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Long: PLBY, BRCC Short: EXAS, CURV, BGFV, WRBY, DOCN, OXM, TNET, DTC, INVH, SG, MAR, WEBR, WE |
Below are updates on our fifteen current high-conviction long and short ideas. We have added WeWork (WE) 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. |
Form 4s for several PLBY insiders hit this week on selling to satisfy tax withholding on performance stock awards. However, the punchline is PLBY execs are out buying stock at the same time. CEO Ben Kohn bought ~55k shares, and CFO Lance Barton bought ~3k share.
So both made some small buys alongside the withholding sales. There is a lot of noise around the required de-SPAC type filings for share registration and disbursements, but there has been no real selling from insiders during the stock drop starting in Dec and we now have some insider buys. Insiders are aligning their incentives with shareholders with greater equity positions.
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. |
An advantage for Black Rifle Coffee Company when it chooses new locations for outposts is its subscriber base. BRCC also has a 1.9 million lifetime customer base to determine the markets with the highest density of customers.
This may point BRCC to different locations than just where other coffee shops are already built. Equally important is having a management team with experience opening stores. Heading the outpost expansion for BRCC are two executives from Starbucks and Wingstop.
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) ended up hitting the top end of its risk range and triggered a Real-Time Alerts short signal on March 23 at $66.87. For readers that also subscribe to RTA, the background story was clear, right? Keith then covered it on the 24th with a Buy Signal at $64.08. This stock was up slightly last week overall (just shy of 2%) and remains on the Health Care team’s Best Ideas Short list. We’ll continue to monitor the consensus estimate momentum (our Micro Quad data) and speak with subject matter experts in search of clues that can help us frame the risk/reward from here.
As of 3/18, EXAS remained stuck in Micro Quad 1, and the forecast is 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 faces severe competition in a space that used to have very little competition. Earlier this year Nordstrom signed an exclusive agreement with 11 Honore that allows Nordstrom to enhance its plus size offerings. 11 Honore positions itself as designer plus size women’s clothing. Nordstrom is 11 Honore’s first retail partnership and the collaboration has launched both online and “in several doors” according to an 11 Honore spokesperson.
We see this partnership as another nail in the coffin of CURV as Nordstrom is another major retailer entering the plus size space already seeing intense competition from the likes Old Navy which is rolling out every SKU up to size 28 in all 1200 of its stores.
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. |
Oxford Industries beat the quarter on a 2% sales beat – no surprise given the strength that we’ve seen from other retailers around the holiday quarter. But the big surprise is that the company guided up 1Q and 2022 massively. Guided to $8.75-$9.15 vs estimates of $7.80. The company noted that ‘the consumer is flush with cash, and they are planning units and AUR up meaningfully in 2022. Which should drive both top line and margins’ [we’re paraphrasing].
The bullish guide is surprising when we’re looking at what’s likely to be the biggest sequential slowdown in discretionary consumer spending in a generation, with particular pressure in the apparel category. We are fading this guide and expect to see downwards earnings revisions in 2022.
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 reported, and while the results at Nike were stellar, we think that the big read from this print is around the wholesale ecosystem. Specifically, Nike said (we’re paraphrasing) that it’s done cutting off wholesale accounts – after shedding 50% of its wholesale distribution globally over the past four years.
That means BGFV officially did not make the cut, while other sporting goods names like DKS, ASO, and HIBB are in-it-to-win-it with NKE. Now that BGFV is no longer a Nike retail partner, and its competitors are, it should provide more downward pressure on the stock as the sporting goods sector laps extremely tough compares and traffic moves towards those with all the top brands and away from BGFV.
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 its 10-K this week providing some granularity to both its COGS and SG&A lines. On COGS like all companies WRBY saw significant YY cost increases in shipping and handling, but interestingly rent expenses leveraged vs 2020 and 2019 with WRBY sales growing nearly 40% in 2021.
The issue is that as WRBY reverts to its stated top line growth algorithm of 20%+ and continues to open more stores in expensive areas which will grow the rent expense line, rent expense will deleverage providing pressure to the company’s 58-60% Gross Margin target.
On SG&A the company continues to see deleverage on the advertising costs line, that can be a sign of a good company stirring brand heat but it also means growth will continue to reinforce the thesis that SG&A leverage will be hard to come by. WRBY can reach its 20% top line growth algorithm, but it will have to keep spending on the SG&A line to do so which will keep the company from achieving its profitability targets.
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. |
A subset of customers is growing fast with high ARPU growth, per management, but the funnel for those customers is flattening, the period of adding PaaS to ARPU will comp, which means major improvement in GM% and Cap Intensity may be harder to come by. This might be a growth or margin company, and acquisitions are required to support an upsell road.
