May 27, 2014
Equity Research Tobacco-Nielsen C-Store Data-E-Cig $ Sales Soften • E-Cigs--LO’s blu Remains Category Leader As Logic Further Entrenches Itself In No. 2 Spot Followed By NJOY--In a continuation of decelerating e-cig trends over the past several periods, e-cig dollar sales declined for the first time (-10.4% in the period ending 5/10/14), as eq. unit growth of 4.1% was not able to offset lower yr/yr net pricing of -13.9% (price has now been negative for 5 sequential periods). Avg. eq. price per unit was $5.66. We believe the 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 nontracked channels (especially vape shops) as Nielsen e-cig data is not a proxy for the vapor category as a whole. LO continues to retain its No. 1 spot in the c-store channel, garnering 43.1% dollar share in the recent period (+5.8 share pt gain yr/yr). Logic maintained its second-place share position this period with a record 24.3% share, as NJOY retained third place with 11.4% share. RAI and MO’s shares were 3% and 1.4%, respectively. LO continues to lead the take-home channel as well, with 45.2% share. Other leading firms in XAOC were FIN (now owned by Victory) and Mistic, each with 15.5% share, and NJOY (8.8% share). Though e-cig category dollar sales growth has been decelerating, dollar sales are meaningful ($37MM this period in the c-store channel and $9.7MM 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 our chart on page 2). Importantly, we note that vapors/tanks are underrepresented in Nielsen but are growing 2x faster than the vapor category based on our “Tobacco Talk” survey. Further, tobacco shops and “vape shops” are not captured by Nielsen and these are meaningful vapor distribution channels. Investors have been questioning if the investments the major players are putting 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 Dollar Sales Decelerate As Unit Declines Intensify--Net Pricing Remains Solid--C-store cig $ sales fell 1.0% (vs. -0.8% last period and +0.8% LY) in the recent 4 weeks, driven by -3.0% eq. units, partially offset by +2.1% avg. eq. pricing. We expect solid manufacturer pricing in 2014 but likely below long-term averages given the multiple levers they have to pull. • LO Dollar Sales Outperform Peers, Industry, Driven By AboveIndustry Unit Performance--LO cig $ sales grew 0.1% in the period, driven by +1.7% pricing (vs. industry +2.1%), almost fully offset by 1.6% unit decline. LO’s dollar share pulled back slightly to 14.3%, up 0.2 points yr/yr. We are bullish on LO ($60.20, Outperform) given its many cig & e-cig growth drivers. • MO Dollar Sales Underperformed, Driven By Below-Industry Pricing-MO cig dollar sales fell 1.1% (vs. -1.2% last month) as +1.7% pricing partially offset -2.8% vol. We maintain our Market Perform rating on MO ($40.68). • RAI’s Dollar Sales Underperformed Industry Driven By BelowIndustry Units--RAI cig dollar sales fell 1.1%, as +2.7% pricing failed to offset 3.7% unit decline. We maintain our Outperform rating on RAI ($58.45).
Please see page 13 for rating definitions, important disclosures and required analyst certifications All estimates/forecasts are as of 05/27/14 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
Source: Wells Fargo Securities, LLC estimates.
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 05/10/14 05/10/14 05/10/14 -3.0% -2.6% -2.6%
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 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 2.1% 1.9% 1.8% -1.0% -0.8% -0.9%
4-Week 05/10/14 100.0%
Dollar Share 12-Week 52-Week 05/10/14 05/10/14 100.0% 100.0%
4-Week 05/10/14 100.0%
Unit Share 12-Week 52-Week 05/10/14 05/10/14 100.0% 100.0%
Altria Group
-2.8%
-2.7%
-2.8%
1.7%
1.6%
1.6%
-1.1%
-1.1%
-1.2%
54.9%
54.8%
54.9%
53.6%
53.5%
53.5%
Reynolds American
-3.7%
-2.7%
-2.8%
2.7%
2.3%
1.7%
-1.1%
-0.5%
-1.2%
25.7%
25.8%
25.8%
26.8%
26.9%
27.0%
Lorillard
-1.6%
-0.8%
-0.9%
1.7%
1.8%
2.0%
0.1%
1.0%
