|
Long: PLBY, BRCC, PGRE Short: EXAS, CURV, BGFV, WRBY, DOCN, DTC, INVH, WEBR, WE, HZO |
Below are updates on our thirteen current high-conviction long and short ideas. We have added MarineMax (HZO) to the short side this week. 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. |
PLBY Earnings are out this week. We think the numbers should look solid, though the question is how much will the market care right now. In Macro Quad4 the multiple continues to compress, and it’ll likely take a few quarters of strong performance for investors to start to pay attention.
One part of the thesis to keep in mind is that the company has a large licensed business. The company has roughly $300mm in forward contracted cashflows around licenses.
There is a lot of investor focus on execution of new growth drivers that could create immense value long term, and rightly so, but the market might be forgetting that this company actually has a stable cash flow stream from licenses, as well as the addition of the high profit Honey Birdette, so while the company is investing around growth, there remains some very real core profit drivers. More to come after next week’s earnings.
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 reports the first quarter of 2022 results on Thursday. It will be the second earnings report by the company since going public. The guidance management provided in the last call established expectations for revenue of $315M, positive adjusted EBITDA and 15-20 new Outposts.
The company is experiencing inflationary pressures like everyone else and had already started raising prices on numerous products. However, management had not yet decided to change the price on the bagged coffee subscriptions. Much of the growth this year is expected to be driven by Ready to Drink (RTD) door expansion.
Management has already been positively surprised by customers rolling out Black Rifle RTDs across their entire fleet rather than being deployed in small or regional tests in the beginning. The early success of RTDs provides top-line visibility for the year and if inflationary costs continue to climb management has pricing levers to use.
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. |
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 two weeks ago, 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
|
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 remained flat to start the month of May (~$54, down 33% YTD).
The stock remains on the Health Care team’s Best Ideas Short list following 1Q22 earnings. As a reminder, Cologuard volume slightly beat our claims trend, but the company continues to lose a ton of money (~$180MM in the quarter), and there were several questions about [Guardant’s] liquid biopsy (i.e., blood-based tests) vs. Cologuard during the Q&A.
On May 2, Guardant Health (GH) Announced that its Shield™ Blood Test is Available in US to Detect Early Signs of Colorectal Cancer in Average-Risk Adults (bw). Until there is data from the 10,000 patient ECLIPSE clinical study (NCT04136002; expected by end of 2Q22), an $895 cash price and 300 patient validation study may not have much impact.
EXAS fine-tuned its guidance for 2022 around existing Consensus estimates, and 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. Our view remains that Cologuard will cede share back to colonoscopy and market 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 (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; and 4) GH’s ECLIPSE data fails to impress.
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. |
We got March OTEXA apparel import data this week. Import prices were up 15%, that was higher than our expectation and solidifies the risk around import data. That risk of course is rising product costs at the same time inventories build and discounting returns driving pricing down.
That means apparel margins start reverting hard. Looking at CURV that margin risk will come alongside share risk from the likes of Shein, Old Navy, and more. Earnings for CURV are under clear pressure.
The company announced a CEO and board change this week likely to help with investor communication, but putting a new CEO in place or a financial vet on the Board doesn’t change the broken nature of the model.
Alongside the exec change announcement the company said it expects to beat its guidance for 1Q, likely meaning slightly, that isn’t surprising given the company guided down last print and there has been some near term apparel reopening demand. Earnings will be looking much worse over the next 2-3 quarters.
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. |
In another Quad 4 week, we saw plenty of our shorts work out like a charm…most notably ETSY, RVLV and W. These are companies with decelerating trends, and importantly, no valuation support. That’s where the WRBY corollary comes into the equation.
WRBY is facing a post-pandemic weakness in demand, spike in labor costs, and does not have the store productivity, or ecommerce momentum to support any of those things. And importantly, it has no valuation support. While its down materially from when we first shorted it, the reality is that it’s trading at 3x sales and 40x+ EBITDA.