TNET
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Short Thesis Overview:
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With COVID fading into the spring, medical utilization is likely to soar. We think a mid-90s Insurance cost ratio (similar to during Obama care) is a more likely scenario. More severe outcomes aren’t at all unlikely. Management may well be looking to get paid on 2021 because we expect the next few years to be vastly less on ‘target’. NSP is just a preview of 1H headwinds.
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 guide down from COOK also has read throughs to DTC as Solo Stove is 75% of the company’s revenue. Solo Stove is growing faster than WEBR, but the overall demand slowdown and tough comps are impacting all durables names and will result in a serious revenue deceleration for Solo Stove.
The other piece of DTC is Chubbies, which is lapping tough comps on its own in the apparel space. Overall DTC is home to a family of brands with no synergies and play in categories about to see material slowdowns.
INVH
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Short Thesis Overview:
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We added Invitation Homes (INVH) as a Best Idea Short on 2/18, due to what we see as SIGNIFICANT potentially monetary risk from a recently unsealed whistleblower lawsuit in California.
Since then (1) the company petitioned the court to escalate the case to the federal level, which both elongates the timing but opens up the risk to complaints filed in other jurisdictions, (2) there have been several sell-side meetings held where the company has addressed the permitting issue (or resisted doing so), and (3) we explored and became incrementally concerned on derivative risks related to INVH’s securitizations.
On point #3, in the case of fraud the securitizations could be in technical default and INVH would be liable for all monetary penalties under the “bad boy carve out” of its limited guarantee. The company has been working to refinance and term out this debt, taking the securitization principal balance down from a peak of ~$7 billion 4 years ago to ~$3 billion currently. On Friday, 3/25 the company filed to issue another $200 million of unsecured notes to repay additional securitization principal.
While we agree that there are advantages to being an unsecured borrower, INVH has already achieved that hurdle and it is strange to us to be trading lower cost paper for higher interest unsecured debt right now, especially with extension options out to 2025. As it stands today, we view these legal risks as idiosyncratic to INVH, with Best Long AMH and TCN likely not impacted.
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. |
Sweetgreen has two things going against it. First, no salad purveyor has ever been successful as a publicly-traded company. Second, very few companies with a high concentration of lunch as the essential day-part make great publicly traded companies.
The best long-term growth stories in the restaurant sector leverage costs over multiple day-parts. SG is the latest example that the market will pay almost any price for the good growth story, especially in restaurants, but this one lacks staying power.
It was my understanding even the underwriters were saying that SG might not be profitable until 2025. In the past decade, only one other restaurant has gone public with negative EBITDA, Luckin Coffee, which wasn't pleasant.
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. |
A longer path to RevPAR recovery and our increasingly bearish view on the industry/company development pipeline, against the backdrop of lofty expectations & valuation moves MAR up to Best Idea Short status.
With the positive estimate revision cycle likely in the rear view, the stock faces a challenging macro environment (Quad 4) as MAR contends with stagnating NUG, underperforming RevPAR growth, and a big valuation.
WEBR
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Short Thesis Overview: The read overall is negative for the big durables names as we think we are about to see unit consumption reversion to the mean, and given the over consumption the last couple years, we need to go well below historical average unit consumption to correct. Bad demand/margin setup. |
Traeger Grills (COOK), a WEBR competitor, reported a 4Q beat, but that is where the good news stops. The company then guided down revenue by 20% and EBITDA by 50% EBITDA for 1Q as well as a 13% revenue guide down for the year. COOK is guiding prudently based on current business trends and knowing the upcoming once-in-a-generation compares.
Regarding trends at retail management said: “What we hear from our retail partners is that the category is down and that Traeger is down less than the category”. COOK is talking about high inventories, at least partially by design, but still high inventories into weakening demand. Not a good recipe for margins. However, the bigger read from that comment is what is means for WEBR. WEBR is the largest share player in the industry as well as the share donor, and COOK noted that its trends (guiding down by DD) are faring better than the industry at retail. That implies WEBR could be looking at even steeper decline than COOK.
The read overall is negative for the big durables names as we think we are about to see unit consumption reversion to the mean, and given the over consumption the last couple years, we need to go well below historical average unit consumption to correct. Bad demand/margin setup.
WE
Hedgeye CEO Keith McCullough added WeWork (WE) to the short side of Investing Ideas this week. Below is a brief note.
I watched the AppleTV series on this and decided it's a short...
Kidding. If you think about markets the way I do, you'll see the same Fractal Pattern here in WeWork (WE) as you do in Warby Parker (WRBY):
A) Bearish @Hedgeye TREND shorts that played out, big time...
B) Big time bear market bounces on #decelerating volume to lower-highs
C) High Short Interest stocks where the weakest hedgie hands cover last
Here's an excerpt from Rob Simone's REIT Pro Research product on the name:
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WE expects to hit Adj. EBITDA positive by the end of FY22 as we had initially modeled, the problems are that (1) revenues directionally are going the wrong way and (2) both credibility and confidence are essentially gone at this point heading into Quad 4. |