1.1%
14.3%
14.4%
14.2%
12.9%
13.0%
12.8%
Imperial T obacco
-10.4%
-9.9%
-9.4%
1.2%
0.4%
1.2%
-9.4%
-9.5%
-8.4%
1.3%
1.3%
1.3%
1.5%
1.5%
1.5%
Private Label
-9.7%
-11.6%
-12.8%
1.9%
1.8%
4.7%
-8.0%
-10.0%
-8.8%
0.8%
0.8%
0.8%
1.1%
1.1%
1.1%
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 Soften
Exhibit 4. C-Store Cigarette Category Pricing, Volume and Elasticity Trends
0.0%
3.0%
-1.0%
2.5%
-2.0%
2.0%
-3.0%
1.5%
-4.0%
1.0%
-5.0%
0.5%
Pricing
Volume
Cigarette Category Volume Vs Pricing Growth
0.0%
-6.0% 5/11/13
6/8/13
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
Pricing Growth
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC Cigarette Industry Price Gaps $9
35%
$8
30%
$7 25%
$5
20%
$4
15%
Price Gaps
Average Prices
$6
$3 10% $2 5%
$1
0%
$0 5/11/13
6/8/13
7/6/13
8/3/13
8/31/13
9/28/13
10/26/13
11/23/13
Average Super Premium Unit Price Average Discount Unit Price Average Super Premium vs. Average Premium Price Gap Average Discount vs. Private Label
12/21/13
1/18/14
2/15/14
3/15/14
4/12/14
5/10/14
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
3
WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT
Tobacco/C-Stores Exhibit 5. C-Store Cigarette Pricing and Volume Trends by Company Source for all charts: Nielsen C-Track Database and Wells Fargo Securities, LLC
RAI - Cigarette Volume Vs Pricing Growth
MO - Cigarette Volume Vs Pricing Growth
3%
0%
3.0%
-1%
-1.0%
2.5%
-2.0%
2.0%
-3.0%
1.5%
-4.0%
1.0%
3%
-1%
-5.0%
Volume
Pricing
Volume
-2%
6/8/13
7/6/13
-3%
1% 1%
-4% -5%
0% 5/11/13
0.0% 5/11/13
2%
-3% -4%
0.5%
-6.0%
2%
-2%
6/8/13
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
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
Volume Growth
Pricing Growth
Pricing Growth
LO - Cigarette Volume Vs Pricing Growth 2%
3.5%
1%
3.0%
1%
Volume
-1%
2.0%
-1%
1.5%
-2%
Pricing
2.5%
0%
1.0%
-2% 0.5%
-3% -3%
0.0% 5/11/13
6/8/13
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
Pricing Growth
Exhibit 6. E-Cig C-Store Scanner Data Summary Table (52-wk Category Retail $ Sales $562M) 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 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 $561.8 6.5 22.0 93.2 $5.66 $5.67 $6.03
Total Category $ (in millions)
Number of Weeks in Period: Period Ending: E-Cigarette Category
4-Week 05/10/14 $37.0
Number of Weeks in Period: Period Ending: E-Cigarette Category
4-Week 05/10/14 100.0%
Lorillard
43.1%
12-Week 05/10/14 $124.5
Dollar Share 12-Week 52-Week 05/10/14 05/10/14 100.0% 100.0% 44.1%
Unit Share Dollar Sales ∆ y/y Avg. EQ Price ∆ y/y EQ Unit 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 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 100.0% 100.0% 100.0% -13.9% -14.1% 4.4% -10.4% 3.6% 70.5% 4.1% 20.6% 63.4%
43.2%
33.4%
34.1%
34.3%
-11.8%
-13.3%
-10.4%
3.6%
32.6%
266.1%
17.5%
53.0%
308.4%
Logic
24.3%
21.9%
18.4%
26.5%
23.8%
20.3%
-13.1%
-15.1%
-21.4%
65.1%
82.1%
171.5%
90.1%
114.4%
245.2%
Njoy, Inc.
11.4%
14.0%
20.3%
10.5%
13.6%
18.3%
-18.2%
-21.7%
-5.5%
-67.5%
-57.2%
8.1%
-60.3%
-45.3%
14.4%
CB Distributors
3.6%
3.6%
4.2%
6.3%
6.2%
7.1%
-18.2%
-13.7%
-15.7%
-52.2%
-48.5%
-39.0%
-41.6%
-40.2%
-27.7%
Nicotek
1.9%
1.8%
2.7%
2.7%
2.7%
4.1%
-7.9%
-10.7%
-17.1%
-52.7%
-46.5%
23.3%
-48.6%
-40.1%
48.7%
FIN Branding Group
1.7%
1.7%
1.7%
2.1%
2.0%
2.0%
-9.0%
-8.2%
-23.2%
34.8%
43.8%
50.0%
48.2%
56.6%
95.3%
Reynolds American
3.0%
2.6%
1.2%
4.6%
3.9%
1.9%
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%
1.6%
1.6%
1.7%
-2.7%
-7.2%
4.4%
-18.3%
-15.2%
48.2%
-16.0%
-8.7%
41.9%
Ballantyne Brands, Inc.
1.0%
0.8%
0.5%
1.0%
0.9%
0.7%
113.0%
50.5%
10.9%
62.8%
2.7%
-93.3%
-23.6%
-31.8%
-93.9%
Altria
1.4%
1.2%
0.6%
1.7%
1.5%
0.8%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Cigirex
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
5.9%
5.2%
-5.6%
-56.9%
-82.8%
-77.2%
-59.3%
-83.7%
-75.9%
DNA Distributors
0.0%
0.0%
0.1%
0.0%
0.0%
0.0%
-14.9%
-12.2%
-4.9%
-85.5%
-87.9%
-43.1%
-82.9%
-86.3%
-40.2%
GS Vapors Inc.
