We’re adding PLBY Group (Playboy) as a Best Idea Long – as we think that the upside here is simply massive. 10-bagger over TAIL duration. Ideas like this come along once every few years. I know that it’s too thinly traded now for a lot of institutions to get involved, but that dynamic should change dramatically over the next 1-3 years while the P&L, Cash Flow, Balance Sheet and float characteristics catapult themselves worlds head of the consensus. The stock is currently at $25.50, for an equity value of $867mm. It’s been a star performer from the $10 SPAC price and the merger that closed on 2/11 with the analysts calling for $30 price targets all looking like heroes. It’s been an exercise in post-SPAC price discovery and in fairness, based on what the company has outlined in its presentation materials, the current valuation, and the spate of eerily similar $30 price targets ($1bn valuation) seems about fair. But that’s only 10% of the story.
This is a once in a generation name where you need to understand what a top notch management team can do to unlock the power of one of the most recognized brands in the world, extract dollars from a globally undervalued and mismanaged licensing organization, and expand into categories that synch with the counterculture foundation of the brand – almost all of which have zero brand leadership in highly fragmented categories that are just begging for a dominant player to come in and exert control over the front-facing consumer. Simply put, you need to think light years ahead of the investment community, and Old Wall, imagine what the tangible opportunities are, and then do the diligence as to whether management has the chops to get ‘er done. I think we check all those boxes here. The question for us is not whether this can get to $2bn-$3bn – in itself a hugely bullish 3-bagger -- but how quickly it can get to $10bn+. Yes, there’s that much upside – and that many ways to win. The upside here is reminiscent of RH at $40, and GME at $14 (both 10+ baggers for us) – though with a much better fundamental backdrop than GME. Ultimately, we’re making a call for a $250 stock over five years – and we have the model to back it up. My sense is that management is playing this game to create a $40bn company (ie a $1,000 stock). Let’s start with $10bn and then revisit -- discount that back by 10% per year and we’re looking at a $125 stock this year alone. What we like so much about this story is that there are so many ways to win, which we’ll outline below.
Gotta Respect History
Before we start with the forward catalysts, it’s important to understand the history and foundations of the brand. Playboy's origin is based in counterculture as Hugh Hefner started the lifestyle magazine to present an alternative way of living from the mainstream perpetuated by the repressive nature of the 1950s. Few things were more repressed than sexuality. Despite the 'womanizer' image, Hefner and Playboy were at the forefront of issues like racism and civil rights, and the magazine published interviewees expressing their opinions on segregation, LGBTQ rights, and abortion and other politically divisive topics of the day. It embraced free speech and did not shy away from controversy. The company saw 2 decades of great success, but started to falter in the late 70s to 90s with rising competition and slow reaction to changing customer preferences. It became too male focused, and the brand was disconnected from its roots. The company/brand could not correctly adapt to return to form and PLB (former ticker) was taken private in 2011 by Rizvi for $207mm. After Hefner's passing in 2017, the brand has been taken in a new direction, the new management team is taking the brand back to its roots, evidenced by the 2019 magazine cover highlighting three female activists with the photo being artwork of a gay photographer. The magazine and media business has since been closed down during covid, but investment continues to make the brand relevant with younger consumers of all genders and is making waves amongst influencers. It’s laid the groundwork over the course of 3-years, and we’re finally starting to see it manifest in financial results today.
Beyond the brand history, is history itself. This brand has been around since the 50s. How does one quantify nearly 70 years of brand building and content generation? It has incredible recognition among consumers of all ages, it just hasn’t done a great job monetizing the consumer connection and growing its share of wallet opportunity. The state of the business is not unlike Marvel in the late 90s. Marvel went bankrupt in 1996, who would want to be in the comic books business with the birth of the internet? But some investors realized the significant opportunity behind decades of brand building, proven character development and story telling, and an already loyal following to be monetized in a new way. A few movies later, a sale to one of the best content monetizers in the world in Disney, and nobody would argue anything less than tens of billions of dollars for the value Marvel. Playboy has been telling very different stories, but there is an immense amount of content, history, and brand wealth here that is not reflected in the current stock price.
