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.
Tobacco/C-Stores
• Cigs $ Sales Again Negative As Unit Declines Offset Solid Pricing – Cstore 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).
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.
Bonnie Herzog, Senior Analyst
( 21 2 ) 2 1 4 -5 0 5 1 /
bo n n i e. h e rzo g @ w el ls f a rgo . c o m
Jessica Gerberi, CFA, Associate Analyst
( 21 2 ) 2 1 4 -5 0 2 9 /
j e s si c a . g e r b e r i @ w el l s fa rgo . co m
Adam Scott, Associate Analyst
( 21 2 ) 2 1 4 -8 0 6 4 /
ad a m. s co t t@ we ll s f ar go . co m
WELLS FARGO SECURITIES, LLC
EQUITY RESEARCH DEPARTMENT
Tobacco/C-Stores
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:
Period Ending:
Cigarette Category
EQ Unit Sales ∆ y/y
4-Week
12-Week 52-Week
07/05/14
07/05/14
07/05/14
-4.0%
-3.3%
-3.0%
Wells Fargo Securities - C-Store Scanner Data Summary
Avg. EQ Price ∆ y/y
Dollar Sales ∆ y/y
4-Week
12-Week 52-Week
4-Week
12-Week 52-Week
07/05/14
07/05/14
07/05/14
07/05/14
07/05/14
07/05/14
3.4%
3.0%
2.0%
-0.8%
-0.4%
-1.0%
4-Week
07/05/14
100.0%
Dollar Share
12-Week 52-Week
07/05/14
07/05/14
100.0%
100.0%
4-Week
07/05/14
100.0%
Unit Share
12-Week 52-Week
07/05/14
07/05/14
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 T obacco
-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%
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
2
WELLS FARGO SECURITIES, LLC
EQUITY RESEARCH DEPARTMENT
Tobacco--Nielsen C-Store Data--E-Cig $ Sales Decline Moderates
Exhibit 4. C-Store Cigarette Category Pricing, Volume and Elasticity Trends
Cigarette Category Volume Vs Pricing Growth
4.0%
0.0%
3.5%
-1.0%
Volume
2.5%
2.0%
-3.0%
Pricing
3.0%
-2.0%
1.5%
-4.0%
1.0%
-5.0%
0.5%
-6.0%
0.0%
7/6/13
8/3/13
8/31/13
9/28/13 10/26/13 11/23/13 12/21/13 1/18/14
2/15/14
Volume Growth
3/15/14
4/12/14
5/10/14
6/7/14
7/5/14
Pricing Growth
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
Cigarette Industry Price Gaps
$8
50%
45%
$7
40%
$6
Average Prices
30%
$4
25%
20%
$3
Price Gaps
35%
$5
15%
$2
10%
$1
5%
$0
0%
7/6/13
8/3/13
8/31/13
Average
Average
Average
Average
9/28/13
10/26/13
11/23/13
12/21/13
1/18/14
2/15/14
Super Premium Unit Price
Discount Unit Price
Super Premium vs. Average Premium Price Gap
Discount vs. Private Label
3/15/14
4/12/14
5/10/14
6/7/14
7/5/14
Average Premium Unit Price
Average Private Label Unit Price
Average Premium vs. Average Discount Price Gap
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
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
3.5%
-1%
-1%
2.5%
-2%
2.0%
-3.0%
1.5%
-4.0%
Volume
Volume
-2.0%
3.0%
Pricing
-1.0%
-2%
-3%
-3%
-4%
1.0%
-4%
-5.0%
0.5%
-6.0%
0.0%
7/6/13
8/3/13 8/31/13 9/28/13 10/26/13 11/23/13 12/21/13 1/18/14 2/15/14 3/15/14 4/12/14 5/10/14 6/7/14
-5%
7/6/13
8/3/13
8/31/13 9/28/13 10/26/13 11/23/13 12/21/13 1/18/14 2/15/14 3/15/14 4/12/14 5/10/14
7/5/14
7/5/14
Volume Growth
Volume Growth
6/7/14
Pricing
RAI - Cigarette Volume Vs Pricing Growth
MO - Cigarette Volume Vs Pricing Growth
0.0%
Pricing Growth
Pricing Growth
LO - Cigarette Volume Vs Pricing Growth
1%
3.5%
0%
3.0%
-1%
Volume
2.0%
-2%
1.5%
-2%
Pricing
2.5%
-1%
1.0%
-3%
0.5%
-3%
-4%
0.0%
7/6/13
8/3/13
8/31/13 9/28/13 10/26/13 11/23/13 12/21/13 1/18/14 2/15/14 3/15/14 4/12/14 5/10/14
Volume Growth
6/7/14
7/5/14
Pricing Growth
3
WELLS FARGO SECURITIES, LLC
EQUITY RESEARCH DEPARTMENT
Tobacco/C-Stores
Exhibit 6. E-Cig C-Store Scanner Data Summary Table (52-wk Category Retail $ Sales $550M)
Wells Fargo Securities - C-Store Scanner Data Summary
Avg. EQ Price
Total Category Units (in millions)
52-Week
4-Week 12-Week 52-Week 4-Week 12-Week 52-Week
07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14 07/05/14
$549.7
6.9
19.7
93.2
$5.69
$5.67
$5.90
Total Category $ (in millions)
Number of Weeks in Period:
Period Ending:
E-Cigarette Category
4-Week
07/05/14
$39.0
Number of Weeks in Period:
Period Ending:
E-Cigarette Category
4-Week
07/05/14
100.0%
12-Week
07/05/14
$111.9
Dollar Share
12-Week
52-Week
07/05/14
07/05/14
100.0%
100.0%
Avg. EQ Price ∆ y/y
EQ Unit Sales ∆ y/y
Unit Share
Dollar Sales ∆ y/y
4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week
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
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%
Logic
24.2%
24.5%
19.8%
26.6%
26.7%
21.7%
-11.4%
-11.9%
-17.9%
6.9%
9.3%
17.5%
6.3%
8.5%
15.9%
-17.3%
-17.3%
-10.1%
Njoy, Inc.
