Equity Research - C-Store Canada C-Stores... · WELLS FARGO SECURITIES, LLC Tobacco/C-Stores EQUITY...
Transcript of Equity Research - C-Store Canada C-Stores... · WELLS FARGO SECURITIES, LLC Tobacco/C-Stores EQUITY...
Please see page 13 for rating definitions, important disclosures and required analyst certifications All estimates/forecasts are as of 07/22/14 unless otherwise stated.
Wells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision.
July 22, 2014
Equity Research
Tobacco--Nielsen C-Store Data--E-Cig $ Sales Decline Moderates • E-Cigs –MO Takes Share Landing In Third Position In C-Stores Driven
By MarkTen National Rollout – LO Remains Category Leader As Logic Further Entrenches Itself In #2 Spot – E-cig $ sales declined (-12.9% in the period ending 7/5/14), driven by net pricing decline of 13.4% and unit growth of 0.5% (price remains negative for the 7th sequential period), though the decline sequentially moderated and we remain optimistic that national rollouts of MarkTen and Vuse could re-ignite category growth. Avg. eq. price per unit was $5.69. We believe negative pricing trends could be due to increased penetration of kits which offer a lower price/cartomizer. Further, we believe the sales decline is more reflective of volume moving to vapors-tanks-mods (VTMs) which tend to be sold in non-tracked channels (especially vape shops) as Nielsen e-cig data is not a proxy for the vapor category as a whole. LO retained its #1 spot in the c-store channel, albeit with a dip to 35.3% $ share in the recent period (vs. 42.0% last period and 5.4 share point loss yr/yr). Logic maintained its 2nd place share position this period with a 24.2% share, as NJOY (6.9% share) yielded the 3rd spot to MO with 13.6% share. RAI’s share was 4.2%. LO continues to lead the take-home channel as well with 42.6% share. Other leading firms in XAOC were Mistic (16.9% share) and NJOY (6.9% share). Though e-cig category $ sales growth has been decelerating, $ sales are meaningful ($38.9MM this period in the c-store channel and $9.4MM in the XAOC take home channel). This implies ~$700MM annual sales in Nielsen-tracked channels and we believe vapor sales in non-Nielsen tracked channels (such as “vape shops"/boutiques) plus online sales (~$650MM) suggest the vapor category is ~$2.5B (see chart on page 2). Importantly, we note vapors/tanks are under-represented in Nielsen but are growing 2x faster than the vapor category based on our “Tobacco Talk” survey. Investors have been questioning if the investments the behind vapor justify a possible longer timeline to contribute to the bottom line. While we remain bullish on the category long term, we acknowledge near-term e-cig profitability could be soft, particularly as volume moves to VTMs. Bottom line – we continue to believe vapor consumption could surpass combustible cigs in the next decade, driving total profit pool growth and generating a 6.6% CAGR.
• Cigs $ Sales Again Negative As Unit Declines Offset Solid Pricing – C-store cig $ sales returned to the declining trend, down 0.8% (vs. +0.5% last period and +1.1% last year) during the recent 4-weeks, driven by +3.4% pricing, offset by -4.0% eq. units. We expect manufacturer pricing to be solid in 2014 but likely below LT averages given multiple levers they have to pull.
• LO $ Sales Turn Negative Driven by Weak Volume and Below-Industry Pricing – LO cig $ sales declined 0.6% in the recent period, driven by +2.6% pricing (vs. industry +3.4%), offset by 3.1% unit decline. LO’s $ share further pulled back to 14.1%, flat vs. PY, but the lowest of the past 9 periods. We remain bullish on LO ($61.05, Outperform) given its many growth drivers.
• MO $ Sales Continue to Underperform on Below-Industry Pricing – MO cig $ sales fell -1.2% (vs. flat last month) as +3.0% pricing just barely offset -4.1% vol. We maintain our Market Perform rating on MO ($41.93).
• RAI’s $ Sales Outperform on Industry-Leading Pricing – RAI cig $ sales rose +0.2%%, driven by +4.4% pricing, partially offset by 4.1% unit decline. We maintain our Outperform rating on RAI ($58.16).
Tobacco/C-Stores
Bonnie Herzog, Senior Analyst(212) 214-5051 /
[email protected] Gerberi, CFA, Associate Analyst
(212) 214-5029 / [email protected]
Adam Scott, Associate Analyst(212) 214-8064 /
WELLS FARGO SECURITIES, LLC Tobacco/C-Stores EQUITY RESEARCH DEPARTMENT
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Exhibit 1. Estimated Size of the Vapor Market
Source: Nielsen C-Store Database, Wells Fargo Securities, LLC estimates *Other Non-Tracked channels include tobacco-only outlets and other e-cig retail locations.