Paycheck #1: The Licensing Angle
One major point that is underappreciated is that Playboy has 97% unaided global brand awareness and has remained one of the top 20 licensed brands in the world, occupying a spot higher than the NBA, and just below the NFL. Look at the company it’s in – Nike, Apple, Coke, P&G -- these are brands with market values in the hundreds of billions. We’re not suggesting PLBY is worth $100bn just bc it’s heavily licensed, but moreso in the percent of the consumer’s dollar that it could capture on its P&L. In typical ‘non business-minded fashion by a founding father’ the royalty rates were all set way to low, with fixed minimums and nothing more – no overage payments. Do the math, PLBY touches $3bn in retail sales – largely through licenses – and has just $61mm in Royalty income. That’s a blended 2% royalty rate and – by a long shot – the poorest economic share of end consumer sales that I have seen in my life. The going royalty rate based on brand power is between 6% and 15% -- based on a number of factors, but the greatest of which is brand power. This is reminiscent of when Ralph Lauren licensed out its non-men’s wear (womens, handbags, shoes, fragrances, accessories) at sub-prime rates in the 1970s and 1980s only to renegotiate the deals at 2x the royalty rate or flat out take the business back in house with a vertical model and capture 100% of the end sale. That was worth a triple in the stock in the mid-2000s. Case in point…Wall Street generally misunderstands and mis-models licenses. That’s what’s at play here – but to an even greater degree.
When you look at the $3bn in sales, roughly half of the sales base is in China – as Playboy is a red hot apparel brand there. It’s roughly $1bn online and $500 in B&M. CEO Kohn raised hell in China in 2019, and it was not until 2020 that the company had the systems in place to see how big the brand actually is in China, and how much in profits are being pulled out of PLBY’s pockets. The partners are also manufacturers, and quite frankly, are getting rich off of Playboy. We think renegotiations are going on today to up the royalty rates (or share the overages as the licensees outperform their minimums) to triple the implied royalty rate – which is all incremental revenue at what we think will be a 90% operating margin. Think about it…if you have a PLBY license for swimwear or boots – would you rather lose and extra $0.05 in EBIT on each sales dollar, or lose $0.97 cents altogether and completely deleverage your fixed cost manufacturing infrastructure to manufacture and sell the product? These might be difficult discussions, but they’re happening, and PLBY is winning. Important to note that Mountain Crest (SPAC) has deep ties in China and is ushering these negotiations along. Then there are the opportunities to take licensees completely in house (the company will be generating the cash flow to get the deals done) to capture 100% of each revenue dollar. Growth will be coming from many areas outside of China as well, and management sounds particularly bullish on opportunities in India with its new licensing and manufacturing partner Jay Jay Iconic Brands (no reason why India can’t be as big as China).
The company has a stated $100mm EBITDA goal by FY25, and we think that the licensing arm alone generates $130mm in EBITDA for that year simply on getting better economics out of existing deals – which ignores the other dozen initiatives PLBY has in the hopper. There’s upside based on taking the brand into new categories through licensing and JV partnerships. In other words…through this one initiative alone, you get to upside from management’s stated goals.
Paycheck #2: Category Growth
Source: PLBY Group
Style and Apparel: The dominant categories for PLBY today is Style and Apparel, which represents about $2.7bn of the $3bn in end retail sales. Mind you that this is likely to be a $1.9trillion global market by 2024. PLBY has had recent success in footwear, hoodies, and had exceptional test runs in 2020 of Playboy-branded lingere to go direct into a market. PLBY also acquired Yandy.com in Dec 2019. Consider it a risqué lingere ecommerce store that the company is using as a platform to go DTC with its own Playboy apparel. The key here is that the consumer is youthful in this segment – not what you’d expect from a brand like Playboy. In 2020 the company’s 2 biggest streetwear partnerships – with PacSun and Misguided – drove more than $100mm in sales. The company only saw ~$6mm in EBITDA due to the licensing nature of the relationship, but in 2021 will have built the infrastructure to go consumer direct and capture 100% of incremental revenue dollars. For anyone that doubts the youth allure of this brand – check out this photo from last week, where Bella Hadid was photographed (unpaid) wearing the Bunny on a bathing suit. Like it or not…this brand is hot, and likely in the early innings of a multiyear run. The company is operating from a position of strength.
Source: Instagram
Sexual Wellness: This is a $300bn category with only $100mm of licensed sales for Playboy – again, at a paltry 2% take-rate. If there is any category on the planet where this company has a right too compete, and build a dominant name in a category that has absolutely no category leader, this is it. This is a direct to consumer business that is aided by recent acquisition of Lovers, which it closed in March 2021, and has both a retail footprint, and warehousing capability to build out an omnichannel experience. The market share opportunity here for PLBY is all blue sky – and we’re expecting an incremental $400mm-$500mm DTC business over 5-years at a 20% EBIT margin. There’s another $80mm-$100mm in EBITDA above the Street’s estimates. For those living under a rock and don’t know what this category is, it includes condoms, lubricants, ‘bedroom paraphernalia’ (use your imagination), arousal kits, and also ties into Playboy.tv, which is down below 10% of revenue. I know, these product classifications might make some people uncomfortable – but get over it. It’s a growth business, its where the consumer is headed, and its screaming for a category leader.
