Imperial Brands $IMBBY, the maker of global cigarette labels such as Winston and KOOL, struggled for years as it continually ceded market share and remained dwarfed by its much larger competitors. When its new CEO, Stefan Bomhard, joined the company in 2020, it was clear that much needed to change. Fast forward to today, and Imperial still lacks a dominant premium cigarette position like Altria. It has no market-leading next-gen product like PMI’s IQOS or BAT’s Scandinavian Velo. In fact, at a cursory glance, the company would appear to not be #1 in anything at all. For these reasons, while most investors shun the industry, even tobacco investors have turned a cold shoulder to Imperial. Even my own publicly published analyses have been notably devoid of paying specific focus to Imperial. Yet, having followed the company for years as part of my diligence in tracking the industry as a whole, I have reached a point where I finally find the company’s position compelling. This change in stance has occurred despite the company’s exit from Russia, as well as the materialization of a generational smoking ban in one of Imperial’s key markets, the United Kingdom. While this shift may appear as an affront to investing sensibility, a strong case can be made by peeking into Bomhard’s vision, the company’s subsequent execution, and a bizarre truth: the company not being #1 in any particular product category is exactly where it wants to be.

Shortly after joining Imperial Brands, Bomhard initiated a strategic review of the ailing company. The results were conclusive. The company had neglected the aspects of its business that had made it great. And rather than doubling down in a vain attempt to lead in new products—an approach that many new CEOs would strive for (that would be perhaps ego-driven)—Bomhard decided to refocus the company on its roots, as he expressed during the dbAccess Global Consumer Conference in 2021 (emphasis added):

"For me, one of the key principles is start off with the consumer and which consumer are we in the industry serving here? We are serving adult smokers. And the reality is in our business 98 percent of our business comes from our consumers smoking cigarettes or fine-cut tobacco. Two percent of our business comes today from NGP products. The reality is when you apply this lens—as excited as I am, like prior management, about the opportunities that resides on the NGP side—my job is also making sure, looking at all the needs of consumers, and it became very clear that in the past and to decide to build an NGP business, we took our eyes off the ball on looking after our core business. Consistent share declines five years in a row in our top five markets! I'm a marketeer by training. It's, for me, a sign that we weren't doing our job good enough. What is today the bulk of our business is also the bulk of how consumers want to interact with Imperial. Yeah? So it's fair to say with the new strategy there is a refocus on the core business."

Recentering on the notion that a consumer goods company should focus on the demands of the consumer is a radically sensible one. It’s also one that was logical for Bomhard to make. His experience and expertise are in rooted in consumer goods—his predecessors had backgrounds in finance and manufacturing. Instead of sharing a desire for empire-building, he further elaborated the company would be taking the approach that had previously served well for decades (emphasis added):

To some, it would appear that this was a tacit admission of failure. After all, how many CEOs want to publicly announce they don’t want their company to be labeled market leader? This would also imply a certain type of impending doom for the company: cigarettes are a product in secular decline!

Such ideas were no bother. Bomhard shook up the management ranks, creating positions and systems specifically focused on the consumer, country by country, brand by brand. Imperial rationalized its portfolio, concentrating resources into key markets: the United States, Germany, the United Kingdom, Spain, and Australia. Operations were simplified and set to become more data-driven and granularly focused. NGP rollouts would only occur as specific new categories became flagged as sizable stand-outs in certain markets. Additionally, there was an expressed resolve to become even more disciplined with regard to its full capital allocation. The company would prioritize reducing its debt burden and promised shareholders that they would not wake up to sudden news that the company had done a massively-priced acquisition, potentially compromising its leverage ratios, introducing greater uncertainty, and quashing the prospects of additional capital returns. There would only be, from time to time, small bolt-on acquisitions that sensibly enhanced core competencies.

Now, several years into the plan, multiple signals point to the strategic overhaul being a success. The company has, in the aggregate, improved its share in key markets, operations have become more efficient through cost rationalization, financials show incremental improvement, and leverage ratios have come down.

Understandably, there are hangups for investors. Could short-term success spilling over into the medium term based largely on legacy products in secular decline be priming the company for full obsolescence? Based on reports I’ve scoured, conversations held with other investors, and a pulse on general market participation, sentiment certainly seems to reflect that is the case. The crux of the thesis against such sentiment rests in several key points...