-24.4%
-11.3%
135.6%
39.5%
48.8%
125.4%
-77.7%
-72.0%
-20.3%
-16.6%
0.0%
164.7%
57.4%
69.0%
174.7%
-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%
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)
Wells Fargo Securities - XAOC Scanner Data Summary
Avg. EQ Price
Total Category Units (in millions)
Number of Weeks in Period: 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week
Period 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
E-Cigarette Category
$9.5
$28.7
$147.8
2.2
6.6
31.3
$4.31
$4.38
$4.73
Total Category $ (in millions)
Dollar Share
Unit Share
Avg. EQ Price ∆ y/y
Dollar Sales ∆ y/y
EQ Unit Sales ∆ y/y
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-Week
Period 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 07/05/14
E-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%
Source: Nielsen XAOC Database and Wells Fargo Securities, LLC
4
WELLS FARGO SECURITIES, LLC
EQUITY RESEARCH DEPARTMENT
Tobacco--Nielsen C-Store Data--E-Cig $ Sales Decline Moderates
Exhibit 8. C-Store and XAOC Combined E-Cigarette Dollar Share Trends
e-Cigs Category - C-Store and XAOC Combined, Dollar Share By Company
50%
40%
Dollar Share
30%
20%
10%
0%
Aug-12
Oct-12
Dec-12
Lorillard
Green Smart Living
Logic
Feb-13
Apr-13
Fin Branding
Njoy
Reynolds American
Jun-13
Aug-13
Oct-13
Ballantyne
CB Distributors
Altria
Dec-13
Feb-14
Cigirex
Vapor Corp
VMR Products
Apr-14
Jun-14
DNA
Nicotek
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
e-Cigarette Category Volume Vs Pricing Growth
40%
140%
120%
30%
20%
80%
60%
10%
40%
Pricing
Volume
100%
0%
20%
-10%
0%
-20%
-20%
7/06/13
08/03/13
08/31/13
09/28/13
10/26/13
11/23/13
12/21/13
01/18/14
Volume Growth
02/15/14
03/15/14
04/12/14
05/10/14
06/07/14
07/05/14
Pricing Growth
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
5
WELLS FARGO SECURITIES, LLC
EQUITY RESEARCH DEPARTMENT
Tobacco/C-Stores
C-store channel - e-Cigs Category, Dollar Share By Company
40%
35%
Dollar Share
30%
25%
20%
15%
10%
5%
0%
Apr-13
May-13
NJOY Inc.
Jun-13
Nicotek LLC
Jul-13
Aug-13
VMR Products
Sep-13
Oct-13
CB Distributors Inc
Nov-13
Dec-13
Logic
Jan-14
Feb-14
Ballantyne Brands
Mar-14
Lorillard
Apr-14
May-14
FIN Branding
Jun-14
GS Vapors Inc.
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
C-Store Channel - e-Cigs Category, Unit Share By Company
40%
35%
Unit Share
30%
25%
20%
15%
10%
5%
0%
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Dec-13
Jan-14
Feb-14
Mar-14
NJOY Inc.