Exhibit 2. Vapor Market Breakdown – 6 Distinct Market Segments (in $M)
Source: Wells Fargo Securities, LLC estimates; Pie chart represents our 2013 estimates of various market segments. Exhibit 3. Cigarette C-Store Scanner Data Summary (52-wk Category Retail $ Sales $50.1B)
Number of Weeks in Period: 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-WeekPeriod Ending: 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14Cigarette Category -4.0% -3.3% -3.0% 3.4% 3.0% 2.0% -0.8% -0.4% -1.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Altria Group -4.1% -3.3% -3.1% 3.0% 2.6% 1.8% -1.2% -0.7% -1.4% 54.8% 54.8% 54.8% 53.6% 53.6% 53.5%
Reynolds American -4.1% -3.5% -3.1% 4.4% 4.0% 2.1% 0.2% 0.4% -1.0% 26.0% 25.9% 25.9% 27.0% 27.0% 27.0%
Lorillard -3.1% -2.1% -1.3% 2.6% 2.6% 2.1% -0.6% 0.4% 0.8% 14.1% 14.2% 14.2% 12.8% 12.8% 12.8%
Imperial Tobacco -11.6% -10.9% -10.2% 2.1% 2.0% 1.4% -9.8% -9.2% -9.0% 1.3% 1.3% 1.3% 1.5% 1.5% 1.5%
Private Label 12.6% 16.3% -8.8% 0.6% -2.0% 3.0% 13.3% 13.9% -6.1% 0.9% 0.9% 0.8% 1.4% 1.4% 1.2%
Wells Fargo Securities - C-Store Scanner Data Summary EQ Unit Sales ∆ y/y Avg. EQ Price ∆ y/y Dollar Sales ∆ y/y Dollar Share Unit Share
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
WELLS FARGO SECURITIES, LLC Tobacco--Nielsen C-Store Data--E-Cig $ Sales Decline Moderates EQUITY RESEARCH DEPARTMENT
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Exhibit 4. C-Store Cigarette Category Pricing, Volume and Elasticity Trends
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Cigarette Category Volume Vs Pricing Growth
Volume Growth Pricing Growth
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
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Cigarette Industry Price Gaps
Average Super Premium Unit Price Average Premium Unit PriceAverage Discount Unit Price Average Private Label Unit PriceAverage Super Premium vs. Average Premium Price Gap Average Premium vs. Average Discount Price GapAverage Discount vs. Private Label
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
Exhibit 5. C-Store Cigarette Pricing and Volume Trends by Company
Source for all charts: Nielsen C-Track Database and Wells Fargo Securities, LLC
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MO - Cigarette Volume Vs Pricing Growth
Volume Growth Pricing Growth
0%1%1%2%2%3%3%4%4%5%5%
-5%-4%-4%-3%-3%-2%-2%-1%-1%0%
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RAI - Cigarette Volume Vs Pricing Growth
Volume Growth Pricing Growth
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LO - Cigarette Volume Vs Pricing Growth
Volume Growth Pricing Growth
WELLS FARGO SECURITIES, LLC Tobacco/C-Stores EQUITY RESEARCH DEPARTMENT
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Exhibit 6. E-Cig C-Store Scanner Data Summary Table (52-wk Category Retail $ Sales $550M)
Number of Weeks in Period: 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-WeekPeriod Ending: 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14E-Cigarette Category $39.0 $111.9 $549.7 6.9 19.7 93.2 $5.69 $5.67 $5.90
Number of Weeks in Period: 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-WeekPeriod Ending: 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14E-Cigarette Category 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% -13.4% -13.7% -1.9% -12.9% -12.8% 43.1% 0.5% 1.1% 45.8%
Lorillard 35.3% 39.9% 43.0% 27.1% 30.9% 33.9% -9.3% -11.3% -11.0% -24.4% -11.3% 135.6% -16.6% 0.0% 164.7%
Logic 24.2% 24.5% 19.8% 26.6% 26.7% 21.7% -11.4% -11.9% -17.9% 39.5% 48.8% 125.4% 57.4% 69.0% 174.7%
Njoy, Inc. 6.9% 9.3% 17.5% 6.3% 8.5% 15.9% -17.3% -17.3% -10.1% -77.7% -72.0% -20.3% -73.0% -66.1% -11.3%
CB Distributors 3.2% 3.4% 3.9% 5.7% 6.1% 6.6% -16.5% -17.6% -16.3% -46.3% -49.3% -43.6% -35.7% -38.4% -32.6%
Nicotek 1.4% 1.7% 2.4% 2.3% 2.6% 3.7% -13.4% -11.1% -14.9% -63.0% -57.2% -2.1% -57.3% -51.9% 15.0%
FIN Branding Group 1.5% 1.6% 1.6% 1.9% 2.0% 2.0% -15.4% -10.4% -18.0% -30.3% -2.3% 40.3% -17.5% 9.0% 71.0%
Reynolds American 4.2% 3.5% 1.8% 7.2% 5.7% 2.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Green Smart Living 0.9% 0.9% 0.9% 1.7% 1.7% 1.7% -10.0% -8.4% 0.6% -26.2% -24.5% 19.3% -18.1% -17.5% 18.5%
Ballantyne Brands, Inc. 1.8% 1.6% 0.7% 1.3% 1.3% 0.9% 175.1% 150.7% 44.2% 522.9% 291.7% -87.2% 126.4% 56.3% -91.1%
Altria 13.6% 5.7% 1.7% 11.4% 5.0% 1.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Cigirex 0.0% 0.1% 0.1% 0.0% 0.0% 0.1% 53.7% 8.7% -6.2% -98.6% -85.1% -85.1% -99.1% -86.3% -84.1%
DNA Distributors 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% -12.8% -14.2% -4.7% -88.5% -84.7% -54.1% -86.8% -82.2% -51.9%
GS Vapors Inc. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -71.3% -68.2% -50.7% NM NM 218.1% NM NM 545.2%
VMR Products 2.3% 2.6% 1.4% 3.9% 4.2% 2.4% -40.5% -38.6% -36.5% NM NM NM NM NM NM
Other 4.5% 5.2% 5.0% 4.5% 5.3% 6.7% 25.4% 18.3% -10.5% -19.5% -5.1% 51.6% -35.8% -19.8% 69.4%
Wells Fargo Securities - C-Store Scanner Data Summary
Avg. EQ Price ∆ y/y EQ Unit Sales ∆ y/y
Avg. EQ PriceTotal Category $ (in millions)
Dollar Share
Total Category Units (in millions)
Unit Share Dollar Sales ∆ y/y
