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Long: PLBY, PCAR, BRCC Short: EXAS, CURV, BGFV, WRBY, DOCN, OXM, TNET, DTC, INVH |
Below are updates on our twelve current high-conviction long and short ideas. We have removed Red Robin Gourmet Burgers (RRGB) from the short side. We have added Solo Brands (DTC) & Invitation Homes (INVH). We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
PLBY
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One thing we see Playboy (PLBY) doing more now is its ability to tier product by price, channel (although PLBY leans into its own DTC channels), and consumer. The two products PLBY does this for are its lingerie and its ready-to-wear apparel. On the lingerie side, from highest price/consumer to lowest, the company has Honey Birdette with price points in the $100s, Playboy lingerie in the $50s, and Yandy in $20s. On the apparel side the company has, from highest price/consumer to lowest, its BigBunny brand in the $100s, Playboy Collaborations in the $70s, and Playboy Apparel in the $50s. This is a strategy that many of the best apparel brands, like Nike, execute to perfection. If Playboy can continue to execute on this strategic initiative, the apparel/lingerie offering will have years of profitable growth ahead. |
PLBY put up a great 4th quarter. Revenue was up 107% to $95.7mm beating our higher than the highest-on-the-street estimate. Adjusted EBITDA came in ahead of consensus as well at $14.0mm vs $13.1mm.
Management guided up 2022 to $350mm in revenue with consensus at $337mm and EBITDA to $55mm with consensus at $50.4mm. Demand for the PLBY brands remains strong and growth initiatives are on track. Ashley Kechter was a great addition to this call carrying her experience building real branded products/goods at large successful public companies.
With other execs excited about the massive growth optionality in the digital content/membership realm, it's reassuring to have her experience at the helm of what is and will for a long time be the core cash flow driving business for PLBY in global products.
PLBY delivered on the quarter despite the small miscues around new initiative launches and covid disruptions like slow supply chains, forced store/casino closures, and delayed licensing negotiations. The big complaint lately from the retail investment community has been the slow development of the Rabbitar holder community/experience. But call commentary gives us the impression that CENTERFOLD became a clear top priority for the digital/tech team in terms of resource allocation.
This makes sense, if you promised a platform to a group of big time creators, you have to make it a top priority to deliver the platform as soon as possible. Perhaps this meant the NFT project suffered temporarily, which we’re completely fine with given our view of the long term value opportunity variance (significantly favors CENTERFOLD). On the NFT front, shortly after the call wrapped Rachel Webber posted on Discord that PLBY has partnered with Nightshift, a premium web3 and NFT creative team, to help develop Rabbitar community perks, benefits, collaborations, and more.
So the company appears to have simply turned to outsourcing the project development. Additionally, Honey Birdette is planning 10 new stores. The runway is long for this brand to grow and take share in the premium sexy lingerie segment that Victoria’s Secret has been vacating in exchange for more mass appeal. The only downside to this print in our view was the annoying semantics around filing rules that PLBY now falls under, meaning the company’s auditors are still cramming to finish their process, so the filing of the 10k (and more detailed fundamentals) will be delayed a couple weeks.
The CFO did share that the company has $70mm in cash on the balance sheet at year end, plenty of liquidity to drive growth initiatives. The growth story here is on track.
PCAR
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Long Thesis Overview: The truck industry should undergo a major structural change this quarter with the spin-off of Daimler Truck. We expect Daimler to seek higher margins via pricing. Hints of that are seen in the delays for opening build slots for 2022. If we are reading that correctly, we think PCAR and Volvo are straightforward beneficiaries. Knorr-Bremse report earnings report read through is a positive on the commercial trucks industry. It’s commercial vehicle segment (CVS) order book slipped a bit in the fourth quarter versus 4Q20 but showed a book-to-bill of 1.15. The book-to-bill improved sequentially from 0.89 to 1.15 as OEMs began opening up build slots for 2022. Orders received were +29.2% for the year. Truck demand continues to be robust into 2022 with North American backlogs near all-time highs – equivalent to around 1 year of production just to produce to meet demand, which should help PCAR, Daimler Truck and Volvo increase margins through pricing power. |
We don’t ‘know’ but we’d bet PCAR management is trying to signal to Daimler Truck (and others) that market share is less important than prices. It would be very irrational for this consistently rational management team to signal anything else.
