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Long: PLBY, BRCC Short: EXAS, CURV, BGFV, WRBY, DOCN, OXM, TNET, DTC, INVH, SG, MAR |
Below are updates on our thirteen current high-conviction long and short ideas. We have removed PACCAR (PCAR) from the long side. We have added Sweetgreen (SG) & Marriott International (MAR). We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
PLBY
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Long Thesis Overview: 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. |
Some investors have asked us about PLBY filing an NT 10-K as well as its note that it expects to find material weakness in its reporting procedures. While that sounds scary, the reality is far less so.
The issue was a combination of PLBY changing its auditor mid-year because the mid-year 2021 market cap put it into a new classification of required filing details. Those same required details are ones you see at larger cap companies instead of the typical emerging growth company requirements.
Overall, the delay is due to the fact that the new auditor has to complete its due diligence process before the 10-K can be filed. Ultimately it will be a positive for analysis, as we’ll get better detail and disclosure out of the company in filed documents.
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 is a mission-focused company committed to supporting veterans, active-duty military, and first responders. The company's three-pronged growth strategy is driving 30%+ top-line growth. This week we discussed Black Rifle Coffee Company on the morning call.
Click HERE to watch.
Our investment themes are as follows:
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 at $62.75, down 11.5% for the week and -23% YTD. We remain encouraged by the stock’s recent weakness and believe that 2022 Cologuard screening revenue guidance ($1,340MM to $1,347MM up from $1,062MM in 2021) will keep the stock in the 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 4 being a much larger allocation. The Macro Quad 4 backdrop is also helpful, and the fact that the Katie Couric campaign didn’t result in a rally is another “win” for us. Raising awareness of CRC screening options may result in some volume for EXAS, but it’s likely to drive volume back to colonoscopies as well; regardless, advertising around CRC screening is a good thing for patients, and we respect EXAS for that.
A reminder on guidance: after excluding $220MM in rescreening and $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 remains 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 risks are 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 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 and ’23 revenue estimates higher from the $2B and 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, and we haven’t felt any pressure to cover.
CURV
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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. |
CURV reports earnings next week, and something we have noticed for CURV is that the promotional emails being sent out continue to have deeper discounts. These deeper discounts are coming from a retailer that already elected not to take advantage of the once-in-a-generation merchandise margin enivronment last year and are happening at the same time where the company is lapping stimulus comps.
For example an email sent this week by Torrid offered 50% discount on everything, when last year the same email promo only offered a 35% discount on everything. The company is facing very steep revenue and margin compares with margin already apparent margin risk.
OXM
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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. |
January OTEXA data was released this week and we wanted to highlight a few things are changing in the data over the last few months. Import prices are accelerating as materials inflation flows through the supply chain. The last 3 months saw average imports up 12%.
Meanwhile apparel inflation looks to be starting to rollover as January slowed 90bps to +5.2%. That still makes for a margin tailwind in backward looking retail 4Q, but a compressing one. With more units coming and likely further consumption pressure in the months ahead, it's a clear recipe for discounting to start to return at a rapid rate. Consensus is not factoring this data in to the OXM estimates, which will lead to EPS misses of OXM.
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. |
DKS reported earnigns this week posting comps of 5.9%, that’s ahead of street at 4.3%... but slowing from 12.2% last Q, also slowing about 500bps on 2 year avg. Gross margin ahead of street by 100bps. Sales momentum and merch margin are driving the upside, both of which we think see pressure in 2022.
The company also guided up vs the street on both comps and EPS, however we continue to believe demand and margin reversion has to come at some point. DKS has credit as a good operator, but BGFV does not. If DKS can’t escape the risk, then BGFV will have that same downturn many times worse.
Overall sporting goods is a category with massive risk heading into the stimmy comp quarter and 2022 broadly.
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. |
WRBY announced a partnership this week with Eastman Chemical to develop a glasses frame recycling program. The crux of the program is that WRBY demo lenses will be sent to Eastman to be re-made into Acetate which is the base of all WRBY frames.
WRBY plans on incorporating this recycled acetate into its core colorways in the upcoming year. WRBY has a credible ESG angle to it, but that still does not make up for the fact that the company trades at a huge premium to competitor EYE at the same time EYE is reporting slowing top line.
