Let’s start off with the obvious, we’ve been dead wrong on this long call in 2022. We’re #accountable to every call we make. We have about 60 active calls in retail right now – the majority short side, and have a track record that I (McGough) am extremely proud of. But I/we were loud on PLBY long, and so wrong. We own that call. After seeing it more than double in Quad2 in 2021, the stock has cratered in Quad4 and now the TREND fundamentals are falling well short of our expectations as both macro and execution are pressuring near term results. What we got very wrong was thinking that the business TREND (the pods) would trump the Macro and Market environment (the Quads and Signal). The business hasn’t performed, and even if it came in as expected, the Macro is so bad (retailers dropping like flies) it would have still likely won the TREND battle.
Management got ahead of its skis last year on setting expectations on growth opportunities and 2022 fundamentals, while also making some investment mistakes in trying to rush the building of CENTERFOLD. That was a gaffe, but it seems like since internal talent has been recruited, KPIs (and gross revenue per creator) have been climbing nicely.
As for what to do from here, if we think about the long-term opportunity, we still think there is massive upside if the brand monetization can be improved and the brand relevance be leveraged into these new businesses. The only thing that might be different is the level of conviction in execution over time. Management made some mistakes for sure, but this is still a very young public company, and one which is still building out the talent team to drive the business forward. It’s a startup all over again.
If we think about the value of PLBY, reversing (hypothetically) new investments and going back to more licensing focused model and adding the Honey Birdette business, it would arguably make for a stock roughly 3x-5x the current price. Fixing the licensing structure would take that value up another 2x (perhaps no better time to do this given it requires no capital and minimal one time SG&A). It’s the “non-core” assets and the disdain for management by the retail community that has this stock trading where it is today. So the question is will the investment in new growth initiatives (a lot being in labor) create material incremental value or destroy the value of the quality/performing assets. We think there is still too much opportunity in the growth initiatives to give up on them, and the stock, at this price. CENTERFOLD may be moving slowly, and it will take time to get it right, but if successful could rapidly flip the script on this stock. We think CENTERFOLD alone could be worth over $25 per share if management can get it even marginally successful. If it achieves only 25% of OnlyFans’ GMV its worth $50+ per share – that initiative alone. For now, barring a big ramp in CENTERFOLD GMV, we think the stock is likely stuck in the single digits for 6-12 months while the Macro is a headwind and until the company can deliver several good quarters and profits. Long term we continue to think this company can be worth many multiples of where it is trading today. Trust us, we shook the etch-a-sketch clean after this quarter, completely re-evaluated our thesis, and still think that the long term upside is meaningfully above the $6 (and $300mm market cap) we’re looking at today. Yes, you have to have a high risk tolerance, suck up the volatility, but owning this name in the mid-single digits should pay off BIG over time.
What we didn’t like:
Revenue weakness, but more specifically the supply chain excuse. We have never considered Yandy and Lovers to be core organic growth assets, more infrastructure investments, but they remain a big portion of DTC revenue, and results were weaker than we expected. We expected to hear about some demand pressure in the business due to a weakening consumer, as this is something we are hearing in the majority of retail earnings calls in 2Q, and specifically weakness in June and July. What we are not hearing though is many companies talking about supply chain issues being a problem more recently. That suggests PLBY is underperforming the average on getting product in when needed. Some of this is likely out of their control, but it’s a disappointment nonetheless.
Guidance pull. The fact that the company is pulling guidance so soon after reiterating the full year is definitely a bearish event. It is likely the right move as is sounds like demand trends are becoming too volatile to forecast, but perhaps the company should also have been more conservative in May. There was some clear signals forming around consumer weakness in Macro data. We blame ourselves for not appropriately baking in the full impact of Hedgeye’s Macro call into our model. Big lesson learned there – especially given that the call has absolutely nailed it.
The “mea culpa”. We like that Ben Kohn discussed the fact that Dream.me was a failure in terms of bringing on the needed CENTERFOLD development capabilities. We’re not sure how the vetting process went there, but it clearly was not robust enough. What we don’t like though is it looks to have come at least a quarter late, as the hiring commentary last quarter suggested the company new it needed more INTERNAL talent to build out CENTERFOLD. The retail community/Discord crew was very vocal about this – and rightly so. Sentiment subsequently completely soured – which in turn left this stock for dead.
There’s still not enough detail around sub brands. The company needs to put more disclosure around certain businesses and include more in the press release or file the Q simultaneously. Honey Birdette should be its own business segment, it’s definitely providing a majority of the EV – potentially ~75%. We should see revenue and profit trends for this on its own. Then if the company is going to go into so much detail around the Yandy and Lovers performance being the issue, the quarterly revenue numbers should be provided here as well. If nothing else it will help people to value the parts which could increase the perceived value in the near-term.
We still have little detail on new initiatives. Maybe some of these are being pushed off to preserve cash, but we don’t have detail on beauty lines, spirits launch performance, India growth trajectory. We’re not saying these are all necessary, but if they aren’t going to be part of the forward strategy or are on hold, say so, and tell investors how the actual initiatives are performing.
What we liked:
Honey Birdette performed well, growing 37% in constant currency while still having an easy compare from closed Australian stores coming in 2H. Though store opening commentary is not bullish, we’d argue that the company should err on the conservative side of opening these stores. Don’t be overly aggressive, but this is brand/asset is performing. Unless the company thinks that is about to change we think it should continue on with the store openings at a measured pace in spite of macro pressure. It’s a stellar asset, and deserves the capital.
Playboy.com still doing well, though it must still be really small to be growing 90%+ yet have DTC decline organically. Plus it looks like the company has been clearing out some excess apparel inventory there, so perhaps some of the revenue is ‘sale’ boosted.
Lack of repo is a HUGE positive. We were happy to hear that the company has NOT deployed its cash buyback authorization and that it is focusing on cash generation/preservation. At these pitifully low valuations the only thing that can take it down significantly (like 50% plus) is liquidity concerns. It appears management knows that and is taking steps to preserve cash. It has $70mm in cash on its balance sheet, which we liked.
Planning for Halloween/peak demand. The company appears to be planning inventory to avoid out of stocks on peak Halloween selling season for Yandy/Playboy. It needs to be a little careful in doing this, but the company also cant afford to lose profitable sales due to out of stocks for the moment when the consumer is willing to spend more heavily
SBC. We don’t “like” it, but one thing we’re actually not upset about is stock comp. Is it high, especially without delivering the growth? Yes, but a core reason for being public was for PLBY to be able to recruit top talent with public equity compensation as opposed to big up-front cash comp. Plus shareholders should be happy the execs are paid in stock, they are feeling the same downside on their holdings instead of collecting cash comp, and they weren’t dumping it at higher levels. A lot of the people which were needed to build out the new initiatives have likely been offered packages with stock based comp, and aligning their interests with shareholders is a good thing. Though we don’t necessarily have strong expectation for it, we’ll keep an eye out for insider buys.