While not confirmation of our thesis on industry pricing in the wake of the Daimler Truck spin, it is supportive and not disconfirming. It looks like one of the leaders is saying they want to ‘play nice in the sandbox’.
BRCC
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Long Thesis Overview: Black Rifle Coffee Company (BRCC) is a veteran-founded coffee company. The company was founded in 2014 by Evan Hafer, a Green Beret. BRCC is a mission-focused company committed to supporting veterans, active-duty military, and first responders. BRCC has targeted the $28B coffee category as its serviceable addressable market. Coffee consumption is a daily choice that consumers have increasingly made into a lifestyle decision. Consumers are viewing the coffee and even the mug the coffee is consumed in as a personal statement. As a brand with differentiated characteristics Black Rifle Coffee Company appeals to a large demographic that does not have a lot of competition. The days when Starbucks coffee appeals to everyone and sparks national debates over its holiday cups are moving into the past. |
Black Rifle Coffee Company opens a store in Oklahoma City today. The company currently only has a handful of outposts open, but it is ramping up store growth. Next year the company expects revenue from outposts to represent nearly one-quarter of its sales from less than 5% in 2021 as seen in the chart below.
Like other digitially native companies, Black Rifle has an advantage in its site selection. The company has a nearly two million lifetime customer database to help it map future store locations. In addition, Black Rifle Coffee Company has a management team with experience in opening stores at a rapid pace.
EXAS
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Short Thesis Overview: Exact Sciences (EXAS) shares remain on the Health Care team’s Best Ideas Short list following its 4Q21 / FY21 earnings release and call. As of mid-day Friday, 2/25/22, the stock is up ~2% on the week after dropping from the low $70s to the high $60s immediately following the earnings call. We think concern around 2022 Cologuard screening revenue guidance ($1,340MM to $1,347MM up from $1,062MM in 2021) is likely to leave the stock in a short bucket in our MicroQuads (MicroQuad 4 or 1), which is not a great place to be for a stock when we’re in Macro Quad 4. |
Exact Sciences (EXAS) remains on the Health Care team’s Best Ideas Short list. The stock closed yesterday at $70.73, down ~9% on the week (-13% YTD).
We are encouraged by the inability of shares to move higher post 4Q/FY21 earnings and believe that the concern around 2022 Cologuard screening revenue guidance ($1,340MM to $1,347MM up from $1,062MM in 2021) is why the stock in a short bucket in our MicroQuads. EXAS has been bouncing back and forth between MicroQuads 1 and 4, with MicroQuad 1 being a smaller allocation in the model portfolio, and MQ4 being a much larger allocation.
You can see an example in our March 3, 2022 Morning Brief: Trading My PA.
Why does the guide matter so much for EXAS? After excluding $220MM in rescreening, $40MM in acquisitions, it looks like "core" Cologuard revenue is declining. With easing COVID-19 restrictions, additional Pfizer reps, provider adds, and electronic ordering acting as presumptive tailwinds, guidance looks even worse. Our view has been that Cologuard will cede share back to colonoscopy and penetration is unlikely to ever get to or above 40%. More recently we have heard that access to physician offices for sales reps is unlikely to ever return to pre-pandemic levels as management highlighted during the earnings call.
The risk is that the new, larger, expensive sales team can have an impact in a world where physician office visits don’t return to pre-COVID levels, the market totally returns to normal (unlikely), or management really does have a "clear line of sight" to profitability a couple of years out and the sell side starts to believe that and ratchets 2022 revenue estimates higher from the $2 billion level.
EXAS is, we think, playing a long game with hereditary and pan-cancer screening (Thrive), but these opportunities are well outside of our purview.