Nicotek LLC
Lorillard
Logic
FIN Branding
Ballantyne Brands
Reynolds American
Altria
GS Vapors Inc
VMR Products
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
6
Nov-13
Apr-14
May-14
Jul-14
Jun-14
CB Distributors Inc
Jul-14
WELLS FARGO SECURITIES, LLC
EQUITY RESEARCH DEPARTMENT
Tobacco--Nielsen C-Store Data--E-Cig $ Sales Decline Moderates
C-Store Channel - e-Cigs Category, Avg Wtd Eq Unit Price (By Company)
$25.00
Avg Wtd Price
$20.00
$15.00
$10.00
$5.00
$0.00
Apr-13
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
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
Jul-14
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
Exhibit 10. C-Store E-Cigarettes –Pricing and Volume Trends by Company
10%
4000%
5%
3000%
0%
2000%
-5%
1000%
-10%
0%
-15%
Pricing
Volume
LO e-Cig Volume Vs Pricing Growth
5000%
-20%
-1000%
8/31/13
9/28/13
10/26/13
11/23/13
12/21/13
1/18/14
2/15/14
Volume Growth
3/15/14
4/12/14
5/10/14
6/7/14
7/5/14
Pricing Growth
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
NJOY e -Cig Volume Vs Pricing Growth
150%
30%
20%
100%
0%
-10%
0%
Pricing
Volume
10%
50%
-20%
-50%
-30%
-100%
-40%
7/06/13
08/03/13
08/31/13
09/28/13
10/26/13
11/23/13
12/21/13
01/18/14
Volume Growth
02/15/14
03/15/14
04/12/14
05/10/14
06/07/14
07/05/14
Pricing Growth
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
7
WELLS FARGO SECURITIES, LLC
EQUITY RESEARCH DEPARTMENT
Tobacco/C-Stores
Logic e-Cig Volume Vs Pricing Growth
700%
0%
600%
-5%
Volume
-15%
400%
-20%
300%
Pricing
-10%
500%
-25%
200%
-30%
100%
-35%
-40%
0%
7/06/13
08/03/13
08/31/13
09/28/13
10/26/13
11/23/13
12/21/13
01/18/14
02/15/14
Volume Growth
03/15/14
04/12/14
05/10/14
06/07/14
07/05/14
Pricing Growth
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
CB Distributors (21St Century) e-Cig Volume Vs Pricing Growth
0%
0%
-10%
-15%
-30%
-20%
-45%
-25%
7/06/13
08/03/13
08/31/13
09/28/13
10/26/13
11/23/13
12/21/13
01/18/14
Volume Growth
02/15/14
03/15/14
04/12/14
05/10/14
06/07/14
07/05/14
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
e-Cigs XAOC Category, Dollar Share By Company
60%
Dollar Share
50%
40%
30%
20%
10%
0%
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
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
8
Dec-13
Jul-14
Pricing
Volume
-5%
-15%
WELLS FARGO SECURITIES, LLC
EQUITY RESEARCH DEPARTMENT
Tobacco--Nielsen C-Store Data--E-Cig $ Sales Decline Moderates
e-Cigs XAOC Category, Unit Share By Company
50%
45%
Unit Share
40%
35%
30%
25%
20%
15%
10%
5%
0%
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
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
Jul-14
Source: Nielsen XAOC Database and Wells Fargo Securities, LLC
e-Cigs XAOC Category - Avg. Eq. Price by Company
900%
Avg Price
800%
700%
600%
500%
400%
300%
200%
100%
0%
May-13
Jun-13
Jul-13
Aug-13
LORILLARD TOBACCO COMPANY
NJOY INC.
NICOTEK LLC
ALTRIA GROUP INC
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
FIN BRANDING GROUP LLC
CB DISTRIBUTORS INC
LOGICECIG
VMR PRODUCTS LLC
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
BALLANTYNE BRANDS LLC
VAPOR CORP
REYNOLDS AMERICAN INC
ALL OTHER MFG - E-CIGARETTES
Source: Nielsen XAOC Database and Wells Fargo Securities, LLC
9
WELLS FARGO SECURITIES, LLC
EQUITY RESEARCH DEPARTMENT
Tobacco/C-Stores
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
RAI Reported Data vs. Nielsen Data
MO Reported Data vs. Nielsen Data
0%
5%
-2%
0%
Y/Y Growth
Y/Y Growth
-4%
-5%
-10%
-6%
-8%
-10%
-15%
-12%
LO Reported Data vs. Nielsen Data
15%
10%
Y/Y Growth
5%
0%
-5%
-10%