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
Exhibit 7. E-Cig XAOC Scanner Data Summary Table (52-wk Category Retail $ Sales $148M)
Number of Weeks in Period: 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-WeekPeriod Ending: 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14E-Cigarette Category $9.5 $28.7 $147.8 2.2 6.6 31.3 $4.31 $4.38 $4.73
Number of Weeks in Period: 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-WeekPeriod Ending: 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14E-Cigarette Category 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% -16.5% -19.6% -16.3% -26.8% -28.2% 8.7% -12.4% -10.7% 29.9%
Lorillard 42.6% 43.8% 47.7% 30.1% 31.7% 35.5% -3.8% -11.8% -11.3% -34.9% -39.5% -0.8% -32.3% -31.4% 11.8%
FIN Branding Group 13.3% 14.4% 15.4% 19.5% 18.8% 17.1% -45.5% -37.2% -32.4% -48.8% -41.6% 2.3% -6.1% -6.9% 51.2%
Ballantyne Brands, Inc. 16.9% 16.7% 13.9% 25.4% 25.0% 24.2% 3.2% 3.9% -14.3% 9.7% 22.7% 30.9% 6.3% 18.2% 52.8%
Njoy, Inc. 6.9% 7.8% 9.3% 4.7% 5.4% 6.4% -16.2% -15.1% 14.1% -49.5% -36.9% 44.0% -39.8% -25.6% 26.1%
CB Distributors 5.2% 5.4% 5.0% 7.5% 7.9% 7.6% -14.9% -13.6% -11.4% -29.4% -21.8% 10.0% -17.0% -9.4% 24.2%
Nicotek 2.0% 2.1% 2.3% 2.4% 2.5% 2.6% -17.4% -18.9% -14.8% -42.3% -36.8% -5.2% -30.2% -22.0% 11.3%
Logic 1.8% 1.6% 1.4% 1.4% 1.2% 1.2% -12.6% -12.4% -25.3% 37.5% 32.9% 106.1% 57.3% 51.7% 175.8%
Reynolds American 1.1% 1.1% 0.6% 1.5% 1.4% 0.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Altria 4.3% 1.7% 0.5% 2.8% 1.2% 0.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
VMR Products 0.9% 0.9% 0.3% 1.0% 1.0% 0.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Other 2.7% 2.5% 1.6% 2.4% 2.4% 2.0% 24.0% 18.5% -2.4% 56.3% 45.8% 63.2% 26.0% 23.1% 67.2%
Dollar Share Unit Share Avg. EQ Price ∆ y/y Dollar Sales ∆ y/y EQ Unit Sales ∆ y/y
Wells Fargo Securities - XAOC Scanner Data Summary Total Category Units (in millions)Total Category $ (in millions) Avg. EQ Price
Source: Nielsen XAOC Database and Wells Fargo Securities, LLC
WELLS FARGO SECURITIES, LLC Tobacco--Nielsen C-Store Data--E-Cig $ Sales Decline Moderates EQUITY RESEARCH DEPARTMENT
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Exhibit 8. C-Store and XAOC Combined E-Cigarette Dollar Share Trends
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e-Cigs Category - C-Store and XAOC Combined, Dollar Share By Company
Lorillard Fin Branding Ballantyne Cigirex DNAGreen Smart Living Njoy CB Distributors Vapor Corp NicotekLogic Reynolds American Altria VMR Products All Other
Source: Nielsen C-Track Database, Nielsen XAOC Database and Wells Fargo Securities, LLC
Exhibit 9. C-Store E-Cigarette Category Pricing, Volume, Dollar Share and Unit Share Trends
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e-Cigarette Category Volume Vs Pricing Growth
Volume Growth Pricing Growth
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
WELLS FARGO SECURITIES, LLC Tobacco/C-Stores EQUITY RESEARCH DEPARTMENT
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C-store channel - e-Cigs Category, Dollar Share By Company
NJOY Inc. Nicotek LLC VMR Products CB Distributors Inc Logic Ballantyne Brands Lorillard FIN Branding GS Vapors Inc.
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
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NJOY Inc. Nicotek LLC Lorillard Logic FIN Branding CB Distributors Inc
Ballantyne Brands Reynolds American Altria GS Vapors Inc VMR Products
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
WELLS FARGO SECURITIES, LLC Tobacco--Nielsen C-Store Data--E-Cig $ Sales Decline Moderates EQUITY RESEARCH DEPARTMENT
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C-Store Channel - e-Cigs Category, Avg Wtd Eq Unit Price (By Company)
E-cigarettes NJOY Inc. Nicotek LLC Lorillard Logic
Green Smart Living FIN Branding DNA Distributors Cigirex LLC CB Distributors Inc
Ballantyne Brands REYNOLDS AMERICAN INC ALTRIA GROUP INC ALL OTHERS
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC Exhibit 10. C-Store E-Cigarettes –Pricing and Volume Trends by Company
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LO e-Cig Volume Vs Pricing Growth
Volume Growth Pricing Growth
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
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NJOY e-Cig Volume Vs Pricing Growth
Volume Growth Pricing Growth
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
WELLS FARGO SECURITIES, LLC Tobacco/C-Stores EQUITY RESEARCH DEPARTMENT
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Logic e-Cig Volume Vs Pricing Growth
Volume Growth Pricing Growth
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
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CB Distributors (21St Century) e-Cig Volume Vs Pricing Growth
Volume Growth Pricing Growth
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
Exhibit 11. E-Cigarette XAOC Category Pricing, Volume, Dollar Share and Unit Share Trends
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e-Cigs XAOC Category, Dollar Share By Company
LORILLARD TOBACCO COMPANY FIN BRANDING GROUP LLC BALLANTYNE BRANDS LLC NJOY INC.
