 34%; Snacks 15%; Dressing flat), with positive sell-through from previous areas of concern in frozen entrees and pizza, the company’s commentary suggests that it simply did not appropriately hedge/account for commodity cost inflation in the quarter (wheat in particular calling pricing an anomaly) – and begs the question how well it is covered for the coming quarters.


We continue to like the favorable consumer trends for natural and organic foods and BNNY’s portfolio of offerings (though frozen concerns do remain). We’re well aware that without prudent management of COGS in what we see as an inflationary macro environment in 2014, profitability will be challenged (HAIN reported similar headwinds). BNNY remains a rich stock (FY 2014 P/E at 40.9x), with no debt on its balance sheet that is expected to be cash flow positive next quarter, is investing in plant and people, and is now past this quarter that is expected to be its most difficult comp of the year.


The stock remains broken from a quantitative perspective across the intermediate term TREND duration, implying a bearish outlook. However we’d consider opportunistically trading the stock on the long side if our levels confirm it's oversold. 


BNNY – Stock Hammered on Input Cost Inflation. Buy it? - v. bnny chart


What We Liked:

  • Adj. net Sales of $46.1MM up +21.7% Y/Y (excludes pizza recall)
  • Adj. diluted EPS of $0.17 vs $0.15 last year, up +13.3% Y/Y
  • Favorable trends in natural and organic foods
  • Strengthening in mac & cheese and consumer acceptance of cups
  • Frozen – pizza performing well and working to improve trialing thru merchandizing events
    • Entrees remain mostly in Target
    • Pizza full rolled out in Whole Foods, expanding foot print to other channels
  • Snacks – fruit snacks trends strong. Crackers and Grams sales all grew 20%+
  • Consumers saying want more Snacks offerings. Offering Cookies, Crackers and Snack mix  in small packaging, positive for mainstream distribution
  • Expanding distribution of granola bar, including gluten free bars
  • Cheese costs covered for 1H of next year
  • Expect EPS growth of 20% for Q4

What We Didn’t Like in the Quarter:

  • Management lowers guidance for adjusted diluted EPS to $0.92 to $0.93, reflecting higher anticipated cost pressure in the fourth quarter
  • Input costs tracking higher in Q4 due to wheat crops remaining tight. Impacting pricing in the short term
  • Wheat inflation 18% in Q3, more modest in Q4


Matt Hedrick

Retail Callouts (2/11): NKE, URBN, AMZN/EBAY/Alibaba, COH, SHLD

Takeaway: New competition for AMZN & EBAY from Alibaba. Finally good week for Sales. Tory jabs COH. GILT & Goldman. URBN NKE/Adi ARO HD BKS DSW SHLD



FOSL - Earnings Call: Tuesday 2/11, 4:30pm




ICSC - Chain Store Sales Index


Takeaway: In what should have been a seasonally  slow weak, retail sales actually chugged along at a pretty good pace. That was the first positive dose of news we got all year. We need several more of them, however, to undo the damage that's been done.


Retail Callouts (2/11): NKE, URBN, AMZN/EBAY/Alibaba, COH, SHLD - chart1 2 11

Retail Callouts (2/11): NKE, URBN, AMZN/EBAY/Alibaba, COH, SHLD - chart2 2 11




URBN - Urban Outfitters Reports Record Q4 Sales



  • "Comparable Retail segment net sales, which include our comparable direct-to-consumer channel, increased 1%. Comparable Retail segment net sales increased 20% at Free People and 10% at Anthropologie and decreased 9% at Urban Outfitters. Wholesale segment net sales rose 24%."


Takeaway: Weakness at the flagship brand was worse than expected. We give the company credit for not blaming the elements and admitting that the weakness at Urban was primarily self-inflicted, but that doesn't change the fact that a lot needs to be done in order to fix the business. We think highly of the URBN management team and approach to growing the brands. If anyone can fix it, they can.


