We’re moving this name down to our Long Bias list. Yeah, we’re probably calling the bottom in doing so, but the departure of Lance Barton as CFO is a huge disappointment to us. He was and is the right CFO for PLBY. CEO Ben Kohn had a very focused and clear (and dare I say bullish) message on the call about asset sales, the new Chinese JV, and acceleration in what was formerly known as CENTERFOLD. But the problem is that he lacks more credibility than any CEO I (McGough) have seen in 30 years. If it was announced that he was leaving, the stock would double tomorrow – regardless of results. The company put together a presentation that outlined ~$25mm in ‘normalized’ EBITDA if the new ‘asset light, lower debt’ model was in place for FY22. But our sense is that Kohn was the architect of that financial model and not Barton, and we’re not going to see that level of cash flow in 2023. Speaking of credibility, I have to point the first finger at myself. We went long at $25, thought we were heroes when it went to $60 over three months, and then rode it down to $2. Worst call I ever made in my life. Huge learning experience. But an embarrassing one.
We clearly got the P&L direction wrong in 2022, however we were sticking with the value play (with the PLBY assets trading below our perceived liquidation value) as long as we had comfort on liquidity, brand health, and the core team intact and buying into the strategy (those being Rachel Webber, Ashley Kechter, and Lance Barton). Today we lose conviction in two and perhaps three of those elements. Lance is leaving, and we’re not sure we blame him given the continued cost cuts (layoffs) the company has to do to sustain cash. He had previously shown confidence in liquidity after the 2022 round of cost cuts, but now the company is forced to cut another $15mm, which gives us less comfort around liquidity, particularly with revenue pressure. The ‘pro forma’ outlook implies profitability with the cost reductions, but that is of course using trailing revenue with forward cost structure while organic revenue is in decline and discretionary spending is far from a bottom in our view. With such consistent SG&A cuts, we start to get concerned about brand investment and brand health over the coming 12 months. The company needs a big improvement in profitability trends to get in line with the new covenant timeline of 2Q24 after its debt paydown. So much depends on the trajectory of the creator platform, where progress has been very slow. We’re not confident it gets to the profitability level needed in ~12 months, meaning equity value will continue to be under pressure for the foreseeable future.
So why are we keeping this on our Long Bias list instead of punting entirely? Perhaps with the exception of Allbirds (BIRD) I haven’t seen such a severe dislocation between the underlying asset value of a company and the security price in my 30-year career. To replicate the Playboy brand and the ecosystem that surrounds it would cost billions. The liquidation value is 3-5x above where the stock is trading today. Those kind of stocks don’t work in Quad 4, but we’re maybe three months away from what appears to be Quad 1, which is a completely different ball game for a name like PLBY. The company is mitigating discounting at Honey Birdette – which pressures the top line for the next three quarters (but is the right move for the brand). But then we’re likely to see the JV fruits start to materialize, cost cuts fully baked, and potential meaningful EBITDA contribution from the Playboy content creator platform. If the company fails at ANY of those, we can’t envision a scenario where Kohn keeps his job. And it's abundantly clear that the Street wants him out. It's kind of a win/win, lose/win scenario.
But the punchline is that without Barton as CFO, and our lack of confidence in the leadership at this company, we can’t – with any shred of analytical integrity – keep this name on the same ‘Best Idea’ list as names like RH, CPRI, DECK, NKE and VVV. We’d rather let this pot simmer and re-evaluate later this year as we see the Playboy digital network evolve (it’s where Kohn is doubling down) or him losing his job. We have no problem making this a Best Idea again even if its 2-3x higher. Because if that happens, and these initiatives work, the stock is likely headed much higher. The potential here remains tremendous. It's 100% execution from here on out.
