Vapor Sales Could Soon Smoke Cigarettes

admin June 29, 2015 Comments Off on Vapor Sales Could Soon Smoke Cigarettes
Vapor Sales Could Soon Smoke Cigarettes

We continue to believe vapor consumption could surpass combustible cigarettes in the next decade, driving total profit pool growth, generating a 6.6% compound annualized growth rate.

All-channel (mass channel plus convenience stores) e-cigarette dollar sales grew year-over-year, but decelerated sequentially to up 19.1% in the period ending June 13, driven by 54.0% unit growth, partially offset by a 22.7% drop in net pricing. Though e-cigarette year-over-year pricing has been negative for 13 consecutive periods, we believe it’s at least partially due to difficulty in capturing [unique] stock-keeping units (SKUs) given the rapidly evolving vapor category and proliferation of vapors/tanks/mods (VTM) and refills which tend to have a lower retail price.

However, we remain encouraged that category dollar sales continue to grow, driven by Big Tobacco’s national e-cigarette rollouts and believe the trial and awareness generated by [Reynolds American ( RAI ) unit] Vuse and [Altria Group ( MO ) unit] MarkTen should help elevate the entire category and drive incremental trial. Importantly, we note that VTMs are underrepresented in Nielsen, but are growing faster than the vapor category based on our “Tobacco Talk” surveys.

While we remain bullish on vapor long term, we acknowledge some near-term profitability headwinds as companies continue to invest in the category and data remain very difficult to capture and measure.

All channel cigarette dollar sales rose 1.2% (down from up 2.6% last period and up from 0.9% growth last year) during the four weeks ended June 13, driven by 2.6% pricing growth, partially offset by a 1.4% drop in equivalent units. As discussed in our “Tobacco Talk” survey notes, a stronger tobacco consumer continues to have a favorable impact on the category. We continue to expect strong manufacturer pricing in 2015 which should generate robust profitability growth.

Reynolds American cigarette dollar sales were flat year-over-year as 2.3% pricing growth was offset by a 2.2% drop in unit growth. We reiterate our Outperform rating on Reynolds American.

Altria cigarette dollar sales grew 1.1%, driven by 2.5% rise in pricing, partially offset by a 1.4% unit decline. We maintain our Outperform rating on Altria.

Lorillard cigarette dollar sales increased 3.5% this period, driven by 2.1% unit growth and a 1.4% rise in pricing. Please note this period’s results do not reflect Reynolds American’s purchase of Lorillard, which closed June 12.

Smokeless tobacco dollar sales grew 5.2% during the period ended June 13, driven by 29.6% unit growth, partially offset by a 18.8% drop in net pricing. The high dollar sales and unit growth was likely driven by continued national expansion of Reynolds American’s Grizzly Dark Wintergreen. Altria continues be the dollar share leader with a 56.6% share; while Reynolds American had a 34.4% share and Swedish Match [of Stockholm], 6.9%.

Reynolds American remained the top dollar share player in all-channel e-cigarette data with a 33.2% dollar share. Lorillard retained the No. 2 dollar share position at 24.2%, while [closely held] Logic was number three at 13.9%. Altria’s share fell to 5.8% and [closely held] NJOY’s fell to 5.3%. In terms of unit share, Reynolds American continues to be No. 1 with 44.4% unit share, followed by Lorillard (18.3%), Logic (8.1%), Altria (7.1%) and NJOY at No. 6 (4.5%). While Nielsen’s data are useful directionally, particularly dollar sales data, we believe the e-cigarette unit and pricing data are particularly difficult to rely on given Nielsen is not yet reporting “equivalent” units in this category.

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