|
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 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 reported earnings this week, it was a solid quarter from PLBY. With growth stories dropping like flies here in 1H 2022, PLBY’s growth story remains on track. Revenue came in about $1mm ahead of consensus, while EBITDA was below, but with the company reiterating its full year guidance of $350mm in revenue and $55mm of EBITDA. The messaging was more focused on the real value drivers, those are global products (which today is concentrated in apparel), CENTERFOLD, and Honey Birdette.
CENTERFOLD is clearly at the center of the ecosystem and the company is investing in the platform citing $2.6mm in investment this quarter and adding new development team talent from some top tech companies. It also highlighted the just announced new high profile creator Amber Rose. The company sees the opportunity behind a creator platform in CENTERFOLD that can be a marketing engine for global products that creates revenue instead of consuming it. Patiently and successfully building it can have massive value. The company isn’t giving explicit targets, but thinks if it can execute its plan successfully, it thinks revenue and EBITDA for CENTERFOLD has the potential to be as large as the global products business by 2025.
We think that might be low balling it, at least in terms of the total profits it drives both directly and in product sales. That suggests $1.2bn in consolidated revenue – which is 2x the consensus and about in line with our long term model. Honey Birdette delivered $23mm of revenue in the quarter, slightly ahead of our expectation, even with Omicron. The new Aventura Mall store is already one of the top performing stores, and the company continues towards its 10 new store opening target.
On recent trends, management noted demand has remained strong for the core brands of Playboy and Honey Birdette, and in China the lockdowns impact on the P&L is manageable for now as partners work hard to keep business chugging along and avoiding disruption, the impact to PLBY is less volatile given the license structure.
China is around $40mm in full year revenue based on minimum guarantees. Cash balance was down in the Q, but that was explained away by the CFO around payments timing. The balance is already in excess of 40mm with more inflows to come. FCF generation should support the business going forward.
We continue to think that this is one of the best growth stories in consumer, as PLBY can transform the monetization of one of the most relevant global brands and drive revenue and profits worthy of $5 to $10bn in EV over 3 to 5 years. The market doesn’t care about that today as we sit in Macro Quad4, but if the company continues to execute, investors will take notice in the coming 2-4 quarters.
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 reported a wider EBITDA loss than expected of -$6.2M vs. consensus of -$2.7M. Revenue growth of 35% was slightly better than expected. Growth was driven by wholesale increasing by 135%. Wholesale doors grew from 42,000 doors to 47,000 sequentially. DTC was flat, but coffee club membership grew 11% to 295,000 from 265,000. The decline was from sales through Amazon or bagged coffee/merchandise which had price increases. Outpost revenue reached $5.5M with the opening of eight company owned locations over the past year.
Gross margins contracted 500bps, improving sequentially from -570bps. Higher coffee and shipping costs were headwinds. The company is raising the price of RTDs in June. Operating expenses doubled as the company added employees and other growth expenses.
- Walmart has increased the distribution from 400 to 4,000 of its stores with all four SKUs.
- The year-end goal for wholesale doors is 75,000.
- There are currently 9 company-owned outposts and 9 franchises.
- BRC has added two additional co-manufacturers to more than double the supply.
- The cold beverage mix in-stores was 40%, notably lower than the 74% at Starbucks, representing future opportunities.
- The club membership monthly churn was 3-4%.
The largest concern from the quarter was management confirming guidance for positive EBITDA guidance for the year. Achieving profitability this year seems more like a leader-imposed target rather than where the business is trending especially with all the growth investments. After reporting an EBITDA loss of $6.2M and guidance of similar margins in Q2, achieving enough profitability in the 2H looks like the proverbial hockey stick. Should profitability be a top priority this year when there are so many investments for growth? Should the company delay hiring an executive, put off a marketing investment, slow outpost growth, etc in order to achieve what is essentially an artificial target that does not have any bearing on 2023? The early success in wholesale and RTD is expanding the TAM. Other investments should be directed to growing the tent.
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) recently switched to bearish TREND last week after remaining a top signal strength long for several weeks. As a reminder PGRE recently rejected a $12/share buyout offer from Monarch Alternative Investment, and we think a revised offer as well as a potential proxy contest are in the cards for 2H22, although Quad 4 may delay the revised offer piece.
This was 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, potentially involving the Otto family “rolling” their equity stake into a take-private transaction.
