Gildan (GIL) | Moving up on Short Bias list. GIL reported earnings and it was a pretty good quarter, coming in ahead of expectations with solid revenue results. We think the setup remains bearish over the next 2-3 quarters. The company acknowledged it is seeing slowing trends recently and that the industry has elevated inventories. We know the large retail store partners have an inventory problem, so they are likely pushing back on GIL in terms of deliveries. The bullish development was the company taking up pricing to offset costs. But with high inventories in the channel, and cotton now falling, the distributors will likely extend replenishment orders out as far as possible, perhaps even looking for GIL to readjust price lower at some point in the not too distant future should commodities continue to fall lower. That means GIL could see low demand for an extended period of time while also facing high input costs from the elevated cotton working its way through the supply chain. We also think that people underappreciate both the level of SG&A that GIL cut from its model during the pandemic (and will have to add back), as well as the negative capacity utilization hit it’s likely to see when its new plant comes on line next year. We actually like the long term outlook for GIL, but slowing demand trends and highly volatile materials costs means that the multi quarter fundamental setup remains bearish, with downside into the mid 20s.
Wayfair (W) | Remains a Best Idea Short – still 50% Downside. The company has looming balance sheet problem in our view. The quarter reported last week was relatively inline. Slight revenue beat, earnings miss. The earnings are significantly negative. 2Q earnings -$2 per share, with -$4 in the first half while the consumer is in the early stages of a slowdown into recession. W burned $600mm in cash in 1H. Maybe that was a little bit better than consensus expected, but cash is a concern. $1.7bn in cash on the balance sheet means all good right? Well sales are down 10% QTD, that implies the start of the quarter slowed on a 2 year basis, after 2Q slowed. Adj EBITDA Margins to be low to mid-single digit negative. Meaning more cash burn in 3Q, and it sounds like 4Q is likely to be the same. The working capital dynamics work against W on declining sales. Normally even without profits if growing the cash balance rises as payables growth significantly exceeds the current assets build. But now if revenue is in decline that payables balance should become a working capital headwind, simply put this model does not work with negative growth and no profitability. Operating cash goes the wrong way so the company needs to cut costs, but that drives growth lower, putting more pressure on the stock and reducing the cash generation potential. In a just moderately weak consumer scenario, W could be out of cash in ~18 months. The company has $3bn in convertible debt, first maturity in late 2024. Who is going to lend to them with falling sales, and negative margins, potentially in the middle of a recession? That leaves the equity market, i.e. even more stock dilution risk with falling total equity value. Let’s not forget that the CFO that brought this company public is heading out the door within a few months. As we said last Quarter, the model is in trouble and though this short has been a massive win for us since $270, we think it can easily get cut in half again to ~$30.
Canadian Tire (CTC.A) Moving CTC Up The Short Bias list. CTC reports this week, and the negative Canadian macro data points have been adding up. Canada unexpectedly lost 31K jobs in July a second straight monthly decline. The housing downturn in Canada is gaining momentum in some key Canadian markets. Toronto home sales fell -47% Y/Y in July and the home price index fell -4% M/M. Vancouver home sales fell similarly in July coming in at -43% Y/Y with home prices down -2.3% M/M. Oil prices are falling as large parts of Canada remain oil economies. Our macro team has a bearish Quad4 outlook for Canada much like it does for the US. Yet CTC’s stock has barely budged over the last 3 months. With such wide exposure to the Canadian consumer, we don’t think it can dodge the clear macro risks here. We’re incrementally concerned about its credit book (where it lends to low income consumers to shop at the stores) as well as the unsustainably elevated productivity levels in the core Canadian Tire asset. This name is quickly making its way closer to our Best Idea Short list.
PLBY Group (PLBY) | Preview into Tuesday’s Print. Reports 2Q22 on Tuesday after the close. It goes without saying that this stock has acted like death – like the market ‘knows’ a miss is coming. It has seen very little institutional interest, while the a large portion of the retail investing crowd has been turned off by management due to execution around CENTERFOLD and Rabbitars, initiatives that previously had that community psyched around the stock about 10 months ago. We have to recognize the significant impact that Macro Quad4 has had on this stock. It is small cap, growthy, with some leverage, and no trailing profitability. All things Quad4 tends to punish severely, particularly in a 'deep' Quad4. As bad as the stock has performed, its not much different than a lot of other names with similar characteristics (we'll discuss over 30 of these similar 'Quad4 casualties' in our Bone, Bagger or Bust deck Monday at 12:30ET).
Management announced a $50mm preferred equity deal intra quarter that was to be used to opportunistically buyback stock and for corporate expenses. We actually would like to see that the company has not used any of this for share buyback yet. With the stock so beat up, the only thing that would justifiably move it materially lower in our view is concerns around liquidity. The company should be generating strong cashflow on a forward basis, but we can't deny that the US consumer is weakening and likely headed for a multi-quarter recessionary environment, and the Chinese consumer is dealing with lockdowns, concerning geopolitics, and a precarious Chinese economy. If there was ever a time to sit on some extra cash out of conservatism, this is it. We don’t think there is a cash problem here, but it wouldn’t hurt to save the new cash until the economy is on a better footing and the company demonstrates to the market the forward profitability we expect to see in the coming quarters.
