Investing Ideas Newsletter

Long: PLBY, PGRE Short: EXAS, CURV, BGFV, WRBY, DTC, INVH, WEBR, HZO, MPW, GIL, CROX, CAR

Below are updates on our fourteen current high-conviction long and short ideas. We have removed CoreCivic (CXW), DigitalOcean (DOCN), & AMN Healthcare (AMN) 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.

Playboy added a new creator to CENTERFOLD this week. Model Jordyn Woods joined the platform, she has 12.6mm followers on Instagram.  The content creator base continues to grow, and the list of Centerfold creators is reaching a wider and wider follower audience.

 We’ll see how the marketing and monetization strategy progresses, but its hard to see how creators with such a large draw wont be able to generate at least some real revenue flow to the platform.  As compelling as the revenue potential is the ability to leverage the creators and their content to feature and market Playboy products directly to warm prospective customers. 

Essentially the marketing vehicle for goods can be its own profit center.  More time and execution is need to realize the potential, but a successful CENTERFOLD platform will add billions to the enterprise value of PLBY.

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) was discussed on the call this week about how they lost another big tenant. Illustrative of why this structure doesn’t belong in the public markets. A platform with little to no earnings growth and no visibility outside of a year of what the earnings will be. Monarch still there with an offer; PGRE remains a long.

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.

We updated the claims chart for Cologuard along with NVTA, GH, MYGN claims trends.  Cologuard is having a good 2Q22.  That’s a good thing for our pent up demand thesis, but in Quad 4 and with liquid biopsy competition looming, is less important. 

You can see the claims trend for EXAS and the other genetic testing labs in our Health Care Presentation linked each morning in the Morning Brief.  NVTA would be a long if there wasn’t several more years of losses coming and GH might be a long if the current volume trend was stronger.

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 CEO spoke at the Jefferies Consumer Conference this week. Results so far seem to be in-line with management expectations. Said how the company is facing the same issues all other companies are facing right now, of high inventory, high freight costs, high cost of goods, and high cost of raw materials.

CURV plans to run additional promotions in the short-term but in the long-term will be more strategic about promotions – specific categories and events rather than the whole website. The company will face the impacts of all around higher costs through the whole year.

To lessen the impact, there will be price increases to additional products. The targeted price increases are unlikely to make a significant dent into the hit margins are taking from increased promotions coupled with increased costs, especially as the consumer’s willingness to spend starts to wane. 

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.

WRBY is keeping its first-ever retail store on 121 Greene Street in SoHo, retaining its spot next to high-end retailers such as Ralph Lauren, David Yurman, Miu Miu, Prozena Schouler, and Apple. 

This is some of the most expensive real estate in the country, and as a more established brand than when the original store opened, its perhaps a property that Warby is better off letting go and moving somewhere with better box economics potential. 

With plans to open another 40 locations this year, WRBY is not slowing down the brick-and-mortar spending. The continued and growing expense of the expensive real estate WRBY has, while simultaneously experiencing slowing revenue growth does not bode well for continued profitability over a TREND and TAIL duration.   The lack of profitability will keep the stock under pressure.

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.

We’re starting to see increasing discounts in the sporting goods channel.  Inventories have been building with demand slowing, so it makes sense for some of the big guys to markdown products some that aren’t moving. 

BGFV rode the demand wave in 2020/2021 enjoying peak margins like the rest of the sporting goods space, but those earnings levels are unsustainable.  Couple that with no more Nike and rising competitive threats, this model is in serious trouble over a TREND and TAIL duration. 

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.

There was a Barron’s article out this week highlighting IPOs that have taken a big hit that investors might want to buy.  DTC was one of them.  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 $4.60).

The outdoor categories it serves benefitted materially from the pandemic, and all of them are likely to slow materially over the rest of 2022 and 2023 – yet the consensus is trusting the management team and modeling ag CAGR over 25% for those 2 years.

We’ll take the under on that. If not for the pandemic, this company would never have come public, and it shouldn’t be public. 

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 saw a no news meme type squeeze this.  It makes some sense as a target, it has high short interest, limited float, and a tight borrow where fees are upward of 50%+.  But as it relates to the longer term squeeze success, there are a few reasons we’d say it’s less likely to succeed compared to some other meme stocks of last year.

One, we are in Quad4 not Quad2, squeeze rallies have been short lived since the pivot out of Macro Quad 2 last year and high short interest is generally a style factor that works short side in Quad4.  Two, there is no fundamental catalyst here, business trends are slowing the company just had to revise down profit expectations significantly. 