AMZN, EBAY, Alibaba - Alibaba Close to Launching eBay-Style Marketplace in US



  • "A new Alibaba subsidiary is close to launching a marketplace in the U.S. and has been on-boarding third-party sellers since late last year, EcommerceBytes has learned. has hand-picked eBay sellers to participate in the pre-launch phase."
  • "The marketplace is called 11 Main to connote 'Main Street' shopping from friendly mom and pop retailers. The plan is to charge charges sellers a 3.5% commission fee when an item sells with a $50 cap. There is no charge for selling printed books, DVDs and music. 11 Main is also actively encouraging sellers to consider lowering their prices since its selling fees are lower than eBay's. While 11 Main does have a 5-cent listing fee per month in certain categories, those fees are waived for sellers who use its selling tools."
  • "Chinese ecommerce company Alibaba had acquired eBay listing tools Auctiva and Vendio in 2010. The companies, both headquartered in California, gave it instant access to over 250,000 eBay sellers who at the time processed over $7 billion in GMV annually and were responsible for an estimated 5 - 10 percent of eBay's listings. 11 Main is leveraging the companies both for their technology and their seller base as it builds out the new marketplace."


Retail Callouts (2/11): NKE, URBN, AMZN/EBAY/Alibaba, COH, SHLD - chart4 2 11


Takeaway: Ebay has to be kicking themselves for that transaction. It'd be extremely difficult for Alibaba to compete for 3rd- party sellers without these US subsidiaries. That being said - the only way 11Main works is if its fees are more competitive than Ebay or Amazon. In the end, make no mistake, this is a BIG idea.


ARO - Aeropostale mulls raising capital from private equity -sources



  • "Aeropostale Inc is considering raising capital from private equity firms as the struggling teen retailer evaluates various ways to shore up both its balance sheet and its share price, four people familiar with the matter said on Monday."
  • "Aeropostale...faces pressure from investors to sell itself and is working with investment bank Barclays Plc to study its options, the sources said."


Takeaway: Let's set this record straight…'considering' raising capital means 'we've been trying to raise capital or attract a buyer'. ARO is one of those companies that probably shouldn't be public.


COH - Tory Burch Said Planning Move Into Men's



  • "Burch has lured Jeffrey Uhl away from Coach Inc., where he was a key member of the team that grew the brand’s men’s business to sales that are currently approaching $700 million. Once on board at Burch, Uhl is said to be taking on both women’s and men’s accessories. He is expected to start in a few weeks."
  • "A spokeswoman for Burch declined comment Monday, as did Uhl. But sources said Burch could launch men’s accessories as soon as next year."


Takeaway: Uhl may have become expendable when Vevers brought in Keith Warren from Louis Vuitton, but shaking up the leadership in a key growth category at a time when COH needs a good story doesn't look good to outside eyes. Men's is a point of emphasis for a number of companies in this space and adding Tory Burch to the fold makes it only more competitive. We wouldn't want to have to compete against her…she gets it.


Gilt Groupe - Gilt Groupe Said to Choose Goldman to Manage Web Retailer’s IPO



  • "Gilt Groupe Inc., an online retailer of discounted luxury goods, picked Goldman Sachs Group Inc. to manage its initial public offering, according to people with knowledge of the deal. Timing for the IPO has still not been decided, said the people, who asked not to be identified because the announcement hasn’t been made public."
  • "Goldman Sachs is an investor in Gilt and was part of a $138 million financing round in 2011, valuing the company at about $1 billion, that included Japan’s Softbank Corp. and venture investors General Atlantic and Matrix Partners. The company has raised a total of at least $240 million."
  • "In 2012, Gilt generated $550 million in revenue, excluding businesses it discontinued, up from $450 million the prior year. The company was expected to generate cash from operations by the end of last year, Peluso said in September."


Takeaway: Gilt may have missed its peak valuation window but there will be significant interest in this offering. We'll certainly have it on our radar.


SHLD - Sears rolls out new pickup service for online purchases



  • Sears has debuted In-Vehicle Pickup, a new service powered by the chain’s Shop Your Way mobile app that enables customers to pick up their online purchases at any Sears store within five minutes of arrival, without ever leaving the car.
  • "'The In-Vehicle Pickup option takes our 'Free Store Pickup - Ready in 5' guarantee even further and out to the parking lot,' said Leena Munjal, senior VP, member experience and integrated retail, Sears Holdings. 'In-Vehicle Pickup on this scale is an industry first and another example of how we are constantly innovating and adding benefits that make shopping a more convenient experience for our members.'"


