“Wheel within wheels in a spiral array, a pattern so grand and complex. Time after time we lose sight of the way, our causes can't see their effects.”
– Neil Peart
Whenever we hear the term ‘ecosystem’ we tend to go right to the world of natural science. After all, the textbook definition of an ecosystem is “…a geographic area where plants, animals, and other organisms, as well as weather and landscape, work together to form a bubble of life.” I like that…’bubble of life’.
I’d take it a step further and say that in a functioning ecosystem, every factor depends on every other factor, either directly or indirectly. When I hear that clarification, I think past the world of natural science, and to the world of businesses, companies and industries – most notably, the one I hold most near and dear, which of course is Retail. As I tell my Retail Pro subscribers, never underestimate the impact of a defendable ecosystem.
Yeah, I know…leave it to McGough to link the title of Hedgeye’s flagship Early Look to the title and lyrics of a song from the greatest prog rock trio to ever grace the billboards. Maybe I score points with McCullough and Jonesy because the band I’m referring to is Canadian. But I digress…
Back To The Retail Grind…
The point here is that the concept of an ecosystem in business is increasingly critical to making money in this retail/consumer discretionary tape – particularly if you like to find the elusive 10-baggers on the long side, as well as sniff out the shorts that get cut in half, and then get cut in half again (when businesses with lack of strategic vision get trounced by those that are building dominant ecosystems).
Nike is one of the obvious examples of ‘ecosystem winners’, which is why the stock is up nearly 1,000X since its IPO, and rarely goes a year without resetting to new highs. But let’s go into a couple of less obvious examples that I think offer unique opportunities today to generate alpha.
The first is RH.
My team went long this name in 2012 at ~$30, and after the stock doubled, we went all out with a price target of $300. Yes, we called for a 10-bagger. Bold call. It was by no means smooth sailing, as the stock was at times a nightmare over a TRADE and TREND duration – making me look like a moron for weeks or months at a time. But I stuck to my analytical guns.
We saw back then that the company was building an ecosystem around wealthy homeowners in the US. By sizing up its store fleet to resemble luxury mansions, it created an atmosphere where people can go to the store, walk into a room, and literally say ‘I want this entire room’. Instead of discounting product, the company introduced a membership club that brought consumers deeper into the RH ecosystem.
It then began to build restaurants in its Galleries, which are premium-priced food and beverage experiences that are profitable on a standalone basis – never mind accretive to the four-wall store operating model via traffic.
On top of that the company has launched a Guesthouse concept – think RH Hotels – has two luxury yachts and a private aircraft available for premium customers/influencers. It’s also entering the business of building luxury homes – RH style. The ultimate example of this is the immersive RH experience in Aspen, where the company will have a gallery, two restaurants, a guesthouse, a bathhouse, and a spa. It’s hitting the consumer from every angle – building a moat that can’t be replicated.
Did I mention that RH has a 50/50 store vs e-comm model? That’s key. One channel can’t exist without the other.
So that got us to where we are today – a 22-bagger from our original call. But what’s next? 2022 marks the year where RH takes its immersive experience overseas with RH England, RH London, and RH Paris. The company is using Aspen as the new normal – completely dominating the consumer experience from all angles. While other retailers are pulling capital out of stores, RH is creating three stores next year that will probably rank as the top 1, 2 and 3 retail stores in terms of guest experience anywhere in the world. Yes – better than Apple retail. Far better, and with a better ROIC to boot.
When we do the math on the revenue RH is likely to generate over a TAIL duration as it opens Europe, we build to ~$8bn vs about $3.5bn today. At a 25% margin and 70% ROIC, we’re getting to $50 per share in EPS power. That compares to the Street at $32. That’s when the ‘dominant ecosystem multiple’ factor kicks in and this name trades at 40-50x earnings. Yes, we’re making a call for a $2,000-$2,500 stock. The consensus Old Wall target on RH today is $770. That’s wrong by a factor of three. The Street is missing the power of the ecosystem.