CB DISTRIBUTORS INC VAPOR CORP NICOTEK LLC LOGICECIG
REYNOLDS AMERICAN INC ALTRIA GROUP INC VMR PRODUCTS LLC ALL OTHER MFG - E-CIGARETTES
Source: Nielsen XAOC Database and Wells Fargo Securities, LLC
WELLS FARGO SECURITIES, LLC Tobacco--Nielsen C-Store Data--E-Cig $ Sales Decline Moderates EQUITY RESEARCH DEPARTMENT
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LORILLARD TOBACCO COMPANY FIN BRANDING GROUP LLC BALLANTYNE BRANDS LLC NJOY INC.
CB DISTRIBUTORS INC VAPOR CORP NICOTEK LLC LOGICECIG
REYNOLDS AMERICAN INC ALTRIA GROUP INC VMR PRODUCTS LLC ALL OTHER MFG - E-CIGARETTES
Source: Nielsen XAOC Database and Wells Fargo Securities, LLC
0%
100%
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500%
600%
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800%
900%
May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14
Avg
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e-Cigs XAOC Category - Avg. Eq. Price by Company
LORILLARD TOBACCO COMPANY FIN BRANDING GROUP LLC BALLANTYNE BRANDS LLCNJOY INC. CB DISTRIBUTORS INC VAPOR CORPNICOTEK LLC LOGICECIG REYNOLDS AMERICAN INCALTRIA GROUP INC VMR PRODUCTS LLC ALL OTHER MFG - E-CIGARETTES
Source: Nielsen XAOC Database and Wells Fargo Securities, LLC
WELLS FARGO SECURITIES, LLC Tobacco/C-Stores EQUITY RESEARCH DEPARTMENT
10
Back-Testing - Nielsen’s C-Store Database Trends A Decent Indicator of Cigarette Companies’ Volume Trends We back-tested Nielsen’s C-Store scanner data to gain a better understanding of Nielsen’s strength as a leading indicator of cigarette companies’ volume performance. We are pleased that this data is highly correlated, when cigarette companies’ quarterly volumes were on a one quarter lag. Therefore, we feel that Nielsen’s C-store data can be used to provide a general sense (especially directionally) of how volumes for the cigarette companies should trend. We downloaded company-level cigarette unit sales for MO, RAI and LO from Nielsen’s C-store database (starting with 1Q08) and modified the numbers proportionally so that the 4-week period for Nielsen aligned with the companies’ reporting quarters. We used year-over-year growth rates for unit sales for these companies to see how they compare with the companies’ reported volume growth rates and to see how strong the correlation is between these data. We analyzed a total of 25 quarters’ worth of year-over-year percentage change data. The correlation between MO’s reported volume growth and Nielsen’s C-Store database was 0.77, correlation between RAI and Nielsen was 0.41, and correlation between LO and Nielsen was 0.30. We found the best correlation between the Nielsen and company reported data when we lagged companies’ reported volume growth by one quarter, meaning that Nielsen data is a decent indicator of the next-quarter’s cigarette volume trends. Below are charts showing Nielsen and company year-over-year unit growth trends during the period we analyzed. Exhibit 12. Year-over-Year Volume Growth Rates from 1Q09 through 1Q14
-20%
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Grow
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MO Reported Data vs. Nielsen Data
MO Dollar Sales Growth (Nielsen)MO Reported Cigarette Sales Growth
-14%
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RAI Reported Data vs. Nielsen Data
RAI Dollar Sales Growth (Nielsen)RAI Reported Cigarette Sales Growth
-15%
-10%
-5%
0%
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15%
1Q09
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LO Reported Data vs. Nielsen Data
LO Dollar Sales Growth (Nielsen)LO Reported Cigarette Sales Growth
Source for all charts: Nielsen’s Scantrack C-Track database, company reports
WELLS FARGO SECURITIES, LLC Tobacco--Nielsen C-Store Data--E-Cig $ Sales Decline Moderates EQUITY RESEARCH DEPARTMENT