Given the massive capex drag in office (can be 25%+ of NOI), we think the $14/share range is the “upper limit” of a private buyer’s ability and willingness to pay, given the downward impact it has on “economic” yield versus nominal yield.
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 are down ~1% this week, as of 1:00 PM ET on Friday (the 13th), and the stock remains on the Health Care team’s Best Ideas Short list. As a reminder, Cologuard volume slightly beat our claims trend for 1Q22, 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) - now expected later in 2022, which is a delay vs. the 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%; however, we took note of EXAS’ Bank of America presentation this past week, as management described a way to potentially increase rescreening compliance from just under 50% to 70-80% by allowing a physician to place a standing order that’ll be good for up to one year.
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; 4) rescreening revenue surprises to the upside; and 5) 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 earnings out of DDS this week, the results in 1Q were strong. There has been decent demand for apparel on re-opening and easter here in 1Q. Consumers are restocking closets.
That should generally be positive for a retailer like CURV, but CURV has actually been promoting more than other competitor retailers, and the company might be seeing demand pressure which has been communicated by the likes of GPS.
Regardless if we see decent results out of CURV in 1Q, the forward outlook is not good. In apparel in total, at the same time demand starts to roll over in the coming months, inventories are building and higher COGS are hitting hit the P&L. Avg Apparel import cost in March accelerated to up 14.8%, Apparel CPI is still elevated, and ahead of our April forecast, but it’s slowing to +6% as of the result released this week.
March imports were 61% ahead of 2019 levels. Everything is trending the way we expect for a big reversion in margins starting over the next few months and extending into 2H and beyond.
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. |
EYE was a negative read for WRBY earnigns coming up next week. National Vision, a top short idea for our Hedgeye Healthcare Team, reported a revenue miss and guided down the fiscal year on revenue and op income.
This is a bad sign for WRBY, and the Demand in the category is slowing with less pent up demand from the pandemic than expected. At the same time Warby Parker looks to be seeing declines in online interest. Slowing growth with no profits (WRBY) has been a very bad recipe in Macro Quad4.
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. |
DKS got a downgrade from the Old Wall this week. That comes after the stock has already seen some pressure. We continue to have a net negative view on sporting goods demand and margin reversion. We think BGFV will be the biggest loser given competitive threats and the risk around losing Nike as a vendor.
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. |
DTC reported earnigns this week. Revenue missed, EBITDA in-line. Management is reiterating the full year, but with not detail on 2Q, which had been the prior norm. Sales slowed to +19% from +164% (acquisition aided) last Q.
Direct to consumer was down 3%, wholesale was all the growth up 220%, so the DTC company isn’t growing DTC. A reminder this business has a few products over earning from the pandemic, the main one being Solo Stoves, then Chubbies, and outdoor products like Oru Kayak. The portfolio doesn’t make much synergistic sense, and all face clear demand reversion pressure.
The stock over the last few months has certainly seen the risk, short has been working, but company is talking about still “volatile” demand trends in recent weeks. There is a big risk to this full year guide.
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. |
COOK reported this week, and though the results in general were good, the company did note that sell through trends had remained volatile. The upcoming weeks of late spring and early summer are big selling periods for grills, so we’ll see how demand looks, but in general the demand trends look to be indicating consumption reversion in the category. People bought more grills than usual during Covid, and given these are long lived assets, they don’t need to be replaced for a while.
As the market leader, WEBR is likely to see issues in demand over the coming quarters.
INVH
|
Short Thesis Overview:
|
Two weeks 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? Finally, as we have said from the beginning, if we are right about this it likely means the entire SFR subsector is operating at artificially/unsustainably high “economic” margins and ROIs inclusive of maintenance capex. 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) reported better than expected revenue results on 5/12, which was the first positive quarterly result since we launched on the stock in November/December of last year.
There remains 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. The name will probably get tagged to the downside in an outsized way along with other high beta/leverage names as volatility trends higher in Quad 4.
HZO
|
Short Thesis Overview: 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... See Retail analyst Brian McGough's Retail Pro research for details on why to short PEAK CYCLE numbers at MarineMax (HZO). |
Online interest in boats and yachts on google is seeing declines Y/Y. With the volatility in stock markets persisting, it’s generally a negative read for the wealth effect impact on demand for high ticket leisure categories like boats and yachts.
We expect to see demand and margins for HZO revert driving earnings well below consensus level over the next couple years.
