Equity Research - C-Store Canada C-Stores... · WELLS FARGO SECURITIES, LLC Tobacco/C-Stores EQUITY RESEARCH DEPARTMENT 2 Exhibit 1. Estimated Size of the Vapor Market Source: Nielsen

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 /

[email protected]

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

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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


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


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RAI - Cigarette Volume Vs Pricing Growth


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LO - Cigarette Volume Vs Pricing Growth



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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


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


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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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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.


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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



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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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CB Distributors (21St Century) e-Cig Volume Vs Pricing Growth



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



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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


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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



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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

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4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

Y/Y

Grow

th

MO Reported Data vs. Nielsen Data

MO Dollar Sales Growth (Nielsen)MO Reported Cigarette Sales Growth

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

Y/Y

Grow

th

RAI Reported Data vs. Nielsen Data

RAI Dollar Sales Growth (Nielsen)RAI Reported Cigarette Sales Growth

-15%

-10%

-5%

0%

5%

10%

15%

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

Y/Y

Grow

th

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


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


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


13

Required Disclosures

$21.00

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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


14

$27.00

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$45.00

$48.00

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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


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

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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.,

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.


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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.

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 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.

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.


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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.

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