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Long: PLBY, BRCC, PGRE Short: EXAS, CURV, BGFV, WRBY, DOCN, DTC, INVH, WEBR, WE |
Below are updates on our twelve 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
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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 stock, like most of growth consumer names, saw a rough week. The stock is obviously the poster child for a rough Quad 4 long where investors shy away from growth, beta, and small cap leverage – which has been 100% of the reason it’s been hammered.
The company has actually delivered on what it said it would do – and then some. Given there was little to no EBITDA in its first year as a public company, there’s no valuation support currently. But note that EBITDA was just $4mm last year, which should ramp to around $55mm+ this year, and could then double next year.
We think as the company executes this year, we will see real earnings/cash flow, and the management team can focus on what are looking to be the best profit drivers.
Then investors will start to take greater interest and the market will wake up to the large long term growth opportunity that PLBY has in front of it.
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. |
There is a scarcity of companies with visible drivers of 30% growth. Compared to retailers and restaurants Black Rifle Coffee Company has top decile new store growth. Compared to food and beverage companies BRCC has multiple channels to drive growth and minimal penetration compared to the total addressable market. At times that scarcity is seen in a large valuation, but it is the wrong thing to do to look at multiples one year out with so much growth ahead of it.
PGRE
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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. |
People generally are and continue to return to pre-COVID levels for other activities, perhaps signaling that indeed personal preferences have shifted so dramatically that some workers may opt to never return to an office job? C
learly there is anecdotal evidence everywhere that many people have already done so, up to and including relocating permanently to lower-cost jurisdictions from which to conduct remote work. In summary and bringing it back to our REIT coverage, our view is that Long Bench name Paramount Group (PGRE) should probably not push on the ask and take something close to the ~$12/share offer.
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) dropped 12% this past week, underperforming the market and comps by a wide margin. 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 (showed an OK trend for Cologuard), as well as Keith’s official levels for any signals that the tide may be turning; however, as of April 18th, EXAS remained stuck in Micro Quad 1 (the smaller short allocation in the model portfolio). EXAS will report 1Q22 earnings after the close on April 26th (call at 5pm ET).
Guardant’s liquid biopsy test seems to have come into greater focus recently. We looked back and can see that GH has been talking about a mid-2022 LDT (lab developed test) launch for its competitive CRC screening test for a while. At sell side conferences in March and February, AmirAli Talasaz, Guardant Health Co-CEO & Director said, “I think that blood can detect some advanced adenoma and we'll see what Eclipse results have for us…,” and he alluded to the ASP (pricing) being similar to Cologuard. We also highlighted With milestones on the horizon, Guardant Health CEOs lay out their vision for cancer detection (STAT, subscription needed) in Friday morning’s brief: “What's good for Guardant is being interpreted as bad for EXAS, and we have kept EXAS on the Best Ideas list for several reasons, including competitive threats.”
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%.
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. |
Watch this recent clip from The Call where Brian walks through the demand and discounting risk at GPS and specifically Old Navy, a core competitor to Torrid. Torrid will most likely see the similar weakening demand and rise in promotions.
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. |
Sporting goods was one of the strongest categories during the pandemic, and that has continued into early 2022 with consumption levels running roughly 60% ahead of 2019 as seen in the chart below.
With BGFV losing Nike as a vendor, more and more earnings will have to come from the hardgoods side of the business, and there the compares are very difficult and the consumption reversion will be a big risk to revenue and earnings. BGFV is likely to face double digit comp declines in 2022.
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, a considerable amount of pent-up demand built up for eyeglasses/optical goods due to cancellations and deferred visits as a result of initial lockdowns. By January of FY21, the build up peaked and outperformance over the past year eroded the remaining opportunity.
From here, we expect volume to return to pre-COVID levels therefore underperforming past year comps.
This will be a difficult industry backdrop for WRBY to try to grow and turn a profit, meaning it will likely miss EBITDA profitability expectations and see the multiple compress.
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. |
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 & WEBR
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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. 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. |
On our recent retail themes presentation, we highlighted import/consumption data across a bunch of consumer products. You’ll notice in the chart below that grills and stoves unit imports in 2021 were 58% ahead of the pre-covid average.
There remains significant reversion pressure in unit consumption for these core categories of DTC and WEBR. We also got numbers out of SNBR this week, where revenue and earnigns missed and expectations were revised lower with the company seeing demand issues in March.
That data point on mattresses is a sign of how bad other durables’ (like grills and stoves) demand could look as 2022 progress.
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) three 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 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.
- 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.
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 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.