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
-15%
1Q09
LO Dollar Sales Growth (Nielsen)
LO Reported Cigarette Sales Growth
Source for all charts: Nielsen’s Scantrack C-Track database, company reports
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
RAI Dollar Sales Growth (Nielsen)
RAI Reported Cigarette Sales Growth
MO Dollar Sales Growth (Nielsen)
MO Reported Cigarette Sales Growth
10
2Q09
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
1Q09
-14%
-20%
Tobacco--Nielsen C-Store Data--E-Cig $ Sales Decline Moderates
WELLS FARGO SECURITIES, LLC
EQUITY RESEARCH DEPARTMENT
Exhibit 13. Combined XAOC and C-Store E-Cig Summary Chart
Number of Weeks in Period:
4-Week
Period Ending:
07/05/14
E-cigarettes Category- TOTAL (M)
$48.5
E-cigarettes Category- TOTAL Growth ∆ y/y -16.0%
E-cigarettes Category- C-Stores (M)
$39.0
E-cigarettes Category- C-Stores Growth ∆ y/y -12.9%
E-cigarettes Category- XAOC (M)
$9.5
E-cigarettes Category- XAOC Growth ∆ y/y
-26.8%
Lorillard Tobacco Company Growth ∆ y/y
-27.1%
Lorillard Tobacco Co. - C-Stores Growth ∆ y/y -24.4%
Lorillard Tobacco Co. - XAOC Growth ∆ y/y
-34.9%
NJOY Growth ∆ y/y
-74.9%
NJOY- C-Stores Growth ∆ y/y
-77.7%
NJOY- XAOC Growth ∆ y/y
-49.5%
Logic Ecig Growth ∆ y/y
39.5%
Logic Ecig - C-Stores Growth ∆ y/y
39.5%
Logic Ecig - XAOC Growth ∆ y/y
37.5%
FIN Branding Co Growth ∆ y/y
-44.1%
FIN Branding Co- C-Stores Growth ∆ y/y
-30.3%
FIN Branding Co- XAOC Growth ∆ y/y
-48.8%
CB Distributors Growth ∆ y/y
-42.4%
CB Distributors - C-Stores Growth ∆ y/y
-46.3%
CB Distributors - XAOC Growth ∆ y/y
-29.4%
Ballantyne Brands Growth ∆ y/y
46.4%
Ballantyne Brands- C-Stores Growth ∆ y/y
522.9%
Ballantyne Brands- XAOC Growth ∆ y/y
9.7%
Nicotek LLC Growth ∆ y/y
-59.3%
Nicotek LLC - C-Stores Growth ∆ y/y
-63.0%
Nicotek LLC - XAOC Growth ∆ y/y
-42.3%
Reynolds American Growth ∆ y/y
NA
Reynolds American - C-Stores Growth ∆ y/y
0.0%
Reynolds American - XAOC Growth ∆ y/y
0.0%
Altria Growth ∆ y/y
NA
Altria - C-Stores Growth ∆ y/y
0.0%
Altria - XAOC Growth ∆ y/y
0.0%
VMR Growth ∆ y/y
NA
VMR- C-Stores Growth ∆ y/y
28092.9%
VMR- XAOC Growth ∆ y/y
0.0%
Vapor Corp - XAOC (M)
$0.2
Vapor Corp - XAOC Growth ∆ y/y
-2.0%
Green Smart Living (M)
$0.4
Green Smart Living - C-Stores Growth ∆ y/y -26.2%
Cigirex LLC (M)
$0.0
Cigirex LLC C-Stores Growth ∆ y/y
-98.6%
DNA Distributors (M)
$0.0
DNA Distributors C-Stores Growth ∆ y/y
-88.5%
Dollar Sales
12-Week
52-Week
07/05/14
07/05/14
$140.6
$697.6
-16.5%
34.1%
$111.9
$549.7
-12.8%
43.1%
$28.7
$147.8
-28.2%
8.7%
-19.6%
79.1%
-11.3%
135.6%
-39.5%
-0.8%
-68.9%
-15.6%
-72.0%
-20.3%
-36.9%
44.0%
48.5%
125.1%
48.8%
125.4%
32.9%
106.1%
-33.4%
10.8%
-2.3%
40.3%
-41.6%
2.3%
-43.6%
-35.5%
-49.3%
-43.6%
-21.8%
10.0%
51.4%
-47.3%
291.7%
-87.2%
22.7%
30.9%
-53.5%
-2.8%
-57.2%
-2.1%
-36.8%
-5.2%
NA
0.0%
0.0%
0.0%
0.0%
0.0%
NA
0.0%
0.0%
0.0%
0.0%
0.0%
NA
1548.6%
89187.1% 248635.1%
0.0%
0.0%
$0.5
$2.8
-37.3%
-39.5%
$1.0
$5.0
-24.5%
19.3%
$0.1
$0.4
-85.1%
-85.1%
$0.0
$0.6
-84.7%
-54.1%
4-Week
07/05/14
$5.35
-13.5%
$3.31
-13.4%
$4.31
-16.5%
-7.2%
-9.3%
-3.8%
-17.1%
-17.3%
-16.2%
-11.4%
-11.4%
-12.6%
-38.6%
-15.4%
-45.5%
-16.4%
-16.5%
-14.9%
27.6%
175.1%
3.2%
-13.9%
-13.4%
-17.4%
NA
0.0%
0.0%
NA
0.0%
0.0%
NA
-40.5%
0.0%
$8.11
56.7%
$3.06
-10.0%
$8.94
53.7%
$15.82
-12.8%
Avg. EQ Price
12-Week
07/05/14
$5.35
-14.7%
$3.31
-13.7%
$4.38
-19.6%
-10.2%
-11.3%
-11.8%
-16.9%
-17.3%
-15.1%
-12.0%
-11.9%
-12.4%
-30.9%
-10.4%
-37.2%
-17.1%
-17.6%
-13.6%
23.8%
150.7%
3.9%
-12.5%
-11.1%
-18.9%
NA
0.0%
0.0%
NA
0.0%
0.0%
NA
-38.6%
0.0%
$6.99
12.0%
$3.05
-8.4%
$7.69
