Investing Ideas Newsletter

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 will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.

PLBY

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.

At close to $11.00 the market is placing a sub $300mm value on the core Playboy brand, or 0.1x end retail sales for the brand globally. That also values CENTERFOLD at ZERO, despite our view that it alone could be worth nearly ~$60 per share over a ‘SUPER TAIL’ duration using conservative growth estimates.

Could this stock crack below the magic SPAC $10 threshold in a deep Macro Quad 4? There’s no reason why it can’t. Yet, the business continues to trend well, management is executing on growth initiatives (lack of focus is investors’ biggest pushback) and there are material catalysts in 2H as it relates to us seeing real underlying cash flow acceleration (rare for a SPAC).

Our valuation work of the individual pieces suggests a value over 10x where the name is today, and 20x over 5+ years. 

BRCC

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. 

The wholesale channel will be the largest dollar contributor to sales growth for the next two years. The planned door growth for new accounts is visible. BRCC has differentiated offerings for different types of accounts. As the company introduces new products it will win additional shelf space at existing accounts. 

PGRE

Long Thesis Overview: Following our addition of Paramount Group (PGRE) as a Best Idea Long on 1/3/22, the most frequent question we received was "assuming an activist could gain Board representation, who would the likely buyer be in a take-out?" We believe a straight take-private transaction could be the most likely outcome, whether by an activist firm with a direct real estate arm, a REPE shop or the Otto family themselves. However, given the math we also believe it is worth considering a scenario where peer Empire State Realty Trust (ESRT) with its dry powder and likely access to capital pulls the trigger and acquires PGRE in an all-cash or cash/stock transaction.

Long Bench name Paramount Group (PGRE) is one of the top Signal Strength stocks on the long side, and recently rejected a $12/share buyout offer from Monarch Alternative Investment.

This is the second time in two years the company has rejected outright an unsolicited offer without running a full process to explore strategic alternatives/value, showing a blatant disregard for its fiduciary duty to shareholders. We believe a topping offer could be forthcoming and have said from the beginning that a takeout would likely be in the $12-14/share range.

The current management team and Board are entrenched with a terrible record of capital allocation, and PGRE should not be a public company. 

EXAS

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) stock was up MSD% this past week – a slight rebound. 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 this past week and being worked into the model), as well as Keith’s official levels for signals that the tide may be turning; however, as of April 11^th, EXAS remained stuck in Micro Quad 1 (the smaller short allocation in the model portfolio). EXAS will release 1Q22 earnings after the close on April 26^th (call at 5pm ET).

The most recent news of significant remains the 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

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 used to be a very unique retailer offering product to a consumer that no one wanted anything to do with. However, over the last few years, that dynamic has significantly changed.

Now just about every retailer caters to plus size customers with examples like Old Navy extending every SKU to size 28, Shein providing an extremely low-cost alternative, Nordstrom partnering with brands to extend its size selection, and more.

The value proposition of this company has diminished over time, and we think its stock price will continue to reflect that declining value. 

OXM

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 saw a sell-side upgrade a week ago with a price target of $126 or about 40% upside. We don’t think the stock gets to those levels. There is nothing structurally wrong with this company, it owns two “fine” brands in Tommy Bahama and Lily Pulitzer as well as a few smaller apparel brands.

However, this company has significantly over earned during the pandemic because of materially elevated gross margins from the low promo/full price selling environment. OXM will go back to selling via promotions and other non-full-price ways once the competition flinches, resulting in Gross Margin getting back to pre-pandemic levels.

If Gross Margins do that, this name will quickly see 20% downside before it sees that 40% upside. 

BGFV

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 question that has been asked to us recently regarding BGFV is “what comp store sales level would the company have to see to get $0.00 in EPS?”. The answer to that question is a -24% comp, which sounds like a serious move, but in actuality it is not all too unreasonable.

In this analysis we are holding steady the SG&A dollars from 2021 and putting Gross Margin at the pre-covid average. Now factor in that NKE was 9% of sales in 2021 and 2021 overall sales were 17% ahead of 2019 levels.

Now we are arguably seeing a weaker consumer without the company’s previous largest traffic driver, so -24% sales is a reasonable outcome given those two factors.  We’re not making a call for zero EPS here, but it it’s definitely within the range of reasonable outcomes.

WRBY

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.

Warby Parker announced it opened a new location at the Cherry Hill Mall in South New Jersey. WRBY also has existing locations in nearby King of Prussia Mall, Center City, and Suburban Square.

These locations are highly sought after and expensive, which does not make economical sense for a retailer like WRBY that sells a product at a structurally lower price point. WRBY continues to guide to an expansion in EBITDA margin but given its expensive rents and other high costs like marketing and labor, the company is more likely going to see a contraction in profitability margins. 

DOCN

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.

DigitalOcean registered ~66.2K signups in Q1, which roughly equates to the 65.6K in Q4. The company added 11K net new customers in Q4, if we assume the signups to net new customers ratio from Q4 sustains then DOCN would grow customers Y/Y 6.0% in Q1 (roughly stable from Q4).

If we take the average download to customer ratio for the last 4 quarters (after adjusting for 3Q21), the implication would be ~5.8K net new customers in Q1 and a continued deceleration to 5.1% Y/Y growth in the quarter.

DTC

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.

On ASO’s earnings conference call a few weeks ago one initiative that management discussed was launching new products. One of those launches is Chubbies apparel, owned by DTC.

Chubbies made its name as the “short-short” for guys with a 5.5 inch inseam and has since expanded into swim trunks, collared shirts, Hawaiian shirts and other similar outdoor themed apparel. While the launch with ASO certainly helps Chubbies, the reality is that this product is only ~10% of DTC’s overall business mix.

The majority of DTC’s revenue, nearly 85%, is from Solo Stove, which falls under the category of an overconsumed durable item that rode pandemic demand tailwinds. Given that business mix, DTC continues to face material revenue/margin reversion pressure. 

INVH

Short Thesis Overview:  We are adding Invitation Homes (INVH) to the Best Idea Short list, as we think the recently revealed whistleblower case in San Diego is a much bigger deal potentially than the market is currently discounting. This will be a controversial one for sure as INVH is a consensus long trade (and we recently had on the long bench), but we think (1) all the more reason to short it here given both the headline and real financial overhang mixed with a Quad 4 macro setup, and (2) clients need to be thinking about this issue critically.

We rang the fire alarm for the final time on Best Idea Short Invitation Homes (INVH) two weeks ago. 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 2^nd 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.
• The risk is the company gets the case dismissed on procedural grounds, with several buysiders saying to us “yes we are pretty sure there is wrongdoing here, but not so sure the legal system will ding them for it, so we will own it.” Think about that…

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

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.

News came out this week (from the company’s own press releases) that WEBR got awarded a product design award for its new Smokefire Stealth Wood Fired Pellet Grill. Good for the company for winning an award on design, but the reality is that Traeger is the clear-cut share winner in the wood pellet grill space and WEBR is fighting for acceptance and playing to catch up on product design/quality.

WEBR already tried breaking into this segment in 2018 when Traeger was less dominant, but failed as many product reviews of its wood-pellet grill noted WEBR simply lacked the quality that the Traeger offered. Grills are a category ripe for demand reversion, but the wood-pellet grills are the one subsector of grills with long term growth – Traeger will be spearheading that group while WEBR continues to be heavily exposed to the reverting gas grill subsector. 

WE

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 a month 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, yet was paid $21 million for 2021 just for taking the company public. Not great! 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.