11
Exhibit 13. Combined XAOC and C-Store E-Cig Summary Chart
Number of Weeks in Period: 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-WeekPeriod Ending: 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14E-cigarettes Category- TOTAL (M) $48.5 $140.6 $697.6 $5.35 $5.35 $5.61 9.0 26.3 124.4 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% E-cigarettes Category- TOTAL Growth ∆ y/y -16.0% -16.5% 34.1% -13.5% -14.7% -10.9% -2.9% -2.1% 41.4% -- -- -- -- -- --
E-cigarettes Category- C-Stores (M) $39.0 $111.9 $549.7 $3.31 $3.31 $3.32 6.9 19.7 93.2 80.5% 79.6% 78.8% 75.8% 75.1% 74.9% E-cigarettes Category- C-Stores Growth ∆ y/y -12.9% -12.8% 43.1% -13.4% -13.7% -1.9% 0.5% 1.1% 45.8% -- -- -- -- -- --E-cigarettes Category- XAOC (M) $9.5 $28.7 $147.8 $4.31 $4.38 $4.71 2.2 6.6 31.3 19.5% 20.4% 21.2% 24.2% 24.9% 25.1%E-cigarettes Category- XAOC Growth ∆ y/y -26.8% -28.2% 8.7% -16.5% -19.6% -16.3% -12.4% -10.7% 29.9% -- -- -- -- -- --
Lorillard Tobacco Company Growth ∆ y/y -27.1% -19.6% 79.1% -7.2% -10.2% -11.1% -21.4% -10.5% 95.3% -557 bps -156 bps NA -656 bps -290 bps NALorillard Tobacco Co. - C-Stores Growth ∆ y/y -24.4% -11.3% 135.6% -9.3% -11.3% -11.0% -16.6% 0.0% 164.7% -5 bps 1 bps 17 bps -6 bps 0 bps 15 bpsLorillard Tobacco Co. - XAOC Growth ∆ y/y -34.9% -39.5% -0.8% -3.8% -11.8% -11.3% -32.3% -31.4% 11.8% -5 bps -8 bps -5 bps -9 bps -10 bps -6 bps
NJOY Growth ∆ y/y -74.9% -68.9% -15.6% -17.1% -16.9% 0.9% -69.8% -62.6% -8.0% -1626 bps -1516 bps NA -1309 bps -2630 bps NANJOY- C-Stores Growth ∆ y/y -77.7% -72.0% -20.3% -17.3% -17.3% -10.1% -73.0% -66.1% -11.3% -20 bps -20 bps -14 bps -17 bps -17 bps -10 bpsNJOY- XAOC Growth ∆ y/y -49.5% -36.9% 44.0% -16.2% -15.1% 14.1% -39.8% -25.6% 26.1% -3 bps -1 bps 2 bps -2 bps -1 bps 0 bps
Logic Ecig Growth ∆ y/y 39.5% 48.5% 125.1% -11.4% -12.0% -21.8% 57.4% 68.7% 174.7% 789 bps 868 bps NA 785 bps -1371 bps NALogic Ecig - C-Stores Growth ∆ y/y 39.5% 48.8% 125.4% -11.4% -11.9% -17.9% 57.4% 69.0% 174.7% 9 bps 10 bps 7 bps 10 bps 11 bps 10 bpsLogic Ecig - XAOC Growth ∆ y/y 37.5% 32.9% 106.1% -12.6% -12.4% -25.3% 57.3% 51.7% 175.8% 1 bps 1 bps 1 bps 1 bps 1 bps 1 bps
FIN Branding Co Growth ∆ y/y -44.1% -33.4% 10.8% -38.6% -30.9% -25.4% -9.0% -3.5% 55.9% -191 bps -107 bps NA -42 bps -9 bps NAFIN Branding Co- C-Stores Growth ∆ y/y -30.3% -2.3% 40.3% -15.4% -10.4% -18.0% -17.5% 9.0% 71.0% 0 bps 0 bps 0 bps 0 bps 0 bps 0 bpsFIN Branding Co- XAOC Growth ∆ y/y -48.8% -41.6% 2.3% -45.5% -37.2% -32.4% -6.1% -6.9% 51.2% -6 bps -3 bps -1 bps 1 bps 1 bps 2 bps
CB Distributors Growth ∆ y/y -42.4% -43.6% -35.5% -16.4% -17.1% -14.1% -31.1% -31.9% -22.7% -165 bps -184 bps NA -251 bps -2750 bps NACB Distributors - C-Stores Growth ∆ y/y -46.3% -49.3% -43.6% -16.5% -17.6% -16.3% -35.7% -38.4% -32.6% -2 bps -2 bps -6 bps -3 bps -4 bps -8 bpsCB Distributors - XAOC Growth ∆ y/y -29.4% -21.8% 10.0% -14.9% -13.6% -11.4% -17.0% -9.4% 24.2% 0 bps 0 bps 0 bps 0 bps 0 bps 0 bps
Ballantyne Brands Growth ∆ y/y 46.4% 51.4% -47.3% 27.6% 23.8% 14.6% 14.8% 22.2% -40.6% 203 bps 212 bps NA 110 bps -2683 bps NABallantyne Brands- C-Stores Growth ∆ y/y 522.9% 291.7% -87.2% 175.1% 150.7% 44.2% 126.4% 56.3% -91.1% 2 bps 1 bps -7 bps 1 bps 0 bps -13 bpsBallantyne Brands- XAOC Growth ∆ y/y 9.7% 22.7% 30.9% 3.2% 3.9% -14.3% 6.3% 18.2% 52.8% 6 bps 7 bps 2 bps 4 bps 6 bps 4 bps
Nicotek LLC Growth ∆ y/y -59.3% -53.5% -2.8% -13.9% -12.5% -14.8% -52.7% -46.9% 14.2% -163 bps -141 bps NA -242 bps -3145 bps NANicotek LLC - C-Stores Growth ∆ y/y -63.0% -57.2% -2.1% -13.4% -11.1% -14.9% -57.3% -51.9% 15.0% -2 bps -2 bps -1 bps -3 bps -3 bps -1 bpsNicotek LLC - XAOC Growth ∆ y/y -42.3% -36.8% -5.2% -17.4% -18.9% -14.8% -30.2% -22.0% 11.3% -1 bps 0 bps 0 bps -1 bps 0 bps 0 bps