8.7%
$15.77
-14.2%
52-Week
07/05/14
$5.61
-10.9%
$3.32
-1.9%
$4.71
-16.3%
-11.1%
-11.0%
-11.3%
0.9%
-10.1%
14.1%
-21.8%
-17.9%
-25.3%
-25.4%
-18.0%
-32.4%
-14.1%
-16.3%
-11.4%
14.6%
44.2%
-14.3%
-14.8%
-14.9%
-14.8%
NA
0.0%
0.0%
NA
0.0%
0.0%
NA
-36.5%
0.0%
$6.14
9.8%
$3.20
0.6%
$5.64
-6.2%
$16.96
-4.7%
VOLUME - Eq Unit Sales
4-Week
12-Week 52-Week
07/05/14
07/05/14 07/05/14
9.0
26.3
124.4
-2.9%
-2.1%
41.4%
6.9
19.7
93.2
0.5%
1.1%
45.8%
2.2
6.6
31.3
-12.4%
-10.7%
29.9%
-21.4%
-10.5%
95.3%
-16.6%
0.0%
164.7%
-32.3%
-31.4%
11.8%
-69.8%
-62.6%
-8.0%
-73.0%
-66.1%
-11.3%
-39.8%
-25.6%
26.1%
57.4%
68.7%
174.7%
57.4%
69.0%
174.7%
57.3%
51.7%
175.8%
-9.0%
-3.5%
55.9%
-17.5%
9.0%
71.0%
-6.1%
-6.9%
51.2%
-31.1%
-31.9%
-22.7%
-35.7%
-38.4%
-32.6%
-17.0%
-9.4%
24.2%
14.8%
22.2%
-40.6%
126.4%
56.3%
-91.1%
6.3%
18.2%
52.8%
-52.7%
-46.9%
14.2%
-57.3%
-51.9%
15.0%
-30.2%
-22.0%
11.3%
NA
NA
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
NA
NA
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
NA
NA
1734.0%
47322.9% 145215.4% 391911.9%
0.0%
0.0%
0.0%
0.0
0.1
0.5
-37.5%
-44.0%
-44.9%
0.1
0.3
1.6
-18.1%
-17.5%
18.5%
0.0
0.0
0.1
-99.1%
-86.3%
-84.1%
0.0
0.0
0.0
-86.8%
-82.2%
-51.9%
Dollar (VALUE) Share
4-Week 12-Week 52-Week
07/05/14 07/05/14 07/05/14
100.0%
100.0% 100.0%
---80.5%
79.6%
78.8%
---19.5%
20.4%
21.2%
----557 bps -156 bps
NA
-5 bps
1 bps
17 bps
-5 bps
-8 bps
-5 bps
-1626 bps -1516 bps
NA
-20 bps
-20 bps -14 bps
-3 bps
-1 bps
2 bps
789 bps 868 bps
NA
9 bps
10 bps
7 bps
1 bps
1 bps
1 bps
-191 bps -107 bps
NA
0 bps
0 bps
0 bps
-6 bps
-3 bps
-1 bps
-165 bps -184 bps
NA
-2 bps
-2 bps
-6 bps
0 bps
0 bps
0 bps
203 bps 212 bps
NA
2 bps
1 bps
-7 bps
6 bps
7 bps
2 bps
-163 bps -141 bps
NA
-2 bps
-2 bps
-1 bps
-1 bps
0 bps
0 bps
360 bps 300 bps
NA
4 bps
3 bps
2 bps
1 bps
1 bps
1 bps
1182 bps 486 bps
NA
14 bps
6 bps
2 bps
4 bps
2 bps
1 bps
1182 bps 486 bps
NA
2 bps
3 bps
1 bps
1 bps
1 bps
0 bps
2.0%
1.8%
1.9%
0 bps
0 bps
-2 bps
0.9%
0.9%
0.9%
0 bps
0 bps
0 bps
0.0%
0.1%
0.1%
0 bps
0 bps
-1 bps
0.0%
0.0%
0.1%
0 bps
0 bps
0 bps
Unit (VOLUME) Share
4-Week 12-Week 52-Week
07/05/14 07/05/14 07/05/14
100.0%
100.0%
100.0%
---75.8%
75.1%
74.9%
---24.2%
24.9%
25.1%
----656 bps -290 bps
NA
-6 bps
0 bps
15 bps
-9 bps
-10 bps
-6 bps
-1309 bps -2630 bps
NA
-17 bps
-17 bps
-10 bps
-2 bps
-1 bps
0 bps
785 bps -1371 bps
NA
10 bps
11 bps
10 bps
1 bps
1 bps
1 bps
-42 bps
-9 bps
NA
0 bps
0 bps
0 bps
1 bps
1 bps
2 bps
-251 bps -2750 bps
NA
-3 bps
-4 bps
-8 bps
0 bps
0 bps
0 bps
110 bps -2683 bps
NA
1 bps
0 bps
-13 bps
4 bps
6 bps
4 bps
-242 bps -3145 bps
NA
-3 bps
-3 bps
-1 bps
-1 bps
0 bps
0 bps
583 bps -2943 bps
NA
7 bps
6 bps
3 bps
1 bps
1 bps
1 bps
930 bps -2999 bps
NA
11 bps
5 bps
2 bps
3 bps
1 bps
0 bps
0 bps
-3404 bps
NA
4 bps
4 bps
2 bps
1 bps
1 bps
0 bps
1.0%
1.2%
1.5%
0 bps
-1 bps
-2 bps
1.7%
1.7%
1.7%
0 bps
0 bps
0 bps
0.0%
0.0%
0.1%
0 bps
0 bps
-1 bps
0.0%
0.0%
0.0%
0 bps
0 bps
0 bps
Source: Nielsen’s Scantrack enhanced AOC database, Nielsen C-Track Database, company reports
11
WELLS FARGO SECURITIES, LLC
EQUITY RESEARCH DEPARTMENT
Tobacco/C-Stores
Number of Weeks in Period:
Period Ending:
Cigarettes Category- TOTAL (M)
Growth ∆ y/y
Cigarettes Category- C-Stores (M)
Growth ∆ y/y
Cigarettes Category- XAOC (M)
Growth ∆ y/y
Dollar Sales
4-Week 12-Week 52-Week
07/05/14 07/05/14 07/05/14
$4,783.7 $14,090.4 $59,677.8
-0.6%
-0.1%
-0.5%
$4,013.4 $11,826.8 $50,080.3
-0.8%
-0.4%
-1.0%
$770.3
$2,263.6 $9,597.5
0.4%
1.3%
2.2%
Altria Growth ∆ y/y
Altria - C-Stores Growth ∆ y/y
Altria - XAOC Growth ∆ y/y
