2023-08-22 11:22:52 ET
Summary
- Playboy's recent changes in its business model and decision to sell its direct-to-consumer companies have led to a downgrade to a HOLD rating.
- The sale of Yandy and Lovers may be strategically sound, but selling Honey Birdette could be a severe mistake due to its potential and synergies with the Centerfold platform.
- The remaining segments of Playboy's business, licensing and e-commerce, have shown mixed results and face challenges in achieving growth and profitability.
The Investment Thesis
PLBY Group ( PLBY ), after listing in 2020, first saw its shares explode to the upside and then plummet following results that fell short of expectations. My investment thesis takes into account the last two quarterly reports in 2023, in which significant changes in the company's business were announced, which led me to rate the company as Hold because of the heavy reliance on Centerfold success and the puzzling decision to sell the three core direct-to-consumer companies.
Playboy's big change
At its second listing, Playboy presented itself to investors as an ecosystem of companies founded on the Playboy lifestyle concept. The company was divided into three main branches: direct-to-consumer, selling branded clothes through Playboy's e-commerce and lingerie and cosmetics through the group's other companies, Yandy, Lovers, and Honey Birdette. The second branch was the licensing business, which provided the company with a steady and growing source of revenue at very high margins. The third branch consisted of the nascent Centerfold platform, designed to give creators and users a place to express their sexuality freely. In a strategic view, the platform was to be the engine for exponential revenue growth for PLBY, supported by the more stable, lower-growth licensing and DTC businesses.
This vision of the business was turned upside down in the first quarterly report of 2023, in sharp contrast to what was announced in the Q4 2022 quarterly report. The company's CEO, Ben Khon, had said during the conference call regarding the latest 2022 quarterly report:
We are changing our business model and moving to a capital-light model with a singular focus on Playboy and Honey Birdette.
Only to turn the tables during the first quarterly call of 2023, announcing that:
We have decided to fully exit serving as the operator of our consumer product businesses [...] we've engaged Molson company to explore all strategic alternatives for Honey Birdette.
While selling Yandy and Lovers may be a strategically sound choice, selling Honey Birdette could be a severe mistake for the company. Yandy was the lowest-margin business for the company, selling products by working on volume rather than margin. With rising inflation and reduced consumer spending on unnecessary consumption, this business had stopped, and the results had significantly deteriorated. The sale of Yandy for $3 million had been negatively received by investors, not so much because of the choice itself, but because the company had been bought for $13 million in 2019, losing 75% of its value-a blatant mistake by the current management.
For Lovers, the situation is less dramatic. The last conference call in 2022 showed that Lovers produced about the same cash flow as when it was purchased (for $25 million , five times EBITDA). I expect that from the sale of Lovers, which I anticipate could come by the end of 2023, the company could make at least 12.5 million, perhaps a little more, if the macroeconomic situation improves and valuations pick up again. This money could be used to reduce the significant debt burden on the company's shoulders or invested in Centerfold to increase its growth.
With the sale of these two companies, PLBY lost about $70 million in revenue in 2023, with analysts expecting 2023 revenues of $150 million versus $267 million in 2022. The remainder of the reduction can be attributed to Honey Birdette, e-commerce, and the licensing segment.
Why Selling Honey Birdette Is A Big Mistake
Honey Birdette represents the most significant company acquired by PLBY, evidenced by the $333 million paid in 2021 in cash and stock. CEO Ben Khon, more than once, has spoken about this company, calling it a potential "multi-billion-dollar luxury lifestyle franchise." The company produces mainly high-end lingerie, with stores in America and Australia, where the company was born. In 2021 the company made 73 million in revenue and then increased again in 2022 to 84 million. The year 2023 opened with news of the attempted sale and a slump in revenues that, by the end of the year, is expected to reach -20%, based on what was achieved in the first two quarters. One of the explanations for this dramatic slump is the company's decision, made at the end of 2022, to stop promotions to avoid a deterioration of the brand, which is in the high-end of lingerie. If we combine consumers with less money on hand and some expensive products, we get a decline in sales, as it has been. In addition, there has been a change in 'digital advertising agency, which has impacted online sales, about half of the total.
As with Lovers and Yandy, PLBY can expect to get from the sale of the business only a fraction of the $300 million invested just two years ago to buy the company. The decision to sell the business is due to PLBY's lack of resources and the CEO's desire to "fully move the company toward a capital-light model," focusing only on licensing and the Centerfold platform. The mistake in selling Honey Birdette concerns timing: After a positive 2022 for the company, it should have gone ahead with the sale instead of waiting six months, when Honey Birdette's revenues decreased by $4.1 million , or -18.2% from the previous year. In addition, Honey Birdette would have allowed for essential synergies with Centerfold's platform, ensuring the ability to advertise through the platform's creators without spending.
What's Left
PlayBoy should be evaluated on these two segments. The first is licensing. During the last conference call in 2022, the company's CEO pointed out that the licensing business is:
A lower risk profile, $346 million of future royalty guarantee payments through 2031, high-quality recurring cash flows and the opportunity to be much larger than it is today.