The stock is very expensive around 20x EBITDA on those revised down numbers, with high leverage.  This isn’t a no debt retailer trading at 5x EPS with business trends accelerating like we saw last year.  Three, insiders that took this public own a ton of stock and are looking to sell, so a rally give them the window to dump stock a lot like you saw with BGFV last year, the meme stock rally gave the Big Five CEO a window to dump millions in stock.

Any WEBR insider sales will also increase the float, giving more borrow for the short sellers to pressure the stock further.  Ultimately think this equity is worth almost nothing, though given the amount of shares held by the sponsors, this likely goes private around a buck or two before it hits zero, but still suggests significant downside.

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.

• Legal risk around non-permitting whistleblower case + headline / political risk will result in multiple compression.
• Relatively unfavorable tenant profile versus coastal gateway multifamily.
• California exposure a drag.
• Systemically lower NOI growth + higher maintenance capex requirements going forward. 

Need we say more? INVH remains a short.

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).

The deterioration in high end consumer sentiment has been seen in the University of Michigan Sentiment Index (chart below).  The core customer at HZO is a high end consumer buying, maintaining, and storing boats. 

The weaker consumer sentiment will mean demand pressure for new boats.  The other risk, is if consumers that bought boats in the last couple years feel pressured financially, they will look to sell their boat, bloating the used boat inventory, which will further pressure new boat sales trends, and reducing used pricing. 

The setup is supportive of significant earnings reversion for HZO.

MPW

Short Thesis Overview: Medical Properties Trust (MPW): company spent 30% of the conference call going down the road of non-credible 3rd party reports rather than presenting credible data; the data and the math is what will matter in the end; CEO said company is in the strongest position they’ve ever been in from a financial standpoint; red flags everywhere on the call, embarrassment for the management team; we encourage people to listen to the conference call; MPW remains a short.

Evolving train wreck, increasingly likely to have a significant tenant issue this year which will result in a rent cut against very high leverage, followed by a dividend cut. We see downside to a low-single-digit stock price under a worst-case scenario (essentially a "goose egg"), likely only worth $10-11/share today under a status quo. 

GIL

Short Thesis Overview: Look for names that just reported #slowing this month (YETI, GIL, etc.) Look for Bullish to Bearish TREND reversals with big 3yr look backs  Look both ways (and down at your feet) before you cross a bear's path Retail analyst Brian McGough remains bearish on Gildan (GIL) after being bullish for most of the bull run. See his Retail Pro research product on why (including high Cotton prices).

Ollie’s Bargain Outlets is featuring Gildan shirts at rock bottom prices.  Generally when Ollies is carrying a certain brand or product, it suggest some bloated inventories in the channel.  We think that is a problem facing Gildan over a TREND duration. 

Sales exceeded expectations in 1Q and regardless of management’s comments on the call saying the channel is clean, our read is that the wholesale (screenprint) channel bought inventory ahead of likely price increases in 2H. That means demand is likely to slow materially for GIL, we’ve seen it before in these volatile costs/demand environments.

CROX

Short Thesis Overview: Coaching Notes: A) Is the ticker making lower-highs on #decelerating volume? ... and  B) Is the ticker one that Retail analyst Brian McGough is bearish on fundamentally? From the LOVE to the Crocs (no you don't buy more pairs with no stimmy checks), this year has been one to remember on the short side.

The Crocs brand has seen an impressive turnaround over the last 5 years or so.  That has led to immense growth and peaked margins. 

We are starting to see some signs of cooling in brand demand. Online search interest is not making lower highs, and a sizeable retailer in Dick’s Sporting Goods has a several Crocs styles on sale.

There is nothing wrong here, but the brand growth and margins have peaked, and the company is going the M&A route for incremental growth, something that the market will not want to pay up for.

CAR

Short Thesis Overview: There are many other considerations that could enter, but the factor that took adjusted EPS from ~$3.50 in 2019 to ~$33 over the last four quarters is used car price gains/reduced depreciation. Used car inflation soared well ahead of broader inflation but is now stalling/rolling-over in the past year. Electric Vehicles, if broadly adopted, would potentially bring much larger depreciation rates as solid-state batteries or other technologies evolve in coming years. CAR’s profits should fall with it as the rental fleet turns over.

There are many other considerations that could enter, but the factor that took adjusted EPS from ~$3.50 in 2019 to ~$33 over the last four quarters is used car price gains/reduced depreciation. Used car inflation soared well ahead of broader inflation but is now stalling/rolling-over in the past year.

Electric Vehicles, if broadly adopted, would potentially bring much larger depreciation rates as solid-state batteries or other technologies evolve in coming years. CAR’s profits should fall with it as the rental fleet turns over.