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
-64.0%
-68.6%
-19.3% 7030.3% 586.4%
Other
7.6%
7.3%
6.0%
9.4%
9.6%
8.7%
-7.4%
-15.9%
-17.8%
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
4
46.4%
65.6%
6.3% 117.3%
19700.0% 2084.6% 58.2%
96.8%
31.8% 164.3%
Pricing
0.0%
WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT
Tobacco-Nielsen C-Store Data-E-Cig $ Sales Soften
Exhibit 7. E-Cig XAOC Scanner Data Summary Table (52-wk Category Retail $ Sales $155M) Wells Fargo Securities - XAOC Scanner Data Summary Total Category Units (in millions) Avg. EQ Price 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: 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 E-Cigarette Category $9.7 $32.3 $154.9 2.2 7.1 31.8 $4.41 $4.54 $4.87 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: 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 05/10/14 E-Cigarette Category 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% -22.8% -23.1% -14.7% -30.2% -19.5% 25.5% -9.6% 4.7% 47.2% Lorillard
45.2%
45.4%
48.7%
33.2%
33.2%
36.9%
-16.8%
-14.1%
-11.4%
-42.6%
-34.6%
18.1%
-30.9%
-23.9%
33.4%
FIN Branding Group
15.5%
15.9%
16.0%
18.4%
18.3%
16.9%
-30.8%
-30.2%
-32.3%
-37.6%
-34.9%
30.6%
-9.8%
-6.7%
92.9%
Ballantyne Brands, Inc.
15.5%
14.1%
12.9%
24.0%
23.5%
23.4%
-1.8%
-9.8%
-18.5%
27.7%
78.4%
23.7%
30.1%
97.7%
51.7%
Njoy, Inc.
8.8%
10.1%
9.6%
6.1%
7.2%
6.7%
-13.8%
-13.1%
24.1%
-19.2%
39.5%
75.3%
-6.3%
60.5%
41.2%
CB Distributors
5.6%
5.2%
5.0%
8.2%
7.7%
7.6%
-12.0%
-12.3%
-10.9%
-13.6%
-9.8%
25.7%
-1.8%
2.9%
41.1%
Nicotek
2.2%
2.1%
2.3%
2.6%
2.5%
2.7%
-19.8%
-17.9%
-14.2%
-34.6%
-32.4%
12.9%
-18.5%
-17.6%
31.6%
Logic
1.4%
1.5%
1.2%
1.1%
1.3%
1.1%
-11.0%
-18.3%
-30.0%
43.7%
85.7%
127.7%
61.4%
127.3%
225.4%
Reynolds American
1.1%
1.0%
0.4%
1.3%
1.2%
0.5%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Altria
0.4%
0.5%
0.2%
0.4%
0.6%
0.2%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Other
2.6%
2.0%
1.6%
2.8%
2.5%
2.1%
9.0%
0.0%
-4.6%
53.8%
43.0%
104.0%
41.1%
43.0%
113.9%
Source: Nielsen XAOC Database and Wells Fargo Securities, LLC
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% Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Lorillard
Logic
Njoy
Fin Branding
CB Distributors
Nicotek
Green Smart Living
Vapor Corp
Cigirex
DNA
Mar-14
Apr-14
May-14
Ballantyne
Source: Nielsen C-Track Database, Nielsen XAOC Database and Wells Fargo Securities, LLC
5
WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT
Tobacco/C-Stores
Exhibit 9. C-Store E-Cigarette Category Pricing, Volume, Dollar Share and Unit Share Trends
40%
120%
30%
Volume
100%
20%
80% 10% 60% 0%
40%
-10%
20% 0%
-20% 5/11/13
06/08/13
07/06/13
08/03/13
08/31/13
09/28/13
10/26/13
11/23/13
Volume Growth
12/21/13
01/18/14
02/15/14
03/15/14
04/12/14
05/10/14
Pricing Growth
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC C-store channel - e-Cigs Category, Dollar Share By Company 50% 45% 40%
Dollar Share
35% 30% 25% 20% 15% 10% 5% 0% Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Logic
NJOY Inc.
CB Distributors Inc
Reynolds American
Nicotek LLC
FIN Branding
Altria
Green Smart Living
Ballantyne Brands
DNA Distributors
Cigirex LLC
GS Vapors Inc.
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
6
Sep-13
Lorillard
Apr-14
May-14
Pricing
e-Cigarette Category Volume Vs Pricing Growth 140%
WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT
Tobacco-Nielsen C-Store Data-E-Cig $ Sales Soften
C-Store Channel - e-Cigs Category, Unit Share By Company 40%
35%
Unit Share
30%
25%
20%
15%
10%
5%
0% Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Lorillard
Logic
NJOY Inc.
CB Distributors Inc
Reynolds American
Nicotek LLC
FIN Branding
Altria
Green Smart Living
Ballantyne Brands
Cigirex LLC
DNA Distributors
GS Vapors Inc.
Apr-14
May-14
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
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 Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
DNA Distributors
Lorillard
NJOY Inc.
Logic
Ballantyne Brands
FIN Branding
Cigirex LLC
Altria
Nicotek LLC
Reynolds American
GS Vapors Inc.
Green Smart Living
CB Distributors Inc
Mar-14
Apr-14
May-14
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
E-Cig Per-Cartomizer Cost Should Trend Down Over Time Due Volume Shift to Multi-Packs – Several leading brands including blu, NJOY and Vuse (still in test markets rolling out nationally starting in June 2014) are coming out with starter kits at attractive price points. Blu for example now offers a 5cartomizer kit priced at $34.99 and RAI’s Vuse kit, which contains 3 cartomizers, will be priced at $29.99.