WRBY reports earnings next week so we will see if the demand/margin trend holds, we think there is slowdown risk over a multi-month time period.
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:
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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
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Short Thesis Overview: 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 |
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.
Three of those four brands also happen to be durables and the outdoor categories/durables 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. We’ll take the under on that.
If not for the pandemic, this company would never have come public. Real underlying earnings power is likely closer to $0.50 per share vs the Street at $1.20, and that’s worth maybe a 10-12x p/e.
INVH
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Short Thesis Overview:
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We added Invitation Homes (INVH) to our Best Idea Short list on 2/17, two days after the company announced what we considered to be a disappointing FY22 outlook relative to both ours and Street expectations.
The driver here is a recently unsealed qui tam whistleblower lawsuit filed in the California Superior Court in San Diego, alleging that INVH has systematically failed to “pull” requisite permits for construction and renovation work performed on homes post-acquisition across multiple municipalities in California. The lawsuit offers tangible examples of non-permitted work, and we have conducted our own investigation of a subset of homes which show similar results/percentages which increased our level of concern.
The company offered non-satisfactory answers on its 4Q21 earnings call, and has since failed to supply either (1) the requisite data to the court to have the case dismissed, or (2) investors any concrete data to support its claims of frivolity. Instead, last week INVH and the plaintiff agreed to an 8-week extension (after the case had been sealed for about a year), followed by INVH filing a motion to escalate the case to federal court under the legal concept of “diversity.”
While offering INVH certain advantages and also serving as an effective stalling tactic, this move to federal also exposes INVH to broader potential liability should other whistleblowers or jurisdictions offer up complaints and/or expert testimony. We believe the fines, fees, interest and ultimate cost to remediate out-of-code homes could approach the billions of dollars with treble damages if the lawsuit is successful. We ask the simple question: “if the proper permits were pulled and the homes are in code, why has the company not provided any such supporting data either to the court or to the investor community?”
There is little advantage to INVH to have this drag on, and the facts that the company has attacked the whistleblower (and our) credibility rather than rely on the facts is an ENORMOUS red flag. Furthermore, if INVH’s business and return profile has been predicated on systemic non-permitted work (can be 5-15% of the total project cost), that would mean that INVH has been effectively over-earning for years. Short the stock.
SG
Hedgeye CEO Keith McCullough added Sweetgreen (SG) to the short side of Investing Ideas this week. Below is a brief note.
If you want to be a professionally accurate short seller, you better have #patience as a core Asset Allocation in your #process...
I've been waiting on Sweetgreen and +13% into the close I get my signal.
Here's a good excerpt on as-good-as-it-gets from Howard Penney on this one (from his Consumables Pro research product which is also professionally accurate):
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As I said on Tuesday, "it looks like the company has guided the street to a reasonable 4Q21 SSS number that the company can meet/beat, but it all ends there." The 1Q22 guidance of (A)EBITDA $18-$20M vs FactSet ($24.9M) and Revenue $100-$102M vs FactSet $100.8M and comps of +30-33% vs FactSet 31.4% all look achievable. For the year, they have guided comps +20-26% vs. FactSet 25.0%, with transactions and mix likely turning negative in 2H22. |
MAR
Hedgeye CEO Keith McCullough added Marriott International (MAR) to the short side of Investing Ideas this week. Below is a brief note.
After buying/covering right when we should have earlier this week, I have been selling the close for the last 2 days...
While many are trying to "trade Russia", I'm risk managing the bigger picture: The Cycle. US GDP slowing, sequentially, from 7% to 0% is a big problem, especially for economically sensitive sectors like Hotels (MAR).
Todd Jordan and his team hosted an excellent research call on why MAR, DRH, etc. are current shorts. Here's an excerpt from that:
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Hotel development and unit growth is critical to the hotel brand business model and a big part of the long term bullish narrative in the investment community. The asset light business is very attractive long term model, but it doesn’t come without its share of risks for the stocks, especially coming out of downturns, and especially given the seemingly full valuations. The pipelines look leaky to us, and we’ll provide a lot of the data to explain why. |