Reynolds American Growth ∆ y/y NA NA 0.0% NA NA NA NA NA 0.0% 360 bps 300 bps NA 583 bps -2943 bps NAReynolds American - C-Stores Growth ∆ y/y 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 4 bps 3 bps 2 bps 7 bps 6 bps 3 bpsReynolds American - XAOC Growth ∆ y/y 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1 bps 1 bps 1 bps 1 bps 1 bps 1 bps
Altria Growth ∆ y/y NA NA 0.0% NA NA NA NA NA 0.0% 1182 bps 486 bps NA 930 bps -2999 bps NAAltria - C-Stores Growth ∆ y/y 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 14 bps 6 bps 2 bps 11 bps 5 bps 2 bpsAltria - XAOC Growth ∆ y/y 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 4 bps 2 bps 1 bps 3 bps 1 bps 0 bps
VMR Growth ∆ y/y NA NA 1548.6% NA NA NA NA NA 1734.0% 1182 bps 486 bps NA 0 bps -3404 bps NAVMR- C-Stores Growth ∆ y/y 28092.9% 89187.1% 248635.1% -40.5% -38.6% -36.5% 47322.9% 145215.4% 391911.9% 2 bps 3 bps 1 bps 4 bps 4 bps 2 bpsVMR- XAOC Growth ∆ y/y 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1 bps 1 bps 0 bps 1 bps 1 bps 0 bps
Vapor Corp - XAOC (M) $0.2 $0.5 $2.8 $8.11 $6.99 $6.14 0.0 0.1 0.5 2.0% 1.8% 1.9% 1.0% 1.2% 1.5%Vapor Corp - XAOC Growth ∆ y/y -2.0% -37.3% -39.5% 56.7% 12.0% 9.8% -37.5% -44.0% -44.9% 0 bps 0 bps -2 bps 0 bps -1 bps -2 bpsGreen Smart Living (M) $0.4 $1.0 $5.0 $3.06 $3.05 $3.20 0.1 0.3 1.6 0.9% 0.9% 0.9% 1.7% 1.7% 1.7%Green Smart Living - C-Stores Growth ∆ y/y -26.2% -24.5% 19.3% -10.0% -8.4% 0.6% -18.1% -17.5% 18.5% 0 bps 0 bps 0 bps 0 bps 0 bps 0 bpsCigirex LLC (M) $0.0 $0.1 $0.4 $8.94 $7.69 $5.64 0.0 0.0 0.1 0.0% 0.1% 0.1% 0.0% 0.0% 0.1%Cigirex LLC C-Stores Growth ∆ y/y -98.6% -85.1% -85.1% 53.7% 8.7% -6.2% -99.1% -86.3% -84.1% 0 bps 0 bps -1 bps 0 bps 0 bps -1 bpsDNA Distributors (M) $0.0 $0.0 $0.6 $15.82 $15.77 $16.96 0.0 0.0 0.0 0.0% 0.0% 0.1% 0.0% 0.0% 0.0%DNA Distributors C-Stores Growth ∆ y/y -88.5% -84.7% -54.1% -12.8% -14.2% -4.7% -86.8% -82.2% -51.9% 0 bps 0 bps 0 bps 0 bps 0 bps 0 bps
Dollar Sales Avg. EQ Price VOLUME - Eq Unit Sales Dollar (VALUE) Share Unit (VOLUME) Share
Source: Nielsen’s Scantrack enhanced AOC database, Nielsen C-Track Database, company reports
WELLS FARGO SECURITIES, LLC Tobacco/C-Stores EQUITY RESEARCH DEPARTMENT
12
Number of Weeks in Period: 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-WeekPeriod Ending: 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14Cigarettes Category- TOTAL (M) $4,783.7 $14,090.4 $59,677.8 $271.42 $269.42 $266.49 17.6 52.3 223.9 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Growth ∆ y/y -0.6% -0.1% -0.5% 3.0% 2.8% 1.7% -3.5% -2.8% -2.4% -- -- -- -- -- --
Cigarettes Category- C-Stores (M) $4,013.4 $11,826.8 $50,080.3 $272.9 $270.6 $267.4 14.7 43.7 187.3 83.9% 83.9% 83.9% 83.4% 83.6% 83.6% Growth ∆ y/y -0.8% -0.4% -1.0% 3.4% 3.0% 2.0% -4.0% -3.3% -3.0% -- -- -- -- -- --Cigarettes Category- XAOC (M) $770.3 $2,263.6 $9,597.5 $263.87 $263.19 $261.92 2.9 8.6 36.6 16.1% 16.1% 16.1% 16.6% 16.4% 16.4% Growth ∆ y/y 0.4% 1.3% 2.2% 1.5% 1.6% 1.3% -1.1% -0.3% 0.9% -- -- -- -- -- --
Altria Growth ∆ y/y -0.8% -0.3% -0.8% 2.7% 2.4% 1.2% -3.4% -2.6% -2.4% -10 bps -11 bps NA 8 bps 9 bps NAAltria - C-Stores Growth ∆ y/y -1.2% -0.7% -1.4% 3.0% 2.6% 1.8% -4.1% -3.3% -3.1% 0 bps 0 bps 0 bps 0 bps 0 bps 0 bpsAltria - XAOC Growth ∆ y/y 1.1% 2.0% 2.4% 1.2% 1.2% 0.6% -0.1% 0.7% 1.8% 0 bps 0 bps 0 bps 1 bps 1 bps 0 bps
Reynolds American Growth ∆ y/y -0.5% -0.2% -1.3% 4.1% 3.8% 2.2% -4.4% -3.9% -3.4% 3 bps -3 bps NA -25 bps -30 bps NAReynolds American - C-Stores Growth ∆ y/y 0.2% 0.4% -1.0% 4.4% 4.0% 2.1% -4.1% -3.5% -3.1% 0 bps 0 bps 0 bps 0 bps 0 bps 0 bpsReynolds American - XAOC Growth ∆ y/y -3.8% -3.3% -2.8% 2.7% 2.8% 2.2% -6.4% -6.0% -4.9% -1 bps -1 bps -1 bps -1 bps -2 bps -2 bps
