2023-08-17 02:46:08 ET
Summary
- Playboy Group stock has dropped 9% after disappointing Q2 earnings, continuing a bad year for the company's shares in which it is down nearly 50%.
- The company continues to write-down significant portions of its business while pivoting to a new, capital-light, operating model.
- While there has been improvement in gross margins, the company still faces challenges in revenue generation and generating cash flow from operations.
- Overall the narrative appears unchanged in this latest quarter and I will reiterate a hold rating for the stock.
Overview
Playboy Group ( PLBY ) stock has been selling off in the wake of its latest earnings report, which came in far below consensus expectations across both GAAP EPS as well as revenue. Dropping roughly 9% in the trading day immediately after, this recent downward momentum is an extension of what has been a bad year for the company’s shares.
Even though PLBY shares had pushed well above the S&P for the first few months of the year, it’s now down roughly 47% even though the S&P has appreciated 16% YTD.
This is playing out across the backdrop of a turnaround effort, something which I detailed in a previous write-up on the stock. PLBY’s management team is in the middle of reorienting the company’s strategy to leverage its intellectual property in a more capital-light fashion while also winding down several low-margin businesses.
While this recent quarter doesn’t spell the end for Playboy, it’s clear that investors have been spooked by the lack of salient progress. In this article I’ll review the firm’s latest filing in more detail to see if perhaps there has actually been some progress and whether there’s still hope for it to regain positive momentum.
Q2 2023 Earnings
The first thing to note is the abysmal performance on GAAP EPS. Playboy posted a loss of -$1.79 per share against consensus expectations of -$0.16. This was driven primarily by impairment charges (asset value write-downs) as the company continues to restructure, namely from the company’s discontinuation of its e-commerce offering as well as its China business.
While this is obviously a poor showing, it is not the most accurate reflection of trendlines in the company’s actual operations due to the one-off adjustments that were incurred. Nonetheless a significant decrease in revenues y/y also indicates continued difficulty in the overall operating model. Q2 ’23 represents a continuation of top-line pressure for PLBY that has been ongoing for 3 quarters. It’s evident that turnaround efforts have not yet gained traction and that the firm is reorienting itself even as it faces pressure across its offerings.
The silver lining here is that there has been demonstrable improvement in margins. Indeed, the latest quarter saw Playboy post its highest gross margin since again becoming a publicly-traded security. This was made possible by a significantly lower cost of revenue overall. It’s still too early to extrapolate this as of right now.
This improved gross margin did not filter down into the bottom line for Playboy. Overall operating expenses remained high, with total operating expenses over 90% for the latest quarter. These figures are also quite variable and reflective of the ongoing restructuring of the firm.
Essentially, this latest quarter was the first in which we saw gross margin improvements as a result of the new capital-light strategy, albeit not on operating margins. Net margins were furthermore reduced significantly due to the write-offs mentioned above. As such, it is one small step in the right direction but not proof of any kind of sustainable change.
This has put the company further in the red as to the accounting value of its equity, which now stands at the lowest level that it has been at since the firm has relisted its shares publicly in Q4 2020.
This is made additionally more concerning as overall shares have continued to increase. While not leveraging new share creation to quite the extent that it did in Q1 ’23, shares still increased by 600K q/q in the latest quarter.
Combined with the ongoing writedowns of its e-commerce assets, the China business, and underperforming acquisitions such as Honey Birdette, Playboy also posted its lowest book value per share since becoming publicly traded again. The overall deterioration in this metric over the last 10 quarters is significant and is a direct result of ongoing impairment charges.
Of course, all of this is par for the course for a company undergoing such significant changes. We can look to the cash flow side of things to generate a clearer view. Surprisingly, the company has made progress here y/y. Playboy’s cash loss from operations was -$26.6M in Q2 ’23 versus -$43.1M in Q2 ’22.
This is still a number well within recent figures and could very well be statistical noise.
Nonetheless, it is good to see this figure improving as gross margins are as well. These are two (early) indicators of the fundamental impact of the company’s strategic pivot. Indeed, the company actually improved its cash position in the latest quarter, albeit marginally so.
Overall we have here a quarter in which the earnings metrics are curtailed materially due to ongoing write-downs. Ongoing revenue declines are also a significant concern. The admittedly thin silver lining is the improvement in gross margin as well as positive cash flow generation. It’s worth noting that this q/q improvement in cash flow originated from financing as opposed to operations, which makes it such that we can’t extrapolate its meaning for future operating performance.
Conclusion
It’s too early to say how things will play out, but Playboy does look set to continue on its current strategic pivot. This latest quarter doesn’t have any data that fundamentally changes the narrative. I will also note that this is a very risky security to trade due to its minimal ($100M) market cap as well as the significant volatility in both its share price and its fundamentals. Bankruptcy is also not out of the question, with PLBY’s Altman z-score currently at -1.49. Interestingly, short interest is not as high as it was, even though it stands at roughly 12% of the float.
The story here is as it was, and Playboy still has to prove that it’s able to actually make progress on revenue generation, cash from operations, and earnings per share. While its balance sheet should give it more time to do so, I would advise caution at present and will reiterate a hold rating for the time being.
For further details see:
PLBY Group: Strategic Pivot Still Unproven