CURV & OXM
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Short Thesis Overview: Consider that Sycamore bought Hot Topic in 2013 for $600mm and purchased it almost entirely for the crown jewel Hot Topic asset. Torrid was the icing on the cake. On July 1, Torrid went public as a stand-alone business in the hottest and most profitable apparel environment we’ve seen in decades and traded at a $2.5bn valuation. In the end, this is an overstored retailer that is benefitting from a once-in-a-generation burst in apparel spending at unsustainable gross margins, which came public because the private equity sponsor saw a unique window to sell an asset at inflated prices. Given that dynamic, there’s still stock that has to come to market and Sycamore still owns 75% of the shares outstanding, or about 82 million shares, which it will get rid of at any price and create continuous downward pressure on CURV. Short Thesis Overview: OXM got a downgrade on the Street a few weeks ago. It is nice to get the negative view support, but Old Wall is a little late to the party. We’re bearish on apparel in 2022, and while there’s nothing really “wrong” with Tommy and Lily, the reality is that both brands are overearning this year, the consensus has margins remaining elevated at 15% in perpetuity (closer to 12% is the right number), and the stock is trading near a peak multiple on the actual underlying earnings power. The right earnings power for this company is closer to $5 per share than the ~$8 that the Street is looking for over a TAIL duration which presents significant downside to the stock. |
There were some clear red flags in apparel related earnings this week as several large apparel retailers reported rising inventories, notably GPS, URBN, TGT. Inventory balance growth at year end are coming in up 20-40 percentage pts higher than sales when compared to 2019 levels.
Those companies have been chasing demand for several quarters, but now with large/early orders and lots of in transit inventory, we think by spring shelves are going to be full at the exact time we’ll be seeing consumer demand weakening from slowing macro trends and lapping big consumer stimulus.
That means increased discounting. GPS in particular is competing aggressively against CURV with its Old Navy plus sized initiative. GPS set high expectations for the year, and it will compete aggressively on share to try to hit that target, which is bearish for CURV share/margins.
Were seeing several brands brand reporting rising inventory levels as well, the whole value chain will see a return of discounting meaning margin reversion for OXM while the street has modeled peak pandemic margins in perpetuity.
BGFV
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Short Thesis Overview: Foot Locker (FL) reported earnings this Friday. It was a beat for 4Q, but what matters most is the company’s commentary around “Vendor Mix and Long-Term Strategy”. The punchline is Nike is dramatically cutting allocations to FL with % of purchases for FL going to ~60% vs 70% for the year just ended. Supply chain pressure are leading Nike to prioritize product flow to its own ecom and DTC channels. FL is Nike’s biggest customer (other than Nike DTC) so this cut means nobody is safe. The announcement by FL came concurrent with a guide down of 2022 EPS 30% below the consensus. If FL loses 30% of EPS from just a 15% reduction in its Nike allocation, how will BGFV look with a 100% reduction in its Nike assortment? Earnings risk is huge in 2022 and beyond for BGFV. Nike is gone and the sporting goods category has seen over consumption during the pandemic which should mean an impending drop off in demand. Double whammy of earnings pressure on BGFV. |
BGFV Going Repo, Short It. BGFV reported EPS last week, with revenue in line and EPS slightly ahead in the quarter. Big guide down for 1Q, which synchs with Nike no longer being part of the assortment. The model here is in trouble.
The conference call started off with CEO talking about new buyback authorization and returning capital to shareholders as top priority, which seemed odd but perhaps frames up the ugly sales/profit trend ahead. Comps accelerated slightly in quarter from -0.7% to +0.2%. Management complained about warm weather and not being able to capitalize on Black Friday from supply chain impacting the quarter yet with strength on a category basis coming from apparel and footwear. Merch margin was up 194bps YY, an acceleration from 154bps last quarter. Vs 2019 merch margin up 437bps.
There is the reversion risk with main drivers cited as a reduction in print advertising and improved promotional environment which management expects to be able to run the business at merch margins significantly above 2019, but said will “have to see” how the supply and demand situation resolves itself.
Inventory up 11% YY. For Q1 guided SSS down 10-13% with current trends tracking around -12% and EPS of $0.30-$0.40 which is 30% below consensus EPS of $0.49 at midpoint. With Nike going away the company trying to save every last bit of EPS it can while stuff every last dollar into the buyback kitty.