Next up on the ‘ecosystem scorecard’ will surprise you. PLBY Group.
Yes, Playboy. Think of this brand as a 68-year old startup. No, it’s no longer a dying media business like when Hefner drove it into the ground. But rather has been reborn as a progressive brand where the incremental customer is Gen Y/Gen Z and skews female.
The digitally native brand is on the cutting edge of socially divisive issues like racism, civil rights, drug decriminalization, freedom of expression, and is a champion of the LGBTQ community. The company is growing into categories like fragrances, cosmetics, spirits, and hospitality, and has a truly global audience and scope with 50% of revenue today coming from China.
But the real ecosystem is in sexual wellness, where PLBY has amassed a portfolio of brands that blankets the consumer across the product spectrum in lingerie, swimwear, and ‘adult bedroom paraphernalia’ (use your imagination – I’m trying to keep this SFW).
But on top of that, the company is launching a 4Q initiative called CENTERFOLD, which will be a classier version of OnlyFans – a creator-driven interactive content platform. Aside from the fact that OF has ~$6bn in GMV and over $1bn in revenue – which is up for grabs -- PLBY can place its product with the content creators for an incredibly immersive experience in the brand. If that weren’t enough, the company just launched a drop of 11,593 ‘Rabbitar’ NFTs, which has been a raging success.
In addition to a piece of unique digital artwork/content, you can think of each Rabbitar as a key that unlocks membership to all the possibilities of Playboy on the blockchain, including exclusive access to Playboy art and artist collaborations, real life and metaverse experiences, and physical and virtual fashion. In the three days since the NFT drop, members of Playboy’s Discord channel went from 3,000 to over ~36,000.
The commercial opportunity in this business – one with no clear category leader – is limited only by management’s ability to execute. And on that front our confidence is high. We got on board the PLBY train at $25, and think it’s ultimately worth $250 over a TAIL duration. With the stock at $28 today, there’s a ton of upside to come.
How can I leave you without highlighting the opposite of a NKE, an RH or a PLBY?
That distinct honor belongs to Macy’s. This takes the concept of an ecosystem and squashes it – or at least the investor narratives do. The activist case a few years ago was that Macy’s can sell its stores and monetize its real estate.
That didn’t work out – not because Macy’s didn’t want it to, but because it was near impossible to execute on the plan. Aside from the fact that nobody wants to buy a portfolio of ~726 anchor tenant stores in dying malls, the reality is that if Macy’s wants to keep the underlying cashflow it’d have to pay in market rents in a sale-leaseback, which it can’t afford without destroying the financial model.
But the latest activist pitch is even more laughable – it’s that Macy’s should separate its e-comm business into its own stand-alone publicly-traded entity. Ask any real retail CEO that understands the value of building an immersive experience around the consumer, and they’ll laugh off the concept of an e-comm spin. Physical retail can’t exist with e-comm, and vice-versa.
The only reason why Macy’s isn’t a Best Idea Short for me right now is that it has 3Q/4Q numbers in the bag – the consumer is flush with cash and this is likely to be a killer holiday. So you’ve got the company beating numbers and an activist pushing their book all during Macro Quad 2 – when junky names like Macy’s perform best. This could be a $35 stock easy – which is exactly when I step on the accelerator short side. It’s the anti-ecosystem – ultimately worth closer to zero.
If you would like to learn more about my research team's in-depth investing research please reach out to .
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.54-1.72% (bullish)
UST 2yr Yield 0.39-0.55% (bullish)
SPX 4 (bullish)
RUT 2 (bullish)
NASDAQ 14,954-15,516 (bullish)
Tech (XLK) 156.01-161.42 (bullish)
Utilities (XLU) 64.91-68.14 (bearish)
Energy (XLE) 56.32-59.48 (bullish)
Financials (XLF) 39.12-41.09 (bullish)
Make it a great day…
Brian P. McGough
Managing Director
