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Long: PLBY, BRCC Short: EXAS, CURV, BGFV, WRBY, DOCN, OXM, DTC, INVH, WEBR, WE |
Below are updates on our twelve current high-conviction long and short ideas. We have removed TriNet Group (TNET), Sweetgreen (SG), & Marriott International (MAR) from 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’s CENTERFOLD announced a few live events in the coming days. More and more capabilities are being added to the platform. The creator list is getting large, live streaming looks to be good for scale, now going to marketable live events.
The market may have been disappointed with the platform at the Launch, but it was clearly in Beta form then, progress continues and marketing to drive monetization is still to come. There is little to no value ascribed to the CENTERFOLD business in the stock but given the performance of OnlyFans ($6bn GMV and $1.3bn in revenue) there is big long term potential for CENTERFOLD both for direct monetization and as a consumer contact point to market other Playboy products.
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. |
RTD coffee sales, while still a small percentage of beverages, had strong growth of 25.3% in the convenience store channel according to National Retail Solutions as seen in the following table. RTD coffee growth will be the largest dollar contributor to Black Rifle Coffee Company’s sales growth this year.
BRCC currently only has 4 SKUs, but distribution growth has necessitated additional RTD manufacturing capacity to be contracted. Several retail chains placed orders for BRCC’s RTD across their store base instead of local or regional tests that is common for new product launches. The strength of the category and the appeal of the brand are driving the distribution growth.
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 had a strong week, +10% as of Friday afternoon, and it remains on the Health Care team’s Best Ideas Short list. We’ll continue to monitor the consensus estimate momentum (our Micro Quad data), Factor Scores, claims data (expected week of 4/4), as well as Keith’s official levels for signals that the tide may be turning; however, as of March 28th, EXAS remained stuck in Micro Quad 1 (the smaller short allocation in the model portfolio).
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, but the backlog of colonoscopies continues to grow as patients return to in-person care and clinicians recommend the Gold Standard option.
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. |
The CURV CEO constantly refers to the about 90mm women TAM that Torrid plays in and how Torrid makes its name on having the best fit that no other retailer can copy. She also brushes off the clear threats in Old Navy, Shein or others because of Torrid’s fit focus and years perfecting the fit.
We are not sure “fit” can stay proprietary for long. Additionally the company continued to use promotions when no one else did because it’s an important way the company engages with consumers. Now with some companies forecasting some promotional reversion in 2022 it begs the questions how low will the Torrid discounts go to stay competitive.
It sounds like the consumer is conditioned for discounting here in order to protect share. Lots of share and margin risk to come for CURV.
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. |
While OXM painted a very bullish picture on the consumer outlook in its earning call, it came in sharp contrast to how OLLI described the consumer as feeling intense pressure.
Specifically, OXM highlighted all the cash out there and the $2.5Tn in deposits build from 2019. However, the issue is if you break down those deposits by income levels the numbers are clearly weighted toward the top 1% of household incomes which expanded their deposits by $246,000 per capita while the bottom 50% of household incomes only saw an increase of $800 per capita.
OXM’s demographic is not the top 1%, so the actual consumer/macro backdrop for the company looks much more difficult than management is forecasting.
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. |
One of BGFV’s competitors, Academy Sports (ASO), reported a strong Q4. However, more important that the quarterly report, ASO discussed plans to enter a unit growth mode. The company will be opening 8 new stores this year which will ramp to a rate of opening 80 to 100 new stores over the next five years.
ASO’s core market is Texas and the South, so it might make sense for ASO to begin its expansion slightly closer to home in the Southwest, California, and similar regions. Those regions are where BGFV has all 454 of its stores, which means ASO could provide intense competitive pressure on BGFV. ASO also has Nike in its stores while BGFV does not, so ASO has the product to potentially win significant share vs BGFV should it expand in those markets.
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. |
Our healthcare team noted this week that Optical Goods Stores and Optician data from the BLS shows weakening Aggregate Hours and Accelerating Wage growth – and subsequently stepped on the accelerator on the National Vision (EYE) short.
That trend for Optical Goods store employees gels with the trends that we have observed for retail workers. Overall, both of those trends are bearish for WRBY because with continued store growth comes the continued requirement to hire employees, and those employees will be hired at elevated wages.
Additionally, on the optician side, WRBY wants to continue to integrate eye exams and eye doctors into the store and the company will see the same wage issue as it builds out that aspect of its business. Overall WRBY is facing significant headwinds that make the path to profitability much more difficult than its management team is pitching.
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.
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. |
DTC quarter was mostly known from pre-announced results. Rev growth of 164%, Gross Margin was 66.4% down 400bps YY due to higher freight and logistics, SG&A expenses were up $60mm to due to increased marketing spend, employee costs and shipping costs. Guidance much less impressive.
1Q revenue being guided down by 8%. Company expecting 35% plus top line growth and EBITDA margins around 23%, EBITDA up MSD%. Even as a guide down of consensus that looks tough to us with what we know about the consumer environment and comparisons set up.
This is a broken IPO which we think remains one and grinds lower and slowing revenues and reverting margins.
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 potential 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 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 $600 million of unsecured notes at 4.125% (after telling investors they would not issue above 4% a week earlier) 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 but also availability under the credit line and plenty of time to first maturity in July 2022.
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. |
This stock continues to be highly likely to trade closer to $5 from our point of view. The underlying earnings power here is about $0.20 per share, and a mature, slow growth consumer durable like WEBR should trade at about 13-15x that number.
However the management team continues to be bullish on WEBR due to product innovation driving continued growth, but we find it very difficult to underwrite any significant growth given the outsized consumption trends during the pandemic – particularly in the US – that Weber will be unable to comp.
We’re likely to see a mean-reversion in demand over a multi-year time period, which does not appear to be in management’s forecast. WEBR is set up for a series of misses coming down the pike which should help drive the stock lower.
WE
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Short Thesis Overview: We added WeWork (WE) to the Short Bench two weeks ago following a disastrous sequence of events surrounding a rumored equity raise on a Friday afternoon sending the stock down 20%+, which (1) given how it was handled and (2) the recent string of negative events, led us to conclude that management of a controversial SPAC had likely lost all credibility heading into a Quad 4 in 2Q. |
We added WeWork (WE) to the Short Bench two weeks ago following a disastrous sequence of events surrounding a rumored equity raise on a Friday afternoon sending the stock down 20%+, which (1) given how it was handled and (2) the recent string of negative events, led us to conclude that management of a controversial SPAC had likely lost all credibility heading into a Quad 4 in 2Q.
These other events included non-clear financial and operating targets, a surprising financial restatement for BOWX the predecessor SPAC (not WE related), revenue results that trailed behind expectations set in the SPAC deck and roadshow, more location closures than we expected, and then finally a surprise Chairman resignation. CEO Sandeep Mathrani assumed the Chairman seat, and 4Q21 results were disappointing in our view.
Just too much heat for a small, controversial, highly-levered SPAC. We think clients need to view WE strictly from the short side until we get through Quad 4 and the company shows signs of stabilization once again.
