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Long: PLBY, BRCC Short: EXAS, CURV, BGFV, WRBY, DOCN, OXM, TNET, DTC, INVH, SG, MAR, WEBR |
Below are updates on our fourteen current high-conviction long and short ideas. We have added Weber (WEBR) to the short side this week. 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. |
PLBY Bullish at Roth Conference. Management was focused on outlining how it will execute on its $600mm long term revenue guidance, while it still has not provided details for how the new digital initiatives might play into that guide.
PLBY talked about how it looks at its business with two circles, an inner circle which is CENTERFOLD that builds the ecosystem, and an outer circle with the store presence that keeps consumers engaged at all touchpoints. Management dedicated a good portion of time to CENTERFOLD, first noting how 2022’s goal is chiefly building the functionality and making the platform as technically sound as it can be.
Management also shared glimpse into the massive potential of CENTERFOLD by elaborating on how some of the creators signed up are musicians, and it would be feasible to have a members only CENTERFOLD concert by that musician, or a music video with behind the scenes takes for CENTERFOLD members. Think how massive the Fortnite concerts were. CENTERFOLD will be the heart of the PLBY ecosystem.
The company also talked about continuing to execute its tiering strategy, brand collabs, the impressive margins of lingerie (specifically HB gross margins at 70%+ and EBITDA margins at 30%+), and integrating all the businesses together in 2022. All together a positive conference from the PLBY management team.
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 reported in-line revenue and EBITDA for its first quarterly results as a public company. BRCC reported 19.9% revenue growth in Q4. DTC revenue grew 2.9% as it lapped 78% growth in the prior year, boosted by COVID-19 at-home spending. Wholesale revenue grew 74%, driven by RTD expansion to 42,000 doors. Outpost revenue grew 181% from a modest base.
BRCC opened seven new stores and now has 16, with eight being company-owned. Gross margins contracted 570bps with inflationary pressures accounting for 400bps and channel mix accounting for 130bps. Management believes achieving profitability is an important milestone in the company’s growth to be a great company, so margins will not be abandoned for the top line. The company has raised prices in several areas, including RTD, bagged coffee, shipping fees when not meeting the free threshold, and brewed coffee. Green coffee beans are only a single-digit percentage of COGS. The company has hedged its green coffee bean needs out one year. Larger buckets of inflationary pressure include parcel shipping, packaging, and labor.
Management guided 2022 revenue to $315M, slightly above the $311M target provided at the analyst day. Management expects to open 15-20 new company-owned outposts, slightly above previous expectations, although they will be heavily weighted towards Q4. Adj. EBITDA is still expected to remain positive.
The on-premise coffee category market share is more vulnerable to fragmentation than any other time since Starbucks achieved prominence. Coffee’s daily, habitual consumption has seen it grow to $45B in the U.S. There is a scarcity of consumer companies with visible drivers to generate 30% annual growth. There are few food and beverage companies with multiple channels to drive growth and minimal penetration of the TAM.
Black Rifle Coffee Company also top decile store opening growth compared to the broader retail and restaurant sectors. Shareholders should focus on the potential share BRCC can ultimately achieve in the coffee category and the probability it can execute upon its strategies than near-term pricing actions and inflationary pressures.
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) shares broke down to a new 52-week low this past week ($56.77; 3/15) and then rallied back to the mid-$60s for a ~7% gain. EXAS remains on the Health Care team’s Best Ideas Short list, and we’ll continue to monitor the consensus estimate momentum (our Micro Quad data) and speak with subject matter experts in search of clues.
As of 3/11, EXAS was stuck in Micro Quad 1, and the forecast was for it to remain a smaller short allocation in the model portfolio for months to come. The Macro Quad 4 backdrop is also helpful, and the fact that the Katie Couric campaign didn’t result in an immediate rally counted as another “win” for bears. Bear market rallies can be sharp, but until something fundamentally changes in our claims or forecast data, there’s no reason to move.
A reminder on guidance: 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 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.
Risks remain: 1) the new, larger, expensive sales team can have an impact in a world where physician office visits don’t return to pre-COVID levels; 2) the market returns to normal (unlikely); 3) 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 don’t feel 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 set the bar high for 2022. The company did not miss the quarter, but the important takeaway from CURV this print is that management put out pretty aggressive top line guidance for the upcoming year while tempering 1Q.
CURV benefitted materially from stimulus money last year, and is going up against that very tough comp in the upcoming quarters. On top of stimulus the company has slowing growth and heavy competition from Primark, Shein and Old Navy which could drive sales down 5 or 10% over the next year vs. the consensus modeling 4% growth.
Sycamore also still owns 75% of the shares outstanding and needs to liquidate its position, but we struggle to find who the buyer of that stock will be. We think this one is still heading lower given the fundamental and macro outlook.
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. |
OXM reports earnings Wednesday after the market close. It’s likely to reflect what we have seen from most apparel players for 4Q: weakish revenues in 4Q with strong margins while tempering 1Q expectations. The big question will be what does the company guide.
So far we have generally seen bullish expectations from apparel retailers that are thinking the 2021 margin lift will actually last for a long time, rather than being transitory. We expect as inventories in the apparel channel return, we will see margins come down industry wide, and OXM will see material earnings pressure vs expectations.
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. |
Nike has growing its assortment in Dick’s Sporting Goods while cutting at other retailers like BGFV. A core reason for this is Dick’s upgrading its entire footwear presentation while investing heavily in its store experience.