Lorillard Tobacco Company Growth ∆ y/y -0.1% 1.1% 2.3% 2.4% 2.3% 1.1% -2.5% -1.2% 0.4% 7 bps 16 bps NA 14 bps 19 bps NALorillard Tobacco Co. - C-Stores Growth ∆ y/y -0.6% 0.4% 0.8% 2.6% 2.6% 2.1% -3.1% -2.1% -1.3% 0 bps 0 bps 0 bps 0 bps 0 bps 0 bpsLorillard Tobacco Co. - XAOC Growth ∆ y/y 3.5% 6.4% 13.8% 1.0% 0.9% 0.0% 2.5% 5.4% 13.8% 0 bps 1 bps 1 bps 0 bps 1 bps 1 bps
Imperial Tobacco Growth ∆ y/y -9.7% -9.0% -9.7% 1.8% 1.8% 1.9% -11.3% -10.5% -11.2% -13 bps -13 bps NA -13 bps -13 bps NAImperial Tobacco- C-Stores Growth ∆ y/y -9.8% -9.2% -9.0% 2.1% 2.0% 1.4% -11.6% -10.9% -10.2% 0 bps 0 bps 0 bps 0 bps 0 bps 0 bpsImperial Tobacco- XAOC Growth ∆ y/y -9.3% -8.0% -12.9% 0.8% 1.0% 2.2% -10.0% -8.9% -14.8% 0 bps 0 bps 0 bps 0 bps 0 bps 0 bps
Vector Group Growth ∆ y/y 18.4% 19.2% 16.2% 0.7% 0.7% 1.0% 17.6% 18.4% 15.0% 0 bps 0 bps 0 bps 1 bps 1 bps 0 bpsPrivate Label Growth ∆ y/y 13.0% 13.7% -6.3% 0.6% -1.9% #DIV/0! 12.3% 16.0% -9.0% 9 bps 9 bps NA 16 bps 19 bps NA
Private Label- C-Stores Growth ∆ y/y 13.3% 13.9% -6.1% 0.6% -2.0% 3.0% 12.6% 16.3% -8.8% 0 bps 0 bps 0 bps 0 bps 0 bps 0 bpsPrivate Label- XAOC Growth ∆ y/y -63.3% -57.8% -46.4% 64.9% 70.3% 34.8% -77.8% -75.2% -60.2% 0 bps 0 bps 0 bps 0 bps 0 bps 0 bps
All Others Growth ∆ y/y 4.7% 1.9% 2.1% -0.2% 1.1% 2.0% 4.9% 0.8% 0.1% 0 bps 0 bps 0 bps 0 bps 0 bps 0 bps
Dollar Sales Avg. EQ Price VOLUME - Eq Unit Sales Dollar (VALUE) Share Unit (VOLUME) Share
Source: Nielsen’s Scantrack enhanced AOC database, Nielsen C-Track Database, company reports
WELLS FARGO SECURITIES, LLC Tobacco--Nielsen C-Store Data--E-Cig $ Sales Decline Moderates EQUITY RESEARCH DEPARTMENT
13
Required Disclosures
$21.00
$23.00
$25.00
$27.00
$29.00
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$33.00
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Altria Group, Inc. (MO) 3-yr. Price PerformanceAltria Group, Inc. (MO) 3-yr. Price Performance
Date
Date Publication Price ($) Rating Code Val. Rng. Low Val. Rng. High Close Price ($) 7/20/2011 Herzog 7/20/2011 NA 2 26.00 28.00 26.37
3/23/2012 30.14 1 31.00 33.00 30.40 4/26/2012 31.93 1 33.00 35.00 31.93 7/23/2012 35.91 1 37.00 39.00 35.49 4/22/2013 35.94 1 39.00 41.00 35.28 12/3/2013 37.23 1 40.00 42.00 37.17 1/27/2014 35.35 1 39.00 41.00 36.83 1/27/2014 38.40 1 41.00 43.00 36.83 5/19/2014 40.69 2 41.00 43.00 40.21
Source: Wells Fargo Securities, LLC estimates and Reuters data
Symbol Key Rating Code Key
Rating Downgrade Initiation, Resumption, Drop or Suspend 1 Outperform/Buy SR Suspended Rating Upgrade Analyst Change 2 Market Perform/Hold NR Not Rated Valuation Range Change Split Adjustment 3 Underperform/Sell NE No Estimate
WELLS FARGO SECURITIES, LLC Tobacco/C-Stores EQUITY RESEARCH DEPARTMENT
14
$27.00
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Lo rillard , Inc. (LO) 3-yr. P rice P erform an ceLorillard , Inc. (LO) 3-yr. P rice P erform an ce
Date
D ate Publication Price ($) R ating C ode Val. R ng. Low Val. R ng. H igh Close P rice ($) 7 /20 /2011 H erzog 7 /20/2011 NA 2 35.67 36.33 34.03
10 /24/2011 38.32 2 38.00 38.67 36.05 2 /9/2012 41.46 2 39.67 40.33 39.46 3 /23/2012 43.14 2 42.33 43.00 42.13 7 /23/2012 45.89 2 46.33 47.00 44.32 7 /25/2012 42.93 2 44.67 45.33 41.88 10 /16/2012 38.48 1 44.67 45.33 38.62 1 /16/2013 3-for-1 stock split 1/16/2013 39.09 1 43.00 45.00 38.82 2/6/2013 41.68 1 44.00 46.00 39.72 4/22/2013 43.15 1 47.00 49.00 41.50 6/24/2013 43.58 1 51.00 53.00 43.39 10/18/2013 49.23 1 53.00 55.00 47.73 12/3 /2013 50.98 1 59.00 61.00 51.20 2/10/2014 47.47 1 56.00 58.00 49.45 2/10/2014 54.06 1 58.00 60.00 49.45 4/29/2014 57.51 1 64.00 66.00 57.51
S ource: W ells Fargo Securities, LLC estim ates and Reuters data
Sym bol Key R ating C ode K ey
R ating D ow ngrade Initia tion, R esum ption , D rop or Suspend 1 Outperform /Buy SR Suspended R ating U pgrade Ana lyst Change 2 M arket Perform /Hold NR N ot Rated Va luation R ange Change Split Adjustm ent 3 U nderperform /Sell N E N o Estim ate