7
WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT
Tobacco/C-Stores Exhibit 10. C-Store E-Cigarettes –Pricing and Volume Trends by Company
LO e-Cig Volume Vs Pricing Growth 5000%
20% 15% 10% 5%
3000%
0% 2000%
Pricing
Volume
4000%
-5% -10%
1000%
-15% -20%
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
Volume Growth
2/15/14
3/15/14
4/12/14
5/10/14
Pricing Growth
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
NJOY e-Cig Volume Vs Pricing Growth 30%
150%
20%
100%
0% -10%
0%
Pricing
Volume
10% 50%
-20% -50%
-30% -40%
-100% 5/11/13
06/08/13
07/06/13
08/03/13
08/31/13
09/28/13
10/26/13
11/23/13
Volume Growth
12/21/13
01/18/14
02/15/14
03/15/14
04/12/14
05/10/14
Pricing Growth
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
0%
700%
-5%
600%
-10%
500%
-15%
400%
-20%
300%
-25%
200%
-30%
100%
-35%
0%
-40% 5/11/13
06/08/13
07/06/13
08/03/13
08/31/13
09/28/13
10/26/13
11/23/13
Volume Growth
Source: Nielsen C-Track Database and Wells Fargo Securities, LLC
8
12/21/13
01/18/14
Pricing Growth
02/15/14
03/15/14
04/12/14
05/10/14
Pricing
Volume
Logic e-Cig Volume Vs Pricing Growth 800%
WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT
Tobacco-Nielsen C-Store Data-E-Cig $ Sales Soften
30%
0%
15%
-5%
0%
-10%
-15%
-15%
-30%
-20%
-45%
Pricing
Volume
CB Distributors (21St Century) e-Cig Volume Vs Pricing Growth
-25% 5/11/13
06/08/13
07/06/13
08/03/13
08/31/13
09/28/13
10/26/13
11/23/13
Volume Growth
12/21/13
01/18/14
02/15/14
03/15/14
04/12/14
05/10/14
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 70%
Dollar Share
60%
50%
40%
30%
20%
10%
0% Lorillard
Mar-13 Apr-13 FIN Branding
May-13 Jun-13 Ballantyne Brands
Jul-13 Aug-13 Sep-13 Oct-13 NJOY INC. CB Distributors Inc
Nov-13 Dec-13 Jan-14 Nicotek LLC Logic eCig
Feb-14 Mar-14 Apr-14 May-14 Reynolds American Altria
Source: Nielsen XAOC Database and Wells Fargo Securities, LLC
9
WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT
Tobacco/C-Stores
e-Cigs XAOC Category, Unit Share By Company 60%
Unit Share
50%
40%
30%
20%
10%
0% Mar-13 Lorillard
Ballantyne Brands
Apr-13
May-13
FIN Branding
Jun-13
Jul-13
Aug-13
CB DISTRIBUTORS INC
Sep-13
Oct-13
NJOY INC.
Nov-13
Dec-13
Nicotek LLC
Jan-14
Logic eCig
Feb-14
Mar-14
Apr-14
Reynolds American
May-14 Altria
Source: Nielsen XAOC Database and Wells Fargo Securities, LLC
e-Cigs XAOC Category - Avg. Eq. Price by Company 800%
Avg Price
700%
600%
500%
400%
300%
200%
100%
0% Mar-13
Apr-13
NJOY INC. Nicotek LLC
May-13
Jun-13
Jul-13
Aug-13
Lorillard Reynolds American
Source: Nielsen XAOC Database and Wells Fargo Securities, LLC
10
Sep-13
Oct-13
Logic eCig CB Distributors Inc
Nov-13
Dec-13
Jan-14
Altria Ballantyne Brands
Feb-14
Mar-14
Apr-14
FIN Branding
May-14
WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT
Tobacco-Nielsen C-Store Data-E-Cig $ Sales Soften
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 Q1 2008) 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 Q1 2009 Through Q1 2014 RAI Reported Data vs. Nielsen Data
10%
15%
5%
10%
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
-15%
2Q10
-20% 1Q10
-10%
4Q09
-15%
3Q09
-5%
2Q09
-10%
4Q09
0%
3Q09
-5%
5%
2Q09
0%
1Q09
Y/Y Growth
20%
1Q09
Y/Y Growth
MO Reported Data vs. Nielsen Data 15%
RAI Dollar Sales Growth (Nielsen) RAI Reported Cigarette Sales Growth
MO Dollar Sales Growth (Nielsen) MO Reported Cigarette Sales Growth
LO Reported Data vs. Nielsen Data 20% 15%
Y/Y Growth
10% 5% 0% -5% -10%
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
-15%
LO Dollar Sales Growth (Nielsen) LO Reported Cigarette Sales Growth
Source for all charts: Nielsen’s Scantrack C-Track database, company reports
11
WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT
Tobacco/C-Stores Exhibit 13. Combined XAOC and C-Store E-Cig Summary Chart
Number of Weeks in Period: Period Ending: E-cigarettes Category- TOTAL Growth ∆ y/y E-cigarettes Category- C-Stores Growth ∆ y/y E-cigarettes Category- 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 NJOY Growth ∆ y/y NJOY- C-Stores Growth ∆ y/y NJOY- XAOC Growth ∆ y/y Logic Ecig Growth ∆ y/y Logic Ecig - C-Stores Growth ∆ y/y Logic Ecig - XAOC Growth ∆ y/y FIN Branding Co Growth ∆ y/y FIN Branding Co- C-Stores Growth ∆ y/y FIN Branding Co- XAOC Growth ∆ y/y CB Distributors Growth ∆ y/y CB Distributors - C-Stores Growth ∆ y/y CB Distributors - XAOC Growth ∆ y/y Ballantyne Brands Growth ∆ y/y Ballantyne Brands- C-Stores Growth ∆ y/y Ballantyne Brands- XAOC Growth ∆ y/y Nicotek LLC Growth ∆ y/y Nicotek LLC - C-Stores Growth ∆ y/y Nicotek LLC - XAOC Growth ∆ y/y Reynolds American Growth ∆ y/y Reynolds American - C-Stores Growth ∆ y/y Reynolds American - XAOC Growth ∆ y/y Altria Growth ∆ y/y Altria - C-Stores Growth ∆ y/y Altria - XAOC Growth ∆ y/y Vapor Corp - XAOC Growth ∆ y/y Green Smart Living - C-Stores Growth ∆ y/y Cigirex LLC C-Stores Growth ∆ y/y DNA Distributors C-Stores Growth ∆ y/y
4-Week 05/10/14 -15.4% -10.4% -30.2% -11.7% 3.6% -42.6% -63.8% -67.5% -19.2% 64.8% 65.1% 43.7% -25.7% 34.8% -37.6% -45.2% -52.2% -13.6% 33.2% 62.8% 27.7% -49.3% -52.7% -34.6% 64.8% 0.0% 0.0% -31.9% 0.0% 0.0% -59.5% -18.3% -56.9% -85.5%
Dollar Sales 12-Week 05/10/14 -2.2% 3.6% -19.5% 9.0% 32.6% -34.6% -51.9% -57.2% 39.5% 82.1% 82.1% 85.7% -22.7% 43.8% -34.9% -41.7% -48.5% -9.8% 57.3% 2.7% 78.4% -43.8% -46.5% -32.4% 82.1% 0.0% 0.0% -39.1% 0.0% 0.0% -48.7% -15.2% -82.8% -87.9%
52-Week 05/10/14 58.3% 70.5% 25.5% 144.4% 266.1% 18.1% 13.1% 8.1% 75.3% 170.5% 171.5% 127.7% 35.4% 50.0% 30.6% -30.2% -39.0% 25.7% -59.0% -93.3% 23.7% 21.1% 23.3% 12.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -35.4% 48.2% -77.2% -43.1%
4-Week 05/10/14 -15.6% -13.9% -22.8% -11.6% -11.8% -16.8% -17.5% -18.2% -13.8% -13.1% -13.1% -11.0% -25.9% -9.0% -30.8% -17.6% -18.2% -12.0% 10.3% 113.0% -1.8% -10.2% -7.9% -19.8% -13.1% 0.0% 0.0% -26.2% 0.0% 0.0% -30.1% -2.7% 5.9% -14.9%
Avg. EQ Price 12-Week 05/10/14 -16.0% -14.1% -23.1% -11.7% -13.3% -14.1% -19.9% -21.7% -13.1% -15.3% -15.1% -18.3% -25.6% -8.2% -30.2% -14.4% -13.7% -12.3% -6.2% 50.5% -9.8% -12.2% -10.7% -17.9% -15.3% 0.0% 0.0% -26.0% 0.0% 0.0% -16.4% -7.2% 5.2% -12.2%
52-Week 05/10/14 -5.1% 4.4% -14.7% -10.9% -10.4% -11.4% 7.7% -5.5% 24.1% -26.0% -21.4% -30.0% -27.8% -23.2% -32.3% -13.5% -15.7% -10.9% -3.7% 10.9% -18.5% -15.6% -17.1% -14.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.7% 4.4% -5.6% -4.9%
VOLUME - Eq Unit Sales 4-Week 12-Week 52-Week 05/10/14 05/10/14 05/10/14 0.3% 16.3% 58.9% 4.1% 20.6% 63.4% -9.6% 4.7% 47.2% -0.1% 23.1% 162.9% 17.5% 53.0% 308.4% -30.9% -23.9% 33.4% -56.2% -39.5% 16.8% -60.3% -45.3% 14.4% -6.3% 60.5% 41.2% 89.6% 114.7% 244.8% 90.1% 114.4% 245.2% 61.4% 127.3% 225.4% 0.2% 3.8% 93.5% 48.2% 56.6% 95.3% -9.8% -6.7% 92.9% -33.5% -32.1% -16.8% -41.6% -40.2% -27.7% -1.8% 2.9% 41.1% 20.8% 64.2% -50.1% -23.6% -31.8% -93.9% 30.1% 97.7% 51.7% -43.6% -36.2% 45.2% -48.6% -40.1% 48.7% -18.5% -17.6% 31.6% 89.6% 114.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -7.7% -17.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -42.1% -38.7% -36.4% -16.0% -8.7% 41.9% -59.3% -83.7% -75.9% -82.9% -86.3% -40.2%
