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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 put out a press release this week around company collaborations and a new hire in the licensing segment. The company perhaps trying to get some positive news flow out in the market, which makes sense, but didn’t appear to have much of an impact.
We think there is still momentum in the brand, but what the stock needs is a couple quarters of solid execution and delivering the earnings while honing the investment message to the biggest value drivers. As the company executes the market will take notice.
It’s a positive for the company to be building the talent around the core business drivers like global licensing. This is a growth company and the right managers need to be in place to drive that growth.
Connie Chang is a licensing veteran that joins PLBY to work on with retail, collaboration, and licensing partners. She has experience at C-Life Group and Disney.
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. |
Coffee consumption and especially at-home coffee consumption has increased during the pandemic. 66% of the U.S. are now drinking coffee daily, the most in about five years, according to a National Coffee Association survey in January.
In 2021, 58% of Americans said they were daily coffee drinkers, and 63% in 2020. The largest increase has been driven by consumers aged 40 and up who are drinking more coffee at home as opposed to specialty drinks at cafes favored by millennials.
84% of respondents said they had consumed coffee at home in the past day. 43% of coffee drinkers had a specialty brew in the last day, up by 20% from January 2021.
A USC study published this month researched the effect of fatigue vs. habit of coffee consumption. Respondents said fatigue was twice as important as a habit for prompting their coffee consumption, but the study showed it was similar.
The study found that “participants strongly overestimated the effect of tiredness on their coffee consumption and underestimated the effect of habit.” At-home consumption will likely remain strong as a way to save money and increasingly because it has become more of a habit. Black Rifle Coffee company’s DTC sales benefited from the shift to at-home consumption. However, the largest contributor to BRCC’s sales growth for at least the next two years will be RTD coffee drinks.
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. |
Long Bench name Paramount Group (PGRE) has remained 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 company reported a non-event 1Q22 last week, but seemed to intimate that Board discussions about what to do here have been ongoing. We think there is an elevated likelihood of an activist campaign here in some capacity, and are confident that Monarch is not going away and may submit an updated bid for the company.
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) is trading at a fresh new 52-week low as of this moment (12:40 PM ET on 4/29) after declining by ~6% this week. The stock remains on the Health Care team’s Best Ideas Short list following an earnings release and conference call that clearly failed to inspire anyone or lift the stock. Cologuard volume slightly beat our claims trend (see below), but the company continues to lose a ton of money (~$180MM in the quarter), and there were lots of questions about [Guardant’s] liquid biopsy (i.e., blood-based tests) vs. Cologuard during the Q&A.
Our view remains that Cologuard will cede share back to colonoscopy and penetration is unlikely to ever get to or above 40%, and the commentary on the 50+ year-old demographic’s use of Cologuard and need to focus on sales there is odd, in our opinion.
We recall survey data showing that the younger demographic was more hesitant to return to the doctor than older Americans. That aside, our Key Call Out on Wednesday morning in our Health Care Pro Morning Brief covered EXAS’ fine tuning of its guidance and how, “On the one hand, Cologuard picked up in our tracker and in the reported numbers. On the other hand, we continue to see a recovery for in-person care through earnings reports and other high frequency data as we exited 1Q22, which in our view means colonoscopy will take back patient share it lost during COVID.”
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 (this risk is rising, but it’s no longer clear that EXAS will benefit); 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. |
We think that SHEIN is one of the greatest existential threats the apparel industry has seen in a generation. The company is a disintermediator to the traditional fast-fashion model, offering trendy apparel at prices that simply can’t be touched by the traditional apparel companies, or even those that have historically been cheap and fast to market like H&M.
Based on our work, we think that Torrid is at particular risk to SHEIN. Aside from the fact that SHEIN has a special ‘plus sized’ section, it’s worth noting that the traditional plus-sized shopper is generally averse to shopping in stores, instead preferring to shop out of their own home.
SHEIN knows this, and has therefore made a particularly big push into the plus sized market. Our cross-shopping analysis shows that the SHEIN shopper and Torrid shopper are one in the same, which has dramatically negative sales and margin implications for the Torrid model given that the typical SHEIN price point is more than 50% below Torrid on like for like items.
SHEIN is the absolute worst competitor for an apparel company, and it has Torrid right in its crosshairs.
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 hit new lows the week. This is a model that wont be profitable for years, and even when it is will likely carry a lower margin than the street expects. The category is now under pressure after the post lockdown demand backlog has been satisfied and brand interest on google is trending below 2019 levels.
When you add all those together, this is an expensive stock with slowing trends and growth that is likely to underperform expectations.
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.
BGFV, DTC, & WEBR
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(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. (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. (BGFV) Short Thesis Overview: 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. |
A couple clear negative data points came out this week on discretionary category spend. The first was AMZN’s earnings where the management team gave 2Q revenue guidance below expectation. The guide implied weak April trend and the company talked about inflation putting a pressure on household budgets meaning less discretionary spend.
The other was the release of March PCE. The headline was fine, but getting into the sub category trends YY discretionary good like sporting goods and appliances have gone to no or negative growth YY. Matching up those data points on two separate months suggests the environment is getting challenging for core categories of BGFV, DTC, and WEBR.
We get earnings out of BGFV this coming week. Trends for its 1Q might have been decent as demand in early to mid-quarter was still ok, but Nike is gone and consumption in sporting goods is starting to revert. It’s a very tough setup for BGFV as it relates to forward earnings and cash flow.
INVH
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Short Thesis Overview:
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Last week Best Idea Short INVH reported in-line 1Q22 results but disappointed the Street in not raising the FY22 outlook. As EQR had shown earlier, that is just not going to get it done in this market.
The management team paid nominal lip service to the permitting issue and related lawsuit, saying they are looking forward to their day in court around mid-year which is obviously upcoming. Perhaps the most important piece of data was the fact that renewal lease spreads slowed further and the second derivative on new lease growth accelerated further into negative territory, resulting in a clear “rolling over” of the blended metric, which is forward looking.
We would make the argument this is happening way earlier than investors expect, and that forward internal and probably external growth expectations need to be revised lower.
From the beginning of the year we saw little-to-no upside to INVH numbers but significant potential upside to AMH, but now the driving force for INVH will be the outcome of the lawsuit. We see significant risk to additional complaints being filed in other states, which would torpedo the bull thesis.
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. |
Short Bench name WeWork (WE) reports results on 5/12. There is a litany of problems with this former SPAC in Quad 4, namely management credibility, now combined Chairman & CEO roles, high adjusted financial leverage, and non-clear financial and operating targets.
Along with that, 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 random rumor of negotiations on an equity private placement at 3pm on a Friday (which was the final straw in our minds).
Stay short through Quad 4 and we will revisit on the other side.