Reynolds American Growth ∆ y/y
Reynolds American - C-Stores Growth ∆ y/y
Reynolds American - XAOC Growth ∆ y/y
Lorillard Tobacco Company Growth ∆ y/y
Lorillard Tobacco Co. - C-Stores Growth ∆ y/y
Lorillard Tobacco Co. - XAOC Growth ∆ y/y
Imperial Tobacco Growth ∆ y/y
Imperial Tobacco- C-Stores Growth ∆ y/y
Imperial Tobacco- XAOC Growth ∆ y/y
Vector Group Growth ∆ y/y
Private Label Growth ∆ y/y
Private Label- C-Stores Growth ∆ y/y
Private Label- XAOC Growth ∆ y/y
All Others Growth ∆ y/y
-0.8%
-1.2%
1.1%
-0.5%
0.2%
-3.8%
-0.1%
-0.6%
3.5%
-9.7%
-9.8%
-9.3%
18.4%
13.0%
13.3%
-63.3%
4.7%
-0.3%
-0.7%
2.0%
-0.2%
0.4%
-3.3%
1.1%
0.4%
6.4%
-9.0%
-9.2%
-8.0%
19.2%
13.7%
13.9%
-57.8%
1.9%
-0.8%
-1.4%
2.4%
-1.3%
-1.0%
-2.8%
2.3%
0.8%
13.8%
-9.7%
-9.0%
-12.9%
16.2%
-6.3%
-6.1%
-46.4%
2.1%
4-Week
07/05/14
$271.42
3.0%
$272.9
3.4%
$263.87
1.5%
Avg. EQ Price
12-Week
07/05/14
$269.42
2.8%
$270.6
3.0%
$263.19
1.6%
52-Week
07/05/14
$266.49
1.7%
$267.4
2.0%
$261.92
1.3%
VOLUME - Eq Unit Sales
Dollar (VALUE) Share
Unit (VOLUME) Share
4-Week 12-Week 52-Week 4-Week 12-Week 52-Week 4-Week 12-Week 52-Week
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
17.6
52.3
223.9
100.0%
100.0% 100.0% 100.0%
100.0%
100.0%
-3.5%
-2.8%
-2.4%
------14.7
43.7
187.3
83.9%
83.9%
83.9%
83.4%
83.6%
83.6%
-4.0%
-3.3%
-3.0%
------2.9
8.6
36.6
16.1%
16.1%
16.1%
16.6%
16.4%
16.4%
-1.1%
-0.3%
0.9%
-------
2.7%
3.0%
1.2%
4.1%
4.4%
2.7%
2.4%
2.6%
1.0%
1.8%
2.1%
0.8%
0.7%
0.6%
0.6%
64.9%
-0.2%
2.4%
2.6%
1.2%
3.8%
4.0%
2.8%
2.3%
2.6%
0.9%
1.8%
2.0%
1.0%
0.7%
-1.9%
-2.0%
70.3%
1.1%
1.2%
1.8%
0.6%
2.2%
2.1%
2.2%
1.1%
2.1%
0.0%
1.9%
1.4%
2.2%
1.0%
#DIV/0!
3.0%
34.8%
2.0%
-3.4%
-4.1%
-0.1%
-4.4%
-4.1%
-6.4%
-2.5%
-3.1%
2.5%
-11.3%
-11.6%
-10.0%
17.6%
12.3%
12.6%
-77.8%
4.9%
-2.6%
-3.3%
0.7%
-3.9%
-3.5%
-6.0%
-1.2%
-2.1%
5.4%
-10.5%
-10.9%
-8.9%
18.4%
16.0%
16.3%
-75.2%
0.8%
-2.4%
-3.1%
1.8%
-3.4%
-3.1%
-4.9%
0.4%
-1.3%
13.8%
-11.2%
-10.2%
-14.8%
15.0%
-9.0%
-8.8%
-60.2%
0.1%
Source: Nielsen’s Scantrack enhanced AOC database, Nielsen C-Track Database, company reports
12
-10 bps
0 bps
0 bps
3 bps
0 bps
-1 bps
7 bps
0 bps
0 bps
-13 bps
0 bps
0 bps
0 bps
9 bps
0 bps
0 bps
0 bps
-11 bps
0 bps
0 bps
-3 bps
0 bps
-1 bps
16 bps
0 bps
1 bps
-13 bps
0 bps
0 bps
0 bps
9 bps
0 bps
0 bps
0 bps
NA
0 bps
0 bps
NA
0 bps
-1 bps
NA
0 bps
1 bps
NA
0 bps
0 bps
0 bps
NA
0 bps
0 bps
0 bps
8 bps
0 bps
1 bps
-25 bps
0 bps
-1 bps
14 bps
0 bps
0 bps
-13 bps
0 bps
0 bps
1 bps
16 bps
0 bps
0 bps
0 bps
9 bps
0 bps
1 bps
-30 bps
0 bps
-2 bps
19 bps
0 bps
1 bps
-13 bps
0 bps
0 bps
1 bps
19 bps
0 bps
0 bps
0 bps
NA
0 bps
0 bps
NA
0 bps
-2 bps
NA
0 bps
1 bps
NA
0 bps
0 bps
0 bps
NA
0 bps
0 bps
0 bps
WELLS FARGO SECURITIES, LLC
EQUITY RESEARCH DEPARTMENT
Tobacco--Nielsen C-Store Data--E-Cig $ Sales Decline Moderates
Required Disclosures
Altria Group, Inc. (MO) 3-yr. Price Performance
$49.00
$47.00
$45.00
$43.00
$41.00
$39.00
$37.00
$35.00
Security Price
$33.00
$31.00
$29.00
$27.00
$25.00
$23.00
7/15/14
5/20/14
6/17/14
4/22/14
2/25/14
3/25/14
1/1/14
1/28/14
12/4/13
11/6/13
10/9/13
9/11/13
8/14/13
6/19/13
7/17/13
5/22/13
4/24/13
2/27/13
3/27/13
1/2/13
1/30/13
11/7/12
12/5/12
9/12/12
10/10/12
7/18/12
8/15/12
6/20/12
5/23/12
4/25/12
3/28/12
2/1/12
2/29/12
1/4/12
11/9/11
12/7/11
9/14/11
10/12/11
7/20/11
8/17/11
$21.00
Date
cz
z
z
z
z
z
z
d
Date
7/20/2011
7/20/2011
3/23/2012
4/26/2012
7/23/2012
4/22/2013
12/3/2013
1/27/2014
1/27/2014
5/19/2014
Publication Price ($)
NA
30.14
31.93
35.91
35.94
37.23
35.35
38.40
40.69
Rating Code
Herzog
2
1
1
1
1
1
1
1
2
Val. Rng. Low
Val. Rng. High