WELLS FARGO SECURITIES, LLC Tobacco--Nielsen C-Store Data--E-Cig $ Sales Decline Moderates EQUITY RESEARCH DEPARTMENT
15
$28.00$30.00$32.00$34.00$36.00$38.00$40.00$42.00$44.00$46.00$48.00$50.00$52.00$54.00$56.00$58.00$60.00$62.00$64.00$66.00$68.00$70.00$72.00
7/20
/11
8/17
/11
9/14
/11
10/1
2/11
11/9
/11
12/7
/11
1/4/
12
2/1/
12
2/29
/12
3/28
/12
4/25
/12
5/23
/12
6/20
/12
7/18
/12
8/15
/12
9/12
/12
10/1
0/12
11/7
/12
12/5
/12
1/2/
13
1/30
/13
2/27
/13
3/27
/13
4/24
/13
5/22
/13
6/19
/13
7/17
/13
8/14
/13
9/11
/13
10/9
/13
11/6
/13
12/4
/13
1/1/
14
1/29
/14
2/26
/14
3/26
/14
4/23
/14
5/21
/14
6/18
/14
7/16
/14
Secu
rity
Pric
e
Reynolds American Inc. (RAI) 3-yr. Price PerformanceReynolds American Inc. (RAI) 3-yr. Price Performance
Date
Date Publication Price ($) Rating Code Val. Rng. Low Val. Rng. High Close Price ($) 7/20/2011 Herzog 7/20/2011 NA 1 38.00 40.00 37.85 10/25/2011 38.04 1 40.00 42.00 38.04 11/14/2011 38.72 1 41.00 43.00 38.72
3/23/2012 41.30 2 38.00 40.00 41.00 7/23/2012 46.12 2 44.00 46.00 45.74 2/6/2013 43.94 2 45.00 47.00 43.76 5/14/2013 49.29 2 49.00 51.00 48.61 12/3/2013 50.63 2 51.00 53.00 50.20 1/23/2014 48.07 2 49.00 51.00 49.03 4/29/2014 56.24 2 59.00 61.00 56.24
5/19/2014 57.33 1 60.00 62.00 57.48 6/17/2014 59.98 1 64.00 66.00 59.98
Source: Wells Fargo Securities, LLC estimates and Reuters data
Symbol Key Rating Code Key
Rating Downgrade Initiation, Resumption, Drop or Suspend 1 Outperform/Buy SR Suspended Rating Upgrade Analyst Change 2 Market Perform/Hold NR Not Rated Valuation Range Change Split Adjustment 3 Underperform/Sell NE No Estimate
Additional Information Available Upon Request
I certify that: 1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed; and 2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report. Wells Fargo Securities, LLC maintains a market in the common stock of Altria Group, Inc., Reynolds American Inc. Wells Fargo Securities, LLC or its affiliates managed or comanaged a public offering of securities for Reynolds American Inc.,
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WELLS FARGO SECURITIES, LLC Tobacco/C-Stores EQUITY RESEARCH DEPARTMENT
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Wells Fargo Securities, LLC or its affiliates intends to seek or expects to receive compensation for investment banking services in the next three months from an affiliate of Lorillard, Inc.
Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm, which includes, but is not limited to investment banking revenue. STOCK RATING 1=Outperform: The stock appears attractively valued, and we believe the stock's total return will exceed that of the market over the next 12 months. BUY 2=Market Perform: The stock appears appropriately valued, and we believe the stock's total return will be in line with the market over the next 12 months. HOLD 3=Underperform: The stock appears overvalued, and we believe the stock's total return will be below the market over the next 12 months. SELL
SECTOR RATING O=Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. M=Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. U=Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.
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LO: Risks include unfavorable regulation and increased competition in cigarettes.MO: Risks include increased price competition and increased downtrading by consumers. RAI: Risks to our valuation include increased competitive pressure within the category and a pullback in consumer spending.
WELLS FARGO SECURITIES, LLC Tobacco--Nielsen C-Store Data--E-Cig $ Sales Decline Moderates EQUITY RESEARCH DEPARTMENT
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