Our Bullish E Cigs Thesis Remains Intact

E Cig Online Sales Ban Being Considered as We Expected We wanted to put out some thoughts on an article earlier this afternoon on potential online sales restrictions on e cigs. According to a WSJ article, the FDA may be considering a ban of online sales of e cigs, citing people ”familiar” with the ”package of regulations” the FDA is readying for e cigs, which we continue to believe will be released in October. We have long been saying that we expect tight regulations of e cigs and that we wouldn’t be surprised if an online ban was eventually enacted. If online sales are banned, we’d expect most of the online sales volume (currently $500 625M) to move to traditional retailers, where we believe e cig sales have passed $1B (we believe total sales retail and online will hit $1.7B by the end of the year). If online sales of e cigs were banned, we believe this clearly would be a huge positive for e cig manufacturers that are already well entrenched with retailers, including LO (blu) with over 100,000 retail points of distribution and privately held NJOY. Blu’s online sales are about 15 20% of its total and we think most of this volume would move to brick and mortar stores if online sales were banned. Bottom line we would not be surprised if online e cig sales were restricted or banned but this does not impact our bullish thesis that consumption of e cigs could overtake conventional cigs within the next decade.

An Online Sales Ban Would Benefit RAI and MO Too Though RAI’s Vuse e cig and MO’s MarkTen e cig are still in limited distribution in test markets, an online sales ban would be positive for them as well given their strong relationships with retailers which we believe will enable them to have easy access to shelf space once they are ready for a broader product roll out. RAI and MO would likely take share from the dozens of smaller e cig players, who do not have strong relationships with retailers, who would find themselves in a tough spot if online sales were banned.

Link to full Equity Research E Cigs Online Sales Ban Being Considered 8 22 13

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