The 2022 results had been positive, with $61 million in revenues earned through licensing and a forecast that this segment could reach $120 million within a few years. However, these estimates seem far-fetched, based on the results reported in the last two quarters. In Q1 of 2023, licensing revenues decreased by 5 million, of which 3 million is attributable to a delay in collections from one of PLBY's most significant licensees in China. In Q2, licensing revenues decreased by 35%. A decline of $3.5 million was experienced in China due to difficulties in collecting receivables, while domestic and rest of the world licenses decreased by $2.1 million from the previous year. The company also expects a steady decline in China in the year's second half. Licensing, therefore, does not seem to be so much of a low-risk business. Playboy also announced that it has almost wholly transferred ownership of its e-commerce stores to the Playboy China joint venture. The JV will control consumer access and the overall brand experience, while the licensees will continue to supply the approved products and hold inventory. Playboy will get 15% of net revenues, thus incurring no cost, and with minimum guarantees of about $5 million per year, to increase this business to $20 million within three years. This estimate seems overly optimistic because it would mean that the e-commerce business would have to reach $130 million from the current $20 million, which is hard to imagine considering the macroeconomic environment and in such a short time.
Centerfold, The Big Bet
The last element I intend to analyze today concerns Centerfold. As mentioned earlier, this platform was supposed to be just a part of Playboy's business, but management choices have made it the company's center. At present, buying Playboy means buying Centerfold above all. Centerfold is a content production platform that aims to be between Instagram and Onlyfans. Unlike Onlyfans, Playboy does not allow explicit content. While this choice is positive because it better predisposes investors and banks to finance Playboy, it also cuts a large slice of the market. Onlyfans had also attempted to ban explicit content, only to retrace its steps shortly after realizing the possible economic damage.
Centerfold's numbers are promising. In the first three months since the platform's relaunch (Between September 2022 and December 2022), Centerfold registered 1.4 million new accounts without spending on marketing, with 1,500 creators on the platform. The figures in the latest quarterly report were even better, with remarkable quarter-on-quarter growth. Gross merchandise value (GMV) grew 2.2x compared to Q1 of 2023, where in turn, GMV had grown 2.4x compared to Q4 of 2022. Annualizing the weekly GMV from the last quarterly, assuming zero growth, would reach $35 million in GMV at the end of the year. However, management expects growth to continue and get $50-55 million by December 2023. With revenues of 20% of GMV and fixed costs of just $500K per month, the business is already breaking even. The number of earning creators has also grown exponentially, touching 4,000, while the number of registered accounts has reached 2.6 million. By the end of the year, I expect that the company can easily reach its target of 10K creators on the platform, partly due to the use of AI to speed up the admission process. I also expect accounts to reach 4.5 million by the end of 2023.
Risks
Investing in Playboy includes many risks, the first being that the future of the company you are buying is profoundly different from its present. Should the Centerfold experiment fail, Playboy's value would be reduced to licenses and a few other revenues, not enough to justify the company's current valuation of 100 million. In addition, the company is currently burdened with more than $210 million in debt, with interest expenses that have increased over the first six months of 2022.
The company's debt is sustainable, but it would be impossible if PLBY wanted to repay it or use part of its cash flow to buy back shares. In addition, the company has proven to dilute its shares if necessary, even when the price was not favourable.
The last significant risk is management. CEO Ben Khon has disappointed investors' expectations in recent quarters, frequently changing his mind, dismantling the company he had built, and giving it a new vision. If management's forecasts remain higher than the reported results, the stock value will continue to fall.
Why Hold And Not Sell
At the end of this analysis, you might ask why I consider the company a Hold and not a Sell. There are mainly two reasons for this. The first concerns the possibility of the company's failure. I consider the probability that PLBY will fail to be low. In the last six months, the company has made deep cost cuts, mainly related to personnel, PLBY's e-commerce, all costs related to Yandy, and parts of those related to Lovers. This has brought the company closer to profitability, significantly reducing Net cash used in operating activities in the first six months of 2023.
Net cash used 2023 vs 2022 (10-Q PLBY)
Playboy's second strength is Centerfold. Although the business does not currently generate profits, the organic growth demonstrated in recent months bodes well. Today PLBY's market cap is only $100 million, a valuation that underestimates the total value of Lovers, Honey Birdette, the $300 million in federal net operating losses, the Playboy brand, and the current value of licensing revenues. I purposely did not put Centerfold on this list to emphasize that the market severely underestimates the company's assets. For comparison, Onlyfans, the world's most considerable NSFW content social, took two years to reach 5.8 million in revenue. If Centerfold were to get 50 million GMV at the end of 2023, PLBY would achieve 10 million in revenue, realized in just over a year since the platform's relaunch. This does not mean that Centerfold's performance overlaps with Onlyfans, but it helps to show the tremendous potential this platform could achieve if management's execution is optimal.
Because of the business change, Playboy should no longer be valued as a clothing company but as a technology company with updated multiples. At the moment, not knowing what the fate of Honey Birdette will be, making an assessment of revenues using PS or PE seems premature. This company should be valued with its PB. Following the two write-downs, the book value per share is 0.72, with a PB of 1.88. I think suitable comparators for the company are Bumble ( BMBL ), a leading online dating app, and the social network Yalla ( YALA ), which is closer in size to Playboy. Both platforms have fluctuated over the past year between a PB of 1.25 and 2, in line with Playboy's following devaluation. This leads me to think that the company is currently correctly valued.
Final Thoughts
For all the reasons given in this analysis, I consider PLBY a Hold. At the moment, the stock price appears correctly valued. However, if Centerfold's platform takes off, the valuations should be adjusted, considering the revenue the business could generate.
The unknowns are too great to justify an investment in this company. A small initial investment could be considered if the next few quarters confirm the platform's good progress and the market begin to reward small caps again.
For further details see:
PLBY Group: An Investment With So Many Unknowns