Takeaway: No doubt its convenient for the consumer - but when you operate 135,000 sq. ft. stores it's probably not the right move to encourage shoppers not to enter your store. We get that Sears is trying to embrace e-commerce, but its current real estate portfolio doesn't jibe with that strategy.


ADDYY - Shop Talk: Adidas in New Orleans... RSG Buys in VA



  • "Adidas opened a pop-up shop, Adidas in the Quarter, in New Orleans as a part of the upcoming 63rd annual NBA All-Star Game. Located in the French Quarter of New Orleans, the store will feature official merchandise for the Feb. 16 game including men’s and women’s jerseys, apparel and accessories."
  • "The brand will also offer limited-edition shoes from Adidas Originals and basketball collections, including the D Howard 4, Crazy 8, Crazy 1 and new Crazyquick 2. In addition to player appearances and other in-store events, Adidas also launched a social media campaign centering on the store. The 2,400-sq.-ft. space is slated to stay open until Feb. 23."


Retail Callouts (2/11): NKE, URBN, AMZN/EBAY/Alibaba, COH, SHLD - chart3 2 11


Takeaway: Adidas may have its name on NBA jerseys but it’s no question that Nike owns the NBA. Player sponsorships as of the end of Dec. 13. = Nike-278, Adidas-71, Jordan-32. Good try by AdiBok to capitalize on the event. I think we know who would win if Nike opened a pop-up shop down the street.




HD - Home Depot bolsters online business with new direct fulfillment center



  • "The Home Depot has opened a new direct fulfillment center (DFC) in the Locust Grove suburb of Atlanta."
  • "It is the first of three new DFCs the company will open across the U.S. in the next two years, adding more than 3 million sq. ft…"


BKS - Barnes & Noble Fired Its Nook Hardware Engineering Staff



  • "Barnes & Noble laid off its Nook hardware engineers, according to a source that tipped Business Insider."
  • "The engineers were let go last Thursday, according to our source. This follows Barnes & Noble dismissing the VP of Hardware, Bill Saperstein in January."
  • "Barnes & Noble confirmed that it laid people off when we asked. A spokesperson told us:
  • 'We’ve been very clear about our focus on rationalizing the NOOK business and positioning it for future success and value creation. As we’ve aligned NOOK’s cost structure with business realities, staffing levels in certain areas of our organization have changed, leading to some job eliminations. We’re not going to comment specifically on those eliminations.'"


HBC - HBC Announces Resignation of CFO



  • "Hudson's Bay Company today announced that Michael Culhane has resigned as CFO of the Company effective February 7, 2014."
  • "As previously announced, Donald Watros, President of HBC, has assumed the role of acting CFO, and the Company has appointed Douglas Scovanner as Executive Vice President of Finance and Accounting, on an interim basis to support the acting CFO."
  • "HBC has engaged a leading executive search firm to assist in recruiting a new CFO."


DSW - DSW Inc. Announces Fourth Quarter Sales Results; Updates 2013 Guidance



  • "DSW Inc...announced that fourth quarter 2013 comparable sales for the thirteen-week period ended February 1, 2014 were flat compared to a 3.6% increase for the same period last year."
  • "Excluding luxury sales of $1 million, total Adjusted revenues decreased by 3.9% to$571 million, for the thirteen week period ended February 1, 2014 versus $594 million for the fourteen week period ended February 2, 2013. Excluding the impact of the fifty-third week last year, total Adjusted revenues increased by 1.6%."
  • "The Company narrowed its 2013 Adjusted EPS guidance to a range of $1.85 to $1.87 per share. Adjusted EPS excludes a $0.13 per share impact from the Company's luxury test and $0.10 per share of legacy charges related to RVI. The new guidance range compares to the previous guidance of $1.80 to $1.90 per share and represents approximately 11% earnings growth."
  • "The Company also announced Douglas Probst, Executive Vice President and Chief Financial Officer will be retiring effective May 1, 2014, after nine years of service."





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