The growth opportunities remain plentiful, perhaps too plentiful, yet so much right now seems in limbo with little information. Let's take a quick assessment.
International Licensing
Fixing China. This means doing the legal work and legwork to get licenses fixed, particularly in China. That has been significantly hindered by Covid restrictions, but China in recent months has been making travel to/from the country a bit easier. We'd like to know where progress stands and what the game plan looks like. Management needs to make this a massive priority, it’s a BIG win to fix the most egregiously un-economical licensing agreements we’ve seen EVER (and ever is a long time).
India. We haven't heard much detail here, we'll give it a pass given Covid over the last year, but now it's time to start to growth the region. Where does it stand? Where is it going? What is the strategy to get there?
Apparel Business
Apparel is the biggest category for the company today (~$2.7bn of the underlying $3bn in sales), and the US business with Pacsun has been particularly successful, yet we don’t know the total size or growth rate to gauge the success of the US apparel growth and potential P&L impact. At the same time, we know the US apparel industry is facing a challenging moment, with high inventories and slowing demand. Even if the Playboy branded apparel remains in demand, it could arguably see weakening trends from the industry pressure.
The Big Bunny sub brand to us looks like perhaps the biggest failure so far in terms of execution of growth initiatives, it doesn’t really change anything in the longer term investment case (we never bought into it as part of our bull case), but it looks like a misstep nonetheless. This was supposed to be a premium sub brand, yet we don’t think the pricing was high enough and it was not positioned to be exclusive enough with the right marketing behind it to succeed. The Big Bunny jet was supposed to be a marketing vehicle for the brand, but we haven't seen the jet leveraged to drive influencer brand engagement as was originally expected. The company could always try again at a different luxury sub brand, but this doesn’t appear to be it.
Halloween is an important selling time for Playboy, as the classic bunny outfit was a leading costume last year. The company actually couldn’t keep enough in stock and ended sales early to avoid deliveries arriving too late. This year it will be interesting to see if demand remains high for the bunny look, and if the company can satisfy the demand.
Product Line Expansion
Spirits could be the most 'on track' growth initiative. The company has launched both a high end tequila line and a high end whiskey line. Now we'd just like a sense of the success of the launches and how big they could be for the P&L over the coming years.
Beauty/Fragrance have been discussed, but we have not seen anything specific here around product launches. PLBY ended some licensed contracts to take back the right to do beauty in house. By year end we'd like to see some detail of where this category is going.
Honey Birdette
This brand has been such a profitable and quality growth asset prior to being bought that it seems hard to mess it up. It is lapping days of closed doors during Covid so it has some growth tailwinds too. Though at the same time the company has a 10 new store plan that looks to be a little behind schedule so far. If the growth opportunity over the next few years for HB is executed, this business alone could be worth 2x or more of the current PLBY EV.
CENTERFOLD
CENTERFOLD is the one area where PLBY could rapidly flip the script on the stock. Demonstrating strong GMV growth trends in the platform would justify a much higher valuation. Capabilities have been build out like live streaming, the site looks better, and it is adding more and more creators every day. However we don’t think the company has had strong user spending trends to date. We're not entirely sure why, we'll see what the company has to say around actual metrics and plans to grow the platform. There is debate on whether capital was poorly deployed in buying Dream.me to accelerate the CENTERFOLD launch. That may very well be the case, management had to show action to appease the creator community, though it appeared more talent additions were needed to continue building out the platform post acquisition. However, $20mm in sunk costs could prove a small price if the platform is successful.
NFTS
This initiative has gone fine in our view, not great, but not bad. We don’t see it as a huge profit driver, but rather a brand building strategy with some revenue generation. The company has definitely changed the execution strategy, making changes to the team and appearing to outsource part of the Rabbitar community engagement. Still there have been some gradual strides here including the recent announcement about the Playboy Meta-mansion experience being launched in partnership with The Sandbox. We don’t know where this will go, or how big of a value creator NFTs will be, but there is progress being made.
The current valuation level is hard to believe. Even if PLBY overpaid for Honey Birdette, pooling the retail acquisitions at discounted values assumes assigning a price of the core playboy brand of something nearing zero to sub $200mm, which we think it ridiculous given the brand power and licensing profit stream connected to it. With that setup, the market expectation into this event are incredibly low. The company could arguably take down expectations some to set a more beatable bar with the market giving it a pass to do so, simply point to macro and China lockdowns. Still the company needs to get a clear message out about where it sees its biggest growth opportunity in terms of profit generation and how its investing and executing to make that happen over a certain duration. The company has gone broad on growth, with little clarity, its time to focus some with more clear guideposts and milestones for investors to watch. Tuesday will be an important event, yet we think this company has to deliver multiple quarters of solid profitability and execution before the market will really take notice.
We’ve been dead wrong on this stock over this past year – Quad4 has crushed it. But we think that it is one of the most mispriced securities in Consumer Discretionary today. The opportunities here are simply too massive, and the market is assigning ZERO value to virtually all of them. Management has to show up on Tuesday with a rock-solid message about where it’s headed strategically.