Dollar (VALUE) Share 4-Week 12-Week 52-Week 05/10/14 05/10/14 05/10/14 ---------182 bps 454 bps NA 6 bps 10 bps 23 bps -10 bps -11 bps -3 bps -1456 bps -1367 bps NA -20 bps -20 bps -12 bps 1 bps 4 bps 3 bps 952 bps 818 bps NA 11 bps 9 bps 7 bps 1 bps 1 bps 1 bps -64 bps -123 bps NA 1 bps 0 bps 0 bps -2 bps -4 bps 1 bps -218 bps -269 bps NA -3 bps -4 bps -8 bps 1 bps 1 bps 0 bps 146 bps 134 bps NA 0 bps 0 bps -11 bps 7 bps 8 bps 0 bps -129 bps -141 bps NA -2 bps -2 bps -1 bps 0 bps 0 bps 0 bps -129 bps -141 bps NA 3 bps 3 bps 1 bps 1 bps 1 bps 0 bps -129 bps -141 bps NA 1 bps 1 bps 1 bps 0 bps 1 bps 0 bps -1 bps -1 bps -2 bps 0 bps 0 bps 0 bps 0 bps 0 bps -1 bps 0 bps 0 bps 0 bps
Unit (VOLUME) Share 4-Week 12-Week 52-Week 05/10/14 05/10/14 05/10/14 ----------11 bps 188 bps NA 4 bps 7 bps 21 bps -10 bps -12 bps -4 bps -1212 bps -1998 bps NA -17 bps -16 bps -8 bps 0 bps 2 bps 0 bps 947 bps -1370 bps NA 12 bps 10 bps 11 bps 0 bps 1 bps 1 bps 0 bps -72 bps NA 1 bps 0 bps 0 bps 0 bps -2 bps 4 bps -345 bps -2539 bps NA -5 bps -6 bps -9 bps 1 bps 0 bps 0 bps 115 bps -2554 bps NA 0 bps -1 bps -19 bps 7 bps 11 bps 1 bps -210 bps -2933 bps NA -3 bps -3 bps 0 bps 0 bps -1 bps 0 bps 947 bps -1370 bps NA 5 bps 4 bps 2 bps 1 bps 1 bps 1 bps -1 bps -3191 bps NA 2 bps 2 bps 1 bps 0 bps 1 bps 0 bps -1 bps -1 bps -2 bps 0 bps -1 bps 0 bps 0 bps 0 bps -1 bps 0 bps 0 bps 0 bps
Source: Nielsen’s Scantrack enhanced AOC database, Nielsen C-Track Database, company reports 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 05/10/14 05/10/14 05/10/14 $4,565.0 $13,386.5 $59,664.9 -0.6% -0.3% -0.4% $3,832.0 $11,229.8 $50,084.0 -1.0% -0.8% -0.9% $733.0 $2,156.7 $9,580.9 1.7% 2.3% 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 Growth ∆ y/y Lorillard - C-Stores Growth ∆ y/y Lorillard - XAOC Growth ∆ y/y Imperial Tobacco Growth ∆ y/y Imperial Tobacco- C-Stores Growth ∆ y/y Imperial Tobacco- XAOC Growth ∆ y/y Vector Group- XAOC Growth ∆ y/y Pvt Label Growth ∆ y/y Private Label- C-Stores Growth ∆ y/y Private Label- XAOC Growth ∆ y/y All Others- XAOC Growth ∆ y/y
-0.5% -1.1% 2.5% -1.5% -1.1% -3.3% 1.1% 0.1% 8.2% -9.2% -9.4% -8.3% 19.9% -8.1% -8.0% -52.1% 0.2%
-0.5% -1.1% 2.8% -0.9% -0.5% -3.0% 2.3% 1.0% 11.7% -9.2% -9.5% -8.1% 20.2% -10.2% -10.0% -57.2% 1.0%
-0.6% -1.2% 2.3% -1.4% -1.2% -2.7% 2.8% 1.1% 16.0% -9.4% -8.4% -13.8% 14.6% -8.9% -8.8% -36.9% 2.1%
4-Week 05/10/14 $266.97 2.0% $267.9 2.1% $262.34 1.5%
Avg. EQ Price 12-Week 05/10/14 $266.69 1.8% $267.6 1.9% $262.09 1.1%
52-Week 05/10/14 $265.18 1.6% $266.0 1.8% $261.24 1.3%
1.6% 1.7% 1.0% 2.7% 2.7% 2.9% 1.6% 1.7% 0.3% 1.1% 1.2% 0.9% 0.4% 1.9% 1.9% 75.1% 2.1%
1.5% 1.6% 0.5% 2.3% 2.3% 2.3% 1.6% 1.8% 0.2% 0.4% 0.4% 0.5% 0.4% 1.9% 1.8% 70.3% 2.6%
1.1% 1.6% 0.6% 2.1% 1.7% 2.3% 1.0% 2.0% -0.2% 1.8% 1.2% 2.3% 1.5% 15.8% 4.7% 25.0% 3.1%
VOLUME - Eq Unit Sales 4-Week 12-Week 52-Week 05/10/14 05/10/14 05/10/14 17.1 50.2 225.0 -2.5% -2.0% -2.1% 14.3 42.0 188.3 -3.0% -2.6% -2.6% 2.8 8.2 36.7 0.2% 1.2% 0.9% -2.1% -2.8% 1.4% -4.1% -3.7% -6.0% -0.5% -1.6% 7.9% -10.2% -10.4% -9.1% 19.4% -9.9% -9.7% -72.6% -1.9%
-1.9% -2.7% 2.2% -3.1% -2.7% -5.2% 0.6% -0.8% 11.5% -9.6% -9.9% -8.5% 19.6% -11.8% -11.6% -74.9% -1.6%
Source: Nielsen’s Scantrack enhanced AOC database, Nielsen C-Track Database, company reports
12
-2.1% -2.8% 1.7% -3.2% -2.8% -5.0% 1.0% -0.9% 16.2% -10.7% -9.4% -15.7% 12.9% -12.9% -12.8% -49.6% -1.0%
Dollar (VALUE) Share 4-Week 12-Week 52-Week 05/10/14 05/10/14 05/10/14 100.0% 100.0% 100.0% ---83.9% 83.9% 83.9% ---16.1% 16.1% 16.1% ----
Unit (VOLUME) Share 4-Week 12-Week 52-Week 05/10/14 05/10/14 05/10/14 100.0% 100.0% 100.0% ---83.7% 83.6% 83.7% ---16.3% 16.4% 16.3% ----
4 bps 0 bps 0 bps -23 bps 0 bps -1 bps 23 bps 0 bps 1 bps -13 bps 0 bps 0 bps 0 bps -5 bps 0 bps 0 bps 0 bps
24 bps 0 bps 1 bps -44 bps 0 bps -2 bps 25 bps 0 bps 1 bps -13 bps 0 bps 0 bps 1 bps -8 bps 0 bps 0 bps 0 bps