Close Price ($)
26.00
31.00
33.00
37.00
39.00
40.00
39.00
41.00
41.00
28.00
33.00
35.00
39.00
41.00
42.00
41.00
43.00
43.00
26.37
30.40
31.93
35.49
35.28
37.17
36.83
36.83
40.21
Source: Wells Fargo Securities, LLC estimates and Reuters data
Symbol Key
d Rating Downgrade
c Rating Upgrade
Valuation Range Change
z
‹
„
ˆ
Initiation, Resumption, Drop or Suspend
Analyst Change
Split Adjustment
Rating Code Key
1 Outperform/Buy
2 Market Perform/Hold
3 Underperform/Sell
SR
NR
NE
Suspended
Not Rated
No Estimate
13
WELLS FARGO SECURITIES, LLC
EQUITY RESEARCH DEPARTMENT
Tobacco/C-Stores
L o rilla rd , In c . (L O ) 3 -y r. P ric e P e rfo rm a n c e
$75.00
$72.00
$69.00
$66.00
$63.00
$60.00
$57.00
$54.00
$51.00
Security Price
$48.00
$45.00
$42.00
$39.00
$36.00
$33.00
$30.00
7/14/14
5/19/14
6/16/14
4/21/14
3/24/14
1/28/14
2/24/14
12/3/13
12/31/13
11/5/13
10/8/13
9/10/13
8/13/13
6/18/13
7/16/13
5/21/13
4/23/13
3/26/13
2/26/13
1/1/13
1/29/13
11/6/12
12/4/12
9/12/12
10/10/12
7/18/12
8/15/12
6/20/12
4/25/12
5/23/12
3/28/12
2/1/12
2/29/12
1/4/12
11/9/11
12/7/11
9/14/11
10/12/11
7/20/11
8/17/11
$27.00
Dat e
z
z
z
z
z
c
z
z
z
z
z
z
z
z
z
D ate
7/20/2011
7/20/2011
10/24/2011
2/9/2012
3/23/2012
7/23/2012
7/25/2012
10/16/2012
1/16/2013
1/16/2013
2/6/2013
4/22/2013
6/24/2013
10/18/2013
12/3/2013
2/10/2014
2/10/2014
4/29/2014
Pu blication Price ($)
NA
38.32
41.46
43.14
45.89
42.93
38.48
39.09
41.68
43.15
43.58
49.23
50.98
47.47
54.06
57.51
R ating C o de
H erzog
2
2
2
2
2
2
1
3-for-1 stock s plit
1
1
1
1
1
1
1
1
1
Val. R n g. Low
Val. R ng . H igh
C lose P rice ($)
35.67
38.00
39.67
42.33
46.33
44.67
44.67
36.33
38.67
40.33
43.00
47.00
45.33
45.33
34.03
36.05
39.46
42.13
44.32
41.88
38.62
43.00
44.00
47.00
51.00
53.00
59.00
56.00
58.00
64.00
45.00
46.00
49.00
53.00
55.00
61.00
58.00
60.00
66.00
38.82
39.72
41.50
43.39
47.73
51.20
49.45
49.45
57.51
S ource: W ells Fargo S ecurities, LLC estim ates and R euters data
Sym bol K ey
R ating D ow ngrade
d
R ating U pgrade
c
Valuation R ange Change
z
14
‹
„
ˆ
Initiation, R esum ption, D rop or Suspend
Analyst C hange
Split A djustm ent
R ating C od e K ey
1
O utperform /Buy
2
M arket P erform /H old
3
U nderperform /Sell
SR
NR
NE
Suspended
N ot Rated
N o Estim ate
WELLS FARGO SECURITIES, LLC
EQUITY RESEARCH DEPARTMENT
Tobacco--Nielsen C-Store Data--E-Cig $ Sales Decline Moderates
Reynolds American Inc. (RAI) 3-yr. Price Performance
$72.00
$70.00
$68.00
$66.00
$64.00
$62.00
$60.00
$58.00
$56.00
$54.00
$52.00
Security Price
$50.00
$48.00
$46.00
$44.00
$42.00
$40.00
$38.00
$36.00
$34.00
$32.00
$30.00
6/18/14
7/16/14
5/21/14
4/23/14
2/26/14
3/26/14
1/1/14
1/29/14
12/4/13
11/6/13
10/9/13
9/11/13
7/17/13
8/14/13
6/19/13
5/22/13
4/24/13
2/27/13
3/27/13
1/2/13
1/30/13
12/5/12
11/7/12
9/12/12
10/10/12
7/18/12
8/15/12
6/20/12
5/23/12
4/25/12
3/28/12
2/1/12
2/29/12
1/4/12
11/9/11
12/7/11
9/14/11
10/12/11
7/20/11
8/17/11
$28.00
Date
z
z
dz
z
z
z
z
z
z
cz
z
Date
7/20/2011
7/20/2011
10/25/2011
11/14/2011
3/23/2012
7/23/2012
2/6/2013
5/14/2013
12/3/2013
1/23/2014
4/29/2014
5/19/2014
6/17/2014
Publication Price ($)
NA
38.04
38.72
41.30
46.12
43.94
49.29
50.63
48.07
56.24
57.33
59.98
Rating Code
Herzog
1
1
1
2
2
2
2
2
2
2
1
1
Val. Rng. Low
Val. Rng. High
Close Price ($)
38.00
40.00
41.00
38.00
44.00
45.00
49.00
51.00
49.00
59.00
60.00
64.00
40.00
42.00
43.00
40.00
46.00
47.00
51.00
53.00
51.00
61.00
62.00
66.00
37.85
38.04
38.72
41.00
45.74
43.76
48.61
50.20
49.03
56.24
57.48
59.98
Source: Wells Fargo Securities, LLC estimates and Reuters data
Symbol Key
Rating Downgrade
d
