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Long: PLBY, BRCC, PGRE Short: EXAS, CURV, BGFV, WRBY, DOCN, OXM, DTC, INVH, WEBR, WE |
Below are updates on our thirteen current high-conviction long and short ideas. We have added Paramount Group (PGRE) from the long 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 added Juliana Hill to its board. Juliana comes with extensive experience in corporate finance, acquisitions, and capital market transactions for high growth companies. Recall the company filed its 10-K noting “material weakness in internal financial controls” with some specific focus on recent acquisitions. Heading the Audit committee, Juliana is a likely remedy accelerator for financial processes that PLBY shall put in place as a newly public company.
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 announced the redemption of all its warrants that remain outstanding on May 4 for $.10 per warrant. The warrants can be exercised on a cashless basis until the redemption date. The exchange ratio is based on the VWAP for the next ten days.
With the shares over $18 the conversion rate would be .361. Shares of BRCC traded up 29% ahead of the announcement, with considerable interest from fintwit looking for a S-1 effective date markup.
We see a bright future ahead for Black Rifle Coffee. In light of the recent volatility, we wanted to highlight our investment thesis for the company and our “multi-bagger” over a tail duration upside. The warrant conversion does not have any impact on the fundamentals or the opportunity for the company.
PGRE
Hedgeye CEO Keith McCullough added Paramount Group (PGRE) to the long side of Investing Ideas this week. Below is a brief note from Wednesday.
First time in a while that I've gone into the close with more longs than shorts...
That's what should be happening A) in The Chop Bucket (of the US Equity Volatility) and B) on red after a big pair of down days.
One name I have been waiting on (for the low-end of its Risk Range on #decelerating volume) is a takeout candidate that Rob Simone likes here: Paramount Group (PGRE).
See Rob Simone's REITs Pro research product for details on why.
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 gave up much of the prior weeks’ rebound, dropping ~11%. The stock 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 (updated but not yet in our model), as well as Keith’s official levels for signals that the tide may be turning; however, as of April 4h, EXAS remained stuck in Micro Quad 1 (the smaller short allocation in the model portfolio).
The only other news we highlighted this past week is pretty interesting in that a provider found an effective way to screen for CRC using just a typical, cheap CBC panel and patient data (i.e., without Cologuard): EXAS, GH (CRC Screening; 4/6): Geisinger, Medial EarlySign detects patients at risk for colorectal cancer (Geisinger). "In the study, Geisinger identified a group of 25,610 patients who were overdue for CRC screening, and used a machine-learning algorithm to flag those at highest risk for developing cancer... Of the patients flagged as high-risk, 68% were scheduled for a colonoscopy, and of those, approximately 70% had a significant finding."
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 & 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. |
When looking at apparel companies the key items to examine when evaluating margin sustainability is the net change in import price vs the net change in the price paid for apparel, otherwise known as a net inflation spread. During 2021, when all the apparel companies saw massive gross margins, this spread was positive for nearly the entire year.
When that spread is positive, companies capture more dollars per unit sold and therefore drive as many units as possible, which hit all-time highs in 2021. However, going forward those trends will decelerate and the net inflation spread will turn squarely negative. That inflection will severely impact the margins of apparel companies such as OXM and CURV despite consensus forecasting continued margin strength.
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 is a 430-store sporting goods retailer based predominantly on the west coast, and pre-covid had extraordinarily volatile earnings with EPS ranging from -$0.20 to $1.25. It was a ~$4 stock with $0.40 in EPS pre-pandemic that turned into a combination of a COVID winner and Reddit meme stock taking the price as high as $40 on record COVID earnings.
That record year, and years prior, came with Nike as a key traffic driver in the store, and the brand was almost 10% of sales, but now that draw is gone. So this is a retailer with a lack of a traffic driver, and the hardgoods side of the business is facing generationally hard growth compares.
The company will have a very difficult hill to climb in 2022 to try and grow its business.
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. |
During the pandemic there were severe delays in healthcare spending that created a substantial backlog of patient volume and ordering of goods across the whole spectrum of health issues.
Vision, specifically eyeglasses and contact lenses, were caught in that trend as well. Vision specifically saw not only a return to the prior growth trend, but also outsized growth from the extreme pent-up demand in the strong consumer backdrop we saw in 2021. In 2022 that backlog is gone, and the consumer backdrop is considerably less bullish.
The majority of WRBY’s business comes from corrective vision, and despite the business’ positioning as the new, on-trend, and low cost option, it will not be able to escape the revenue headwind that is coming.
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. |
It's abundantly clear that in the pandemic people socialized and decorated the home more than ever before, which stimulated sales for items that helped people entertain at home, such as an outdoor stove.
Or, if you were not hanging out at home, the only activities were those that could be socially distanced such as outdoor activities like kayaking. DTC gets 75% of its sales from its flagship Solo Stove product, while the other 25% come from a mix of other overconsumed goods like kayaks, paddleboards, and apparel.
Four goods that are facing higher-than-high comps and have no synergies. That is a portfolio that will see stagnating growth in the coming quarters.
INVH
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Short Thesis Overview:
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We rang the fire alarm for the final time on Best Idea Short Invitation Homes (INVH) this past week. At this point barring additional information (very possible, as its always incoming), we are going to sit back and see how this plays out for now. The name obviously remains highly controversial, and rightfully so, and many on the buy-side and all on the sell-side are not ready to see the matrix just yet. But with that said, to recap:
- INVH has been accused in a whistleblower lawsuit in California, now escalated to federal court, of systematically neglecting to obtain necessary permitting for renovation work performed post-acquisition of single-family homes for rent. Through our work on a smaller sample size, we have concluded that the percentage of homes without permitting likely approximates what is being alleged in the suit. The evidence in CA is easily attainable, so long as you have a property address.
- This would definitionally imply that many INVH tenants are currently leasing out-of-code homes.
- If true, we believe these issues would aggregate to meaningful financial penalties including treble damages, a scenario that is essentially being written off and assigned a 0-5% probability by the Street in our estimation.
- There would be knock-on or 2nd order effects of such an outcome, namely loss of confidence and significant multiple compression. The risks surrounding INVH’s ~$3 billion securitization debt should not be ignored.
- We believe that additional media attention, given the rising temperature surrounding SFR recently, as well as potential additional complaints are possible. Barring those outcomes, the next catalyst is likely a motion to dismiss filed by the company in the coming weeks and subsequently to be evaluated by the courts.
We reiterate our short call here, and question why anyone would want to own INVH here in lieu of two alternatives essentially doing the same thing in the form of AMH and TCN.
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. |
Grills, similar to mattresses, are a long replacement cycle good (average of 5-7 years) and after a serious surge in demand WEBR will continue to see a serious deceleration in sales as customers have already purchased the grills that they need.
On top of that, surveys continue to show that people are feeling more comfortable eating at restaurants so perhaps not only will people not be buying new grills soon, but that replacement cycle could be even longer if dining out continues to increase in popularity and some people put off a new grill purchase.
This company came public at the height of popularity for grilling and outdoor activities and set itself up to go up against the toughest comps in its history.
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. |
WeWork (WE) was added Short Bench three 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.
