Multi-Million Dollar E-Cigarette Investment – What Are Your Thoughts?
Reynolds Amerian Inc, is geared to boost its presence in the growing e-cigarette category as a measure to offset its dwindling volumes. As part of this strategy, Reynolds is making a multi-million dollar investment to expand the distribution of its iconic e-cigarette brand Vuse nationwide in fiscal 2014. Reynolds’ two subsidiaries — R.J. Reynolds Tobacco Company and R.J. Reynolds Vapor Company — have entered into a service agreement under which they will gear up the production of e-cigarettes within the next four years.
In order to support the increased supply, Reynolds has announced the expansion of its manufacturing facility to Tobaccoville, NC. Moreover, Reynolds is arranging for high speed, next generation e-cigarette manufacturing equipment at the facility. Reynolds is set to hire 200 positions this summer for the facility and will pay, on an average, more than $40,000 a year till 2018.
Reynolds currently manufactures Vuse at a contractor’s facility in Kansas, which it intends to keep along with the new one for future use. Vuse has been re-engineered and developed by Reynolds’ subsidiary — Reynolds Vapor Company — using its own patented vapor technology. It has the advantage of being a digital cigarette due to the in-built proprietary computer chip that modulates its performance. The chip delivers consistent flavor giving Vuse an edge over other e-cigarettes.
Moreover, Vuse has received favorable response since its launch in 500 stores in Colorado in Jul 2013 and has gained major market share. Moreover, Reynolds recently launched the brand in Utah and has plans to expand its distribution nationwide in the first half of fiscal 2014.
This Zacks Rank #3 (Hold) company posted mixed first-quarter fiscal 2014 results in Apr 2014. Earnings per share of 72 cents lagged the Zacks Consensus Estimate by 2.7% due to lower-than-expected volume. However, earning remained flat year over year as lower cigarette volume and increased investment on the Vuse brand offset higher pricing of cigarette and moist snuff segments. Top line increased 2.8% year over year on the back of market share gains by it premium brands. Sales also inched past the Zacks Consensus Estimate by 2.1%.
Although volumes declined and tough industrial conditions prevailed, the company’s flagship Camel and Pall Mall brands showed considerable strength and reported substantial market share gain during the quarter.
What are your thought?