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Investment Thesis
My thesis for PLBY Group (NASDAQ:PLBY) centres on the potential for value-unlock from a prominent brand that has been poorly mismanaged prior to the current management team's involvement. Under new management, I believe that PLBY can be transformed into a multi-billion dollar business.
PLBY Group represents a misunderstood business armed with a capable management team and layered with multiple call options that could translate into some form of re-rating in the not so distant future. No longer a legacy media business ruled by the misogynistic purview of the Hefner family, the PLBY business houses a nascent and high-growth DTC business, a legacy high-margin licensing arm, and a host of 'other bets' which includes the pending launch of Centerfold, the company's OnlyFans adaptation.
Globally, the Playboy brand generates billions of dollars of consumer spending each year and is one of the world's most recognised brands. To unlock this value Kohn and his management team are focusing on four broad areas.
- DTC: Building a DTC business from the ground up. After launching the DTC business circa 2019, the segment includes is already generating 62% of PLBY's revenue base as of Q3 2021.
- Licensing: For decades, that consumer spending has been squandered as a result of poorly negotiated licensing deals where PLBY only see between $0.05 to $0.06 per dollar of those sales. Ben Kohn (CEO) is in place to unlock the value in a global brand that has been poorly managed for decades.
- Digital Subscriptions: In December 2021, PLBY is set to launch 'Centerfold', their own version of the successful OnlyFans platform. The prospect of a high-margin, highly-scalable, and recurring revenue business has the potential to materially impact the consolidated business in a positive way.
- Other Bets: Other bets for PLBY include more obscure licensing deals, as well as the experimentation with NFTs, which has thus far raised over $10M in revenues for the company YTD.
Company Background
After first going public in 1971, Playboy Enterprises (old name) run by the Hefner family, boasted strong adoption of their flagship product, the Playboy magazine, with over 7 million copies circulated each year. However, the legacy magazine business began to falter and the company went private in 2011 for $207M. By 2015, magazine circulation fell to 800,000 and in 2020 the current CEO, Ben Kohn, decided that the time had come for Playboy magazine to die.
Interestingly, Ben Kohn, who was made interim CEO of the private company in 2016, hailed from Rizvi Traverse Management, one of the PE firms that initially took the company private back in 2011.
After co-founding Rizvi in 2004, Kohn would leave the PE firm, after 13 years of service, in 2017 to solidify his interim CEO role and become the full-time CEO of Playboy enterprises, citing that he left PE because "this is one of the biggest opportunities I've ever seen in my career."
In late 2020, Kohn would announce that Playboy Enterprises, which would now be called the PLBY Group, would be going public once again via the SPAC route in a merger with Mountain Crest Acquisition Corp. This deal would pit PLBY's valuation at ~$380 million.
In February 2021, the company would open on the Nasdaq for the first time as the PLBY Group. To date, the PLBY business has acquired several brands including two luxury lingerie brands Yandy (2019) and Honey Birdette (2021), as well as one sexual wellness brand called Lovers (2020) and more recently a digital subscription platform to build their Centerfold platform from, called Dream (2021).
Kohn's mission at PLBY is to rejuvenate the untapped potential of the Playboy IP, and build the consolidated business into a brand powerhouse.
I joined playboy as CEO because I saw the opportunity to rejuvenate one of the world's greatest brands into a massive growth engine with the right business model transformation. It was clear that the model of selling magazines and complementing that media business with licensing revenue was a broken model - Ben Kohn, PLBY Q3 Earnings Call
Financials
In total, PLBY generated $58.4M (+67%) in revenues during Q3 with the $150.9M they have generated YTD representing YoY growth of 49%. This is despite a reported $5M headwind to sales in Q3. For the full year, it is expected that PLBY generate $200M from the core business plus $25M to $30M from the Honey Birdette business. For the ~2/3 of Q3 that Birdette revenues were attributable, the business brought in $7.9M in sales.
For now, I assume the core business of PLBY to be their licensing and DTC arms. Here they are looking to extract incremental cents on each dollar of sales through improving existing licensing deals, as well as simultaneously bringing the sale of IP-branded merchandise in-house and collecting the full dollar amount on each sale through their nascent DTC business.
The licensing business grew 12% this quarter with revenues of $16.9M. A figure which is still largely driven by the success of apparel partnerships with the likes of PacSun and Misguided. Whilst physical offering licensing partnerships (casinos, clubs, etc) are still impeded by travel restrictions, the company signed 8 new strategic partnership agreements in Q3, most of which are fashion/apparel collaborations, with one partnership in the spirits category.
The DTC business recorded $36M in revenues (+143%) this quarter. I refer to the DTC business as 'nascent' because of its infancy, and not its size. The Playboy dot com commerce site was only fully launched within the last 12 months and represents a smaller portion of overall DTC. Whilst small, the early data has been promising. Last quarter Lance Barton (CFO) would explain that Playboy's native commerce site grew revenues 130% from Q1 2021 to Q2 2021, largely through increasing average order value (AOV) and the influx of new customers.
This quarter, we learned that the AOV currently sits at more than $90, a figure which has grown approximately 70% YoY. Moreover, those customers who spent more than $200 on the site, are found to revisit more frequently.
October was a big month for us as playboy.com became a destination for Halloween shopping, generating more revenue in 3 weeks than we generated in the first 4 months of this year alone. - Lance Barton, PLBY