-11 bps 0 bps 0 bps -16 bps 0 bps -1 bps 35 bps 0 bps 1 bps -13 bps 0 bps 0 bps 0 bps -7 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
7 bps 0 bps 1 bps -30 bps 0 bps -2 bps 33 bps 0 bps 1 bps -13 bps 0 bps 0 bps 1 bps -10 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 Soften
Required Disclosures
5/19/14
3/24/14
4/21/14
2/24/14
1/28/14
12/3/13
12/31/13
11/5/13
10/8/13
9/10/13
8/13/13
7/16/13
6/18/13
4/23/13
5/21/13
3/26/13
2/26/13
1/1/13
1/29/13
12/4/12
11/6/12
9/12/12
10/10/12
8/15/12
7/18/12
5/23/12
6/20/12
4/25/12
3/28/12
2/1/12
2/29/12
1/4/12
12/7/11
11/9/11
9/14/11
10/12/11
8/17/11
7/20/11
5/25/11
6/22/11
Security Price
L o rilla rd , In c . (L O ) 3 -y r. P ric e P e rfo rm a n c e $71.00 $69.00 $67.00 $65.00 $63.00 $61.00 $59.00 $57.00 $55.00 $53.00 $51.00 $49.00 $47.00 $45.00 $43.00 $41.00 $39.00 $37.00 $35.00 $33.00 $31.00 $29.00 $27.00
Dat e
z z z z z c z z z z z z z z z
D ate 5/25/2011 5/25/2011 10/24/2011 2/9/2012 3/23/2012 7/23/2012 7/25/2012 10/16/2012 1/16/2013 1/16/2013 2/6/2013 4/22/2013 6/24/2013 10/18/2013 12/3/2013 2/10/2014 2/10/2014 4/29/2014
Pu blication Price ($) 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 split 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
34.89 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 d R ating D ow ngrade R ating U pgrade c z Valuation R ange Change
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
13
WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT
Tobacco/C-Stores
Altria Group, Inc. (MO) 3-yr. Price Performance $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
5/20/14
3/25/14
4/22/14
2/25/14
1/1/14
1/28/14
12/4/13
11/6/13
10/9/13
9/11/13
8/14/13
7/17/13
6/19/13
4/24/13
5/22/13
3/27/13
2/27/13
1/2/13
1/30/13
12/5/12
11/7/12
9/12/12
10/10/12
8/15/12
7/18/12
5/23/12
6/20/12
4/25/12
3/28/12
2/1/12
2/29/12
1/4/12
12/7/11
11/9/11
9/14/11
10/12/11
8/17/11
7/20/11
5/25/11
6/22/11
$21.00
Date
cz z z z z z z d
Date 5/25/2011 5/25/2011 3/23/2012 4/26/2012 7/23/2012 4/22/2013 12/3/2013 1/27/2014 1/27/2014 5/19/2014
Publication Price ($) 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
27.91 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
14
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
WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT
Tobacco-Nielsen C-Store Data-E-Cig $ Sales Soften
Reynolds American Inc. (RAI) 3-yr. Price Performance $68.00 $66.00 $64.00 $62.00 $60.00 $58.00 $56.00 $54.00 $52.00 $50.00
Security Price
$48.00 $46.00 $44.00 $42.00 $40.00 $38.00 $36.00 $34.00 $32.00 $30.00 4/23/14
5/21/14
3/26/14
2/26/14
1/1/14
1/29/14
12/4/13
11/6/13
10/9/13
9/11/13
8/14/13
7/17/13
5/22/13
6/19/13
4/24/13
3/27/13
2/27/13
1/2/13
1/30/13
12/5/12
11/7/12
9/12/12
10/10/12
8/15/12
7/18/12
5/23/12
6/20/12
4/25/12
3/28/12
2/1/12
2/29/12
1/4/12
12/7/11
11/9/11
9/14/11
10/12/11
8/17/11
7/20/11
5/25/11
6/22/11
$28.00
Date
z z dz z z z z z z cz
Date 5/25/2011 5/25/2011 10/25/2011 11/14/2011 3/23/2012 7/23/2012 2/6/2013 5/14/2013 12/3/2013 1/23/2014 4/29/2014 5/19/2014
Publication Price ($) NA 38.04 38.72 41.30 46.12 43.94 49.29 50.63 48.07 56.24 57.33
Rating Code Herzog 1 1 1 2 2 2 2 2 2 2 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
40.00 42.00 43.00 40.00 46.00 47.00 51.00 53.00 51.00 61.00 62.00
39.59 38.04 38.72 41.00 45.74 43.76 48.61 50.20 49.03 56.24 57.48
Source: Wells Fargo Securities, LLC estimates and Reuters data Symbol Key Rating Downgrade d Rating Upgrade c Valuation Range Change z
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. 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.,
Altria Group, Inc. within the past 12 months.
