Did Casey's Comment Create Tobacco Stock Selloff?

"Challenging cigarette environment" resonates on Wall Street

Steve Holtz, Editor in Chief, CSP Daily News

ANKENY, Iowa -- The same day Casey's General Stores Inc. reported that a "challenging cigarette environment" was partly to blame for an earnings shortfall in the convenience store chain's second-quarter, tobacco stocks underperformed the stock market as a whole. The timing led at least one tobacco analyst to "attribute today's selloff to Casey's General Stores commentary."

Ankeny, Iowa-based Casey's, an operator of 1,700 c-stores in 12 Midwestern states, "reported grocery and other merchandise down -0.7% for the October quarter, due to cigarette sales 'adversely impacted by competitive pricing as well as an Illinois state excise tax increase'," wrote Nik Modi of UBS Securities in a research note. "Given the debate around the cigarette pricing environment, we believe some may have taken remarks from Casey's management as a net negative for tobacco stocks."

"Cigarettes in the quarter accounted for approximately 36% of the total revenue in the category, down from 40% a year ago," CFO Bill Walljasper said on the earnings call Tuesday. "Over the course of the past several months, we have made additional price adjustments in response to the more competitive cigarette landscape."

That same day, tobacco stocks underperformed the market by -146 basis points and underperformed "staples peers" (HBC, beverages and packaged food) by -140 bps, according to Modi.

However, Modi concluded that "tobacco investors should not be concerned."

"We note two things here: 1) It should not be a surprise that certain retailers are stepping up promotional spending post the excise-tax increase in Illinois, and 2) we believe price reductions discussed by Casey's management are being funded by Casey's and not the tobacco manufacturers," Modi wrote. "Most importantly, we believe any commentary about the 2012 cigarette pricing environment (by retailers and even the manufacturers for the December quarter) is backward looking since we expect a reduction in promotional spending starting in 2013."

(See Related Content below for previous CSP Daily News coverage.)

Steve Holtz, CSP/Winsight By Steve Holtz, Editor in Chief, CSP Daily News
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