Great brand presentation and customer experience makes Nike happy as a vendor. What it also does, is means Dick’s is likely to win share in core markets in all categories. BGFV lost Nike because it didn’t invest, and now it’s likely to lose in other categories as competitors like DKS provide a better store experience.
Like everyone in sporting goods, BGFV benefitted from some competitors going away over the last 5 years. Now however it is one of the worst operators and big competitors are getting stronger. We don’t see a way out for the EPS profile of BGFV to do anything but disappear over a multi-year basis, and 2022 will be a big leg down.
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 released earnings this week. Revenue and EBITDA missed with revs decelerating on a YY and 2-yr basis. The callout from management was the omicron hurt store traffic and that was what caused the slower revenue than anticipated. Gross margin was down YY due to the continued ramp up the Las Vegas production facility as well as a one-time impact from a tariff rebate in Q4 last year.
One note from management on gross margin was that as the company continues to scale its contact offering (which it is) that business is dilutive to rate but accretive to dollars due to the high purchase frequency of contacts. On SG&A the company saw deleverage due to increased media spend, which the company has said it will continue to spend on media to drive brand awareness. EBITDA margin of -5% was a 500bps YY contraction.
The customer acquisition cost problem is a big portion of bearish view. In addition the company operates in a low turnover category with a value offering yet is going with relatively high end real estate. Going to be a challenge to get the box profitability high enough in the context of a marketing driven customer acquisition model.
Inventory up 48% YY vs sales up 18% YY, vs 2019 inventory up 100% on sales up 50%. Management guided down revenue and margin for 2022, though the stock got a relief rally alongside other growth names late in the week. This stock gets a “techy” multiple, yet what was once a disruptor in consumer eyewear is now just a low margin retail business.
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 |
The competitive moat being pitched by the company is that all of the marketing and fulfillment is done in house so as a collection of brands the company can leverage the shared information to create a stronger marketing flywheel for all products and use shared infrastructure efficiently to reduce total costs.
The problem is that the company has a portfolio of brands that have very little relationship to each other. Those brands are Chubbies (apparel), Solo Stove (durables), Oru (Sporting Goods) and Isle (sporting goods). It is very difficult to leverage shared infrastructure on products that do not overlap, effectively rendering the competitive moat of this company as not so strong.
INVH
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Short Thesis Overview:
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There were some "interesting" comments made by INVH's CEO at a REIT conference in Florida last week re: the evolving legal situation hanging over the stock. We wanted to respond/opine on some below:
- "... in terms of permitting and in terms of scope... 95%+ of what we do is purely cosmetic." - This statement runs directly counter to (1) what we have observed through our own work, (2) the company's own statements + Schedule III in the 10-K which shows ~$30k invested per property in California post-acquisition, and (3) statements we have heard from professional contractors who have performed work for INVH in California, as well as in other states. Just thinking through #2 above logically, if what the CEO said was true (95%+ are just cosmetic), we estimate the cost of non-cosmetic/high-touch renovations would be over ~$300k per home, assuming ~$15k per cosmetic renovation (painting, replacing carpets, not touching any electrical/plumbing, etc.). This would roughly equal the ~$300k spent to initially acquire all 12,260 homes in Northern and Southern California (see Figure 1 below). At ~$20k per cosmetic renovation, the investment per home for the ~5% under management's scenario would be over ~$200k per home based on simple math. Let's think about that one for a second - why would anyone effectively double their basis on a single home, versus conserving that capital and building a larger footprint? We are not saying that it's impossible, just that it makes no logical or economic sense. It is far more likely, in our view, that the costs capitalized subsequent to acquisition are spread out over more properties in the California portfolio, implying a much higher % of high-touch renovations. Again, actual house-by-house data would help if available. Hint: it should be available.
SG
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Short Thesis Overview: Nothing in Sweetgreens Q4 earnings report suggests we should back off our SHORT call. The SG headlines look better with reported 4Q21 revenue $96.4M better than FactSet $84.7M and (A)EBITDA ($14.2M) vs FactSet ($25.9M). These better numbers were due to SSS of +36% vs. FactSet +17.8%, driven by transactions/mix at 32% and pricing of 4%. All of that produced an EBIT loss of ($47.8 million) versus ($40.1 million) last year. |
Q1 guidance for revenue and EBITDA look achievable. For the year, they have guided comps +20-26% vs. FactSet 25.0%, with transactions and mix likely turning negative in 2H22. In 2Q21, the comp was 86%. In 1Q22 on a 32% comp, the company can only put up (as per guidance) a restaurant-Level Profit Margin of 10-11% and expect a margin restaurant-Level Profit Margins to improve to 16-17% in FY22 on a slowing comp. In FY22, SG will grow revenues 50% to $522 million in revenues; SG will lose more than $104 million in EBIT versus $134 million loss in FY21. The company burned ($184 million) in cash in 2021 and likely another ($130 million) in 2022. SG will never be profitable.
MAR
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Short Thesis Overview: 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. |
Click HERE to watch as Gaming, Lodging and Leisure analyst Todd Jordan compares the outlook for business and leisure travel within a #Quad4 setting, while noting on ESG policy risks and other business travel risks facing the unstable hotel industry.
WEBR
Hedgeye CEO Keith McCullough added Weber (WEBR) to the short side of Investing Ideas this week. Below is a brief note from Wednesday.
Is being long BBQs a Russia peace pipe trade?
Or was buying them during the pandemic create the toughest comp (base effect) the company will ever see?
Re-shorting some of Retail analyst Brian McGough's fav Consumer Discretionary shorts here as weak handed hedgies cover and chase.