Rating Upgrade
c
Valuation Range Change
z
‹
„
ˆ
Initiation, Resumption, Drop or Suspend
Analyst Change
Split Adjustment
Rating Code Key
1 Outperform/Buy
2 Market Perform/Hold
3 Underperform/Sell
SR
NR
NE
Suspended
Not Rated
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.
ƒ Wells Fargo Securities, LLC maintains a market in the common stock of Altria Group, Inc., Reynolds American Inc.
ƒ Wells Fargo Securities, LLC or its affiliates managed or comanaged a public offering of securities for Reynolds American Inc.,
Altria Group, Inc. within the past 12 months.
ƒ 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 Altria Group, Inc., Reynolds American Inc., Lorillard, Inc.
ƒ Wells Fargo Securities, LLC or its affiliates received compensation for investment banking services from Lorillard, Inc., Reynolds
American Inc., Altria Group, Inc. in the past 12 months.
ƒ Altria Group, Inc., Reynolds American Inc., Lorillard, Inc. currently is, or during the 12-month period preceding the date of
distribution of the research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided investment
banking services to Altria Group, Inc., Reynolds American Inc., Lorillard, Inc.
ƒ Reynolds American Inc., Altria Group, Inc. currently is, or during the 12-month period preceding the date of distribution of the
research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided noninvestment banking
securities-related services to Reynolds American Inc., Altria Group, Inc.
ƒ Wells Fargo Securities, LLC received compensation for products or services other than investment banking services from Altria
Group, Inc., Reynolds American Inc. in the past 12 months.
15
Tobacco/C-Stores
WELLS FARGO SECURITIES, LLC
EQUITY RESEARCH DEPARTMENT
ƒ Wells Fargo Securities, LLC or its affiliates has a significant financial interest in Reynolds American Inc., Altria Group, Inc.,
Lorillard, Inc.
ƒ 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.
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 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.
VOLATILITY RATING
V = A stock is defined as volatile if the stock price has fluctuated by +/-20% or greater in at least 8 of the past 24 months or if the
analyst expects significant volatility. All IPO stocks are automatically rated volatile within the first 24 months of trading.
As of: July 22, 2014
50% of companies covered by Wells Fargo Securities, LLC
Equity Research are rated Outperform.
Wells Fargo Securities, LLC has provided investment banking
services for 44% of its Equity Research Outperform-rated
companies.
48% of companies covered by Wells Fargo Securities, LLC
Equity Research are rated Market Perform.
Wells Fargo Securities, LLC has provided investment banking
services for 33% of its Equity Research Market Perform-rated
companies.
3% of companies covered by Wells Fargo Securities, LLC
Equity Research are rated Underperform.
Wells Fargo Securities, LLC has provided investment banking
services for 7% of its Equity Research Underperform-rated
companies.
Important Information for Non-U.S. Recipients
EEA – The securities and related financial instruments described herein may not be eligible for sale in all jurisdictions or to certain
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and should not be relied upon by, retail clients.
16
Tobacco--Nielsen C-Store Data--E-Cig $ Sales Decline Moderates
WELLS FARGO SECURITIES, LLC
EQUITY RESEARCH DEPARTMENT
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SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE
17