"Other guys read Playboy. I read annual reports."
- Warren Buffett
The Oracle of Omaha might want to revisit his stance on Playboy. While he can’t read current issues of the magazine – it was 86’d with the Spring 2020 publication – he can look forward to reading the 2021 Playboy annual report. I know I am – pictures or no pictures. The numbers are what excite me – and the trajectory of sales, margins, and outsized market share gains in an otherwise capital-light model across multiple consumer goods product categories should lead this to be one of the best performing consumer stocks of this decade. I kid you not.
Yes, I gotta admit up front that when researching the name I alerted my head of compliance that I would be spending some time online searching some web sites that might be flagged by our servers as ‘workplace inappropriate’. But you need to in order to understand the breadth of this story and the many pieces of the consumer landscape where it will lay its claim.
Let’s also address the elephant in the room…this company de-SPAC’d at a valuation of $413mm, which quite frankly, is a joke. The PE owner, Rizvi, which bought Playboy for $207mm in 2011, wanted a warrant-free public equity currency it could use to attract talent and incentivize licensees and future JV partners to drive outsized value creation over time.
Let’s respect history for minute, as consumer perception of the brand, based on what generation you were born into, carries a lot of weight as to your perception of what Playboy represents. This brand has been around since the 50s. It’s roots are in counter-culture, and socially polarizing topics such as desegregation, LGBTQ rights, illegal substance use (and abuse), and yes, most notably, sexuality. What people don’t realize is that while this business was run by the late Hugh Heffner, he repeatedly tried to run it as a misogynistic media company, and failed more often than not to deliver on what was a borderline pathetic strategic vision. Well, Heff is out of the picture, and a new management team has stepped up to the plate to capitalize on one of the most recognizable brands in the world. And I must say, we have a $10+bn team operating a ~$1bn EV company.
The brand has been taken in a new direction, the new management team is taking the brand back to its roots. 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.
This is a money-maker like I haven’t seen since RH at $40 (now pushing $600). We issued a research report this past weekend to Institutional and RetailPro subscribers outlining why at $25, the recently de-SPAC’d PLBY Group is a 10-bagger, and is egregiously misunderstood and mis-modeled on many levels. The stock had a good week since our call, up 44% as of last night. But I literally think that the stock should be a double from its current level TODAY as the price-discovery process evolves, and is more likely than not to hit $100 within 12 months. $250 over a TAIL duration, and I think that might even be low.
All this is fine and good…but let’s look at how you actually get paid owning this name.
Back to the Retail Macro Grind…
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.
Let’s do some math… (and this is what really connected me at first blush to the story), PLBY touches $3bn in global sales at the consumer level – about half of which are in China. Astonishingly enough, PLBY books just $61mm in Royalty income on $3bn in sales. 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 27 years of analyzing licensing agreements across Retail. An absolutely massive miss by the former F+ management team. 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.
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. It also just signed a deal in India (at a market rate) – which could be as large as China. 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
The licensing angle gets you 40% above the consensus – and then we have to account for growth into new categories that grow consolidated revenue, expand margins and extend the company’s reach into relevant categories now that it has broadened its consumer appeal to a younger and increasingly female audience.
1) Style and Apparel: The dominant category 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.
Source: Instagram
2) 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 to 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. Playboy will likely be that leader.
3) 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).
4) 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 and even hospitality 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. PLBY projects the JV is going to launch in China in 1H 2021.
An 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.
Valuation on the Street’s Numbers Are Borderline Irrelevant
Why? The Street’s numbers are beyond wrong. Case in point…We’re at $328mm in EBITDA in FY25, which compares to the Street at $90mm. In fact our EBITDA number is above the Street’s REVENUE number of $322mm. Our revenue estimate is a full billion dollars above the consensus. A few analysts have gotten the ‘mispriced SPAC” angle right, which drove the stock from $10 to $25. But you need to really dig deep into the underlying IP/asset base, category opportunity, and the quality of management in place to execute on the plan in order to get to the real value creation over a TAIL duration. Ultimately, we're at EPS of near $6 per share by year 5 vs the Street at $1.44. That's 4.5x EPS and 2x 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.
This is just a taste as to why we like PLBY. We’ll be hosting a Deep Dive Black Book presentation for our subscribers in the coming weeks to outline our full thesis on the name.
If you would like to learn more about my research team's in-depth investing research please reach out to .
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Make it a great one…
Brian McGough
Managing Director
Retail Sector Head