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.
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. 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. 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. 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
Wells Fargo Securities, LLC or its affiliates has a significant financial interest in Reynolds American Inc., Altria Group, Inc.,
Lorillard, Inc. 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: May 27, 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 46% of its Equity Research Outperform-rated companies.
47% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Market Perform.
Wells Fargo Securities, LLC has provided investment banking services for 35% 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 13% 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 categories of investors. For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited (“WFSIL”). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (“the Act”), the content of this report has been approved by WFSIL a regulated person under the Act. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients.
16
Tobacco-Nielsen C-Store Data-E-Cig $ Sales Soften
WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT
Australia – Wells Fargo Securities, LLC is exempt from the requirements to hold an Australian financial services license in respect of the financial services it provides to wholesale clients in Australia. Wells Fargo Securities, LLC is regulated under U.S. laws which differ from Australian laws. Any offer or documentation provided to Australian recipients by Wells Fargo Securities, LLC in the course of providing the financial services will be prepared in accordance with the laws of the United States and not Australian laws. Hong Kong – This report is issued and distributed in Hong Kong by Wells Fargo Securities Asia Limited (“WFSAL”), a Hong Kong incorporated investment firm licensed and regulated by the Securities and Futures Commission to carry on types 1, 4, 6 and 9 regulated activities (as defined in the Securities and Futures Ordinance, “the SFO”). This report is not intended for, and should not be relied on by, any person other than professional investors (as defined in the SFO). Any securities and related financial instruments described herein are not intended for sale, nor will be sold, to any person other than professional investors (as defined in the SFO). Japan – This report is distributed in Japan by Wells Fargo Securities (Japan) Co., Ltd, registered with the Kanto Local Finance Bureau to conduct broking and dealing of type 1 and type 2 financial instruments and agency or intermediary service for entry into investment advisory or discretionary investment contracts. This report is intended for distribution only to professional investors (Tokutei Toushika) and is not intended for, and should not be relied upon by, ordinary customers (Ippan Toushika). The ratings stated on the document are not provided by rating agencies registered with the Financial Services Agency of Japan (JFSA) but by group companies of JFSA-registered rating agencies. These group companies may include Moody’s Investors Services Inc, Standard & Poor’s Rating Services and/or Fitch Ratings. Any decisions to invest in securities or transactions should be made after reviewing policies and methodologies used for assigning credit ratings and assumptions, significance and limitations of the credit ratings stated on the respective rating agencies’ websites. About Wells Fargo Securities, LLC Wells Fargo Securities is the trade name for the capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission and a member of NYSE, FINRA, NFA and SIPC, Wells Fargo Institutional Securities, LLC, a member of FINRA and SIPC, Wells Fargo Prime Services, LLC, a member of FINRA, NFA and SIPC, Wells Fargo Bank, N.A. and Wells Fargo Securities International Limited, authorized and regulated by the Financial Conduct Authority. Wells Fargo Securities, LLC is a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the New York Stock Exchange, the Financial Industry Regulatory Authority and the Securities Investor Protection Corp. This report is for your information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments named or described in this report. Interested parties are advised to contact the entity with which they deal, or the entity that provided this report to them, if they desire further information. The information in this report has been obtained or derived from sources believed by Wells Fargo Securities, LLC, to be reliable, but Wells Fargo Securities, LLC, does not represent that this information is accurate or complete. Any opinions or estimates contained in this report represent the judgment of Wells Fargo Securities, LLC, at this time, and are subject to change without notice. For the purposes of the U.K. Financial Conduct Authority's rules, this report constitutes impartial investment research. Each of Wells Fargo Securities, LLC, and Wells Fargo Securities International Limited is a separate legal entity and distinct from affiliated banks.. Copyright © 2014 Wells Fargo Securities, LLC. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE
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