Beauty and Grooming: This is on track to be a $434bn category by 2024, and while there are category leaders here, I’d argue not so much as to where PLBY is going with its offering. This is likely to be a licensing model and will account for incremental growth in licensing revenue – at a royalty rate approaching 10% instead of the 5-6% goal in Style and Apparel. This was a rounding error in 2020 for PLBY, but based on what the company has coming down the pike, this could be an incremental $400mm-$500mm in revenue at the consumer level, or which PLBY should recognize $40-$50mm in EBITDA. It already has sexual wellness product selling in CVS and WalMart, and we’d expect to see a global rollout of product everywhere color cosmetics are sold to the younger target audience (yes, including ULTA).
Gaming and Lifestyle: Playboy has a $1.4bn TAM here, and has some history in this category. PLBY used to have a number of nightclubs and casinos as well as the famous Playboy ‘Big Bunny’ Jet but now only has the Caesars Casino in London. PLBY has recently revitalized the Big Bunny Jet and also has long standing relationships with i-gaming companies Scientific Games and Microgaming which have produced Playboy branded mobile gaming products in the past. Going forward PLBY has an opportunity to build a strong mobile, and physical, gambling segment. However, gaming is just one piece of the puzzle as PLBY also has a JV in alcoholic spirits. Not much has been revealed about this initiative yet, but it is done with the maker of Angel's Envy Bourbon that sold to Bacardi back in 2015. Company projects the JV is going to launch in China in 1H 2021.
Here's and added Bonus…
NFTs: Playboy has an immense catalog of photography, artwork and digital content accumulated over its decades of publishing that could be monetized in many different ways. One of which the company is pursuing is through NFTs, potentially selling pieces or licensing content to some up and coming digital artists to create new art pieces leveraging the Playboy library. The opportunity is nascent, and not included in any guidance, but could be a very material incremental value creator at the current company valuation.
Financials and Valuation
There's nothing about this stock that is cheap unless you look out over a TAIL duration. But let's be clear, this story is all about growth. For FY25, we're coming in at revenue of $1.3bn -- nearly $1bn above the consensus estimate of $322mm. As for EBITDA, we're at $328mm vs the Street at $90mm and the company's guide of $100mm (there are far too many growth initiatives that are not baked into the company's guidance). Ultimately, we're at EPS of near $6 per share vs the Street at $1.44. That's 4.3x EPS and 1.7x EBITDA. Our $250 target assumes 25x our above consensus EBITDA estimate, and about 7x Sales. That might sound rich, but fair given the underlying growth and margin characteristics. Another thing to consider here is replacement value. If someone went on a capital raising mission to reproduce the 50+ years of Playboy's brand building and content, it would simply fail to raise the capital. What would it take -- $5bn? $10bn? The truth is that it can't be done. The IP base and consumer awareness can't be rebuilt -- but it can be leveraged into growth into new categories and growth vehicles by this management team with a disproportionately small amount of incremental capital spend.
Source: Hedgeye Estimates
Management -- A $10bn Team for a $1bn Company
CEO Ben Kohn has a long history with Playboy as he was formerly a managing director at Rizvi Traverse, the Private Equity firm that took Playboy private back in 2011. Then in 2017 Kohn decided to leave his position at Rizvi and take the helm at the transforming entity that is currently PLBY Group. In the following years Kohn has curated an impressive management team at PLBY.
- In 2018 he hired Rachel Webber who previously served as SVP Digital at NatGeo to be Chief Brand Officer and reinvigorate the bunny by taking it back to its roots as a counter-culture space for young individuals.
- In November 2020 Kohn tapped AJ Saltzman and Tittu Nellimoottil to work on PLBY’s digital commerce efforts. Saltzman was most recently Senior Director of Digital Product Management at GOAT and has the role of VP Digital Product.
- Nellimoottil takes the role of SVP Data and most recently worked as Director of Data Science at FabFitFun while previously working in senior data science roles at Bird and PayPal.
- In February 2021 Kohn made more impressive hires naming Lance Barton as CFO and Kevin Diamond as Chief Digital Officer. Barton joined PLBY from Match Group where he was the head of Corporate Development and IR. Barton has a strong history of building company value through M&A and this hire fits in with PLBY’s accretive and active M&A strategy as demonstrated by the acquisitions of Yandy in 2020 and Lovers in early March. Kevin Diamond joins from Forever 21 where he was Head of Global Ecommerce responsible for the company’s $700mm global digital business and is slated to head PLBY’s efforts to elevate its global digital experience and expand ecommerce.
This is just a taste as to why we like PLBY. We’ll be hosting a Deep Dive Black Book presentation in the coming weeks to outline our full thesis on the name. Details to come.