WRBY
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Short Thesis Overview: Warby Parker is currently staring at a fork in the road as a business. Its current business model is selling glasses at a lower price than market leader Luxottica, but the CEO has talked about how the company is transitioning to become a “holisitic” vision care company. That means that consumers can buy glasses as well as get eye exams and prescriptions at Warby Parker stores. The issue is that type of transition requires capital intensity to allow stores to have the capabilities to offer exams as well as the requirement on SG&A to pay for doctors and other professionals to be in the stores to give exams. The initiative flies in the face of the company’s targets to leverage SG&A spending, and as the company goes down this path it will need to continue to spend to keep top line rolling which impacts margins. |
Negative datapoint from National Vision (EYE) this past week, as the company guided down FY22 EPS by 20%. The downside largely came from the top line, which the company suggested would comp -1% to +1.5% vs the consensus of +2.6%.
WRBY management would argue that it doesn’t compete with National Vision – that Warby is higher-end. We’d argue that the brand absolutely compete with one another. Warby might be higher up the fashion spectrum, but it does so at discount prices. While we like the consumer value proposition, we don’t like how the company is selling value-priced product at extremely expensive real estate locations, and needs outsized (unrealistic) comps to leverage its occupancy costs.
This stock has been absolutely destroyed – down 55% since the last earnings release. But even at $26 (vs $40 IPO price, and first day price of $54), this stock has no valuation support at 4.3x sales and 58x EBITDA.
DOCN
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Short Thesis Overview: Our signups data for DOCN still looks depressed on total customer growth. We expect the company likely has another Q to go (2Q22) of excessively weak customer adds until a new normal arrives closer to a historical (non-covid) average. |
Our signups data for DOCN still looks depressed on total customer growth. We expect the company likely has another Q to go (2Q22) of excessively weak customer adds until a new normal arrives closer to a historical (non-covid) average. You had some pent-up post covid response in terms of strength which is now comping and teetering out. Revenue of their largest customer cohort increased in 3Q21 Y/Y but the rest of the customer base decreased. Site detection data cumulatively declined on a Y/Y basis
TNET
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Short Thesis Overview:
TNET’s profits lie in the sliver of space between large Insurance service revenues and almost as large Insurance costs. An Insurance Cost Ratio equal to that of last year – an exceptionally optimistic input given the severity of last winter’s pandemic – would knock about a third operating income out (that is, no consensus EPS beat). Costs that looked like NSP’s would have been far more adverse. Perhaps TNET is very lucky, or just very slow to recognize costs, or found it convenient to dump costs into 1Q22. We’re in that last category. |
In general, TNET seems to recognize medical costs on a longer lag than NSP does. There are real ambiguities as to when a cost for medical care has been incurred and should be recognized…and there are reasons a management team might want costs in one quarter vs. another.
TNET’s profits lie in the sliver of space between large Insurance service revenues and almost as large Insurance costs. An Insurance Cost Ratio equal to that of last year – an exceptionally optimistic input given the severity of last winter’s pandemic – would knock about a third operating income out (that is, no consensus EPS beat). Costs that looked like NSP’s would have been far more adverse. Perhaps TNET is very lucky, or just very slow to recognize costs, or found it convenient to dump costs into 1Q22. We’re in that last category.
DTC
Hedgeye CEO Keith McCullough added Solo Brands (DTC) to the short side of Investing Ideas this week. Below is a brief note.
Staying with a steady dose of McGough and Van Sciver shorts on green because their sectors have some of the toughest earnings comparisons for #Quad4 in Q2...
Here's a good summary excerpt from Retail analyst Brian McGough from his Retail Pro research product on Solo Brands (DTC):
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DTC (Solo Brands): New Short Idea. Solo Brands originally started in 2011 as just Solo Stove, but in 2021 acquired Chubbies (apparel), Oru (kayaks), and Isle (paddleboards) to create a portfolio of brands – that ultimately have Zero synergies at the company or consumer-level. The company went public the traditional route back in October at an initial price of $17/share, and has been broken ever since (currently trades at $16). The outdoor categories it serves benefitted materially from the pandemic, and all of them are likely to slow materially over 2022 and 2023 – yet the consensus has earnings growing 20% over the next two years |
INVH
Hedgeye CEO Keith McCullough added Invitation Homes (INVH) to the short side of Investing Ideas this week. Below is a brief note.
Shorting stocks at any time and price is for amateurs...
Timing matters, especially when grossing up top short ideas.
Rob Simone recently added Invitation Homes to his SELL list, and it just bounced to a lower high. That's when you get more aggressive (selling).
Here's an excerpt from Rob's REITs Pro research product on the name:
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