We don’t want to get to greedy on a name that’s worked, but ath this valuation with the absence of a positive catalyst, it is likely to work again – short side.
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. |
Click HERE to watch Technology analyst Yosef Vaitsblit discuss the latest update on Digital Ocean (DOCN). Update is timestamped at 3:44.
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. |
Big deceleration in trends at Best Idea Short BGFV – with the company putting up $0.41 per share vs $0.96 last year. Also guided down 2Q to $0.40-$0.50 vs (a lone estimate) of $0.79 – vs the $1.69 that BGFV reported in 2Q last year.
Guided 2Q comps down high teens based on trends seen so far this quarter – not good. The reality is that BGFV falls into the ‘does not have the right to exist’ bucket of retailers. It has DKS and ASO both knocking on its doorstep with new store growth, which is a massive threat to BGFV.
Keep in mind that this company barely broke even pre-covid, and has since had Nike (9% of sales and ~20% of softgoods business) fire it as a customer. That should result in earnings going negative once demand fully normalizes in sporting goods. It’s a heavily shorted stock, we get it – 42% of the float is short.
But it’s deserved…this company might very well not exist in five years. Stock trading down 8% pre market on this print, but ultimately we think that this stock has risk of being worth close to zero over 3 to 5 years.
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. |
Solo brand reports earnings this week. We continue to see negative data points around durables categories in the market and retail earnings. We expect to see slowing demand across the DTC product portfolio.
With earnings reports from online players like Wayfair and ETSY this week signaling a significant slowdown in home product demand online, it likely reads negatively for a home/outdoor retailer that sells direct in DTC. This name is still over earning and likely continues to see risk to the stock.
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. |
WEBR reports 2Q EPS on May 16th, and we don’t think it will be a good report. Keep in mind that this is a seasonally strong quarter for WEBR (frill sales are weighted towards 2Q and 3Q) but we think that the top line will decelerate from the 8% growth we saw in 1Q.
Freight and input costs remain elevated, which wont help the cause. We’re about 20% below the Street for the quarter, but we think the big problem will be the guide, which is likely to come down for the year.
We think WEBR will struggle to earn $0.10 for the year, and the Street is sitting at $0.45.
INVH
|
Short Thesis Overview:
|
Last Friday INVH filed its motion to dismiss the qui tam whistleblower case in federal court. We don’t necessarily want to wade into the legal specifics, but a few observations from a fundamental perspective.
INVH wrote in its 10-K filing earlier this year that “it was not subject to material litigation risk,” and this was highlighted by a significant portion of the rest of sell-side as reason not to worry about potential legal liability. Thanks for coming out.
Then, the company petitioned to remove the case from state court and escalate to federal court. Then on 5/4 INVH hired a new SVP of Legal with more than 15 years of experience in dispute resolution, investigations, litigation, compliance and corporate transactions.
Watch what they do, not what they say – clearly this is a company concerned about its legal liability. In the motion to dismiss the company basically claimed (paraphrasing) “yea, maybe we committed fraud, but only the government can sue us, not private plaintiffs.”
And it also tugged further on the thread of shifting responsibility for the non-permitting to prior owners, despite the fact that INVH represented in subsequent transactions that all homes were up to code and had all necessary permits, licenses, etc. What? Staying short here and would most definitely steer clear on the long side.
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) 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, 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 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.
hzo
Hedgeye CEO Keith McCullough added MarineMax (HZO) to the short side of Investing Ideas this week. Below is a brief note.
Here's another good example of how you professionally covered a short lower and now have a another shot to short it again with the latest weak-handed hedgie covering on green...
This morning's ISM Services print was another #Quad4 Slowing report. If you think high-end yachts is what people are going to be buying (do they need 2?) post their NFT, Crypto, and #BubbleCaps imploding, I’m fading that concept.
There’s been an abrupt change to the “wealth effect” here in America – and not a good one!
See Retail analyst Brian McGough's Retail Pro research for details on why to short PEAK CYCLE numbers at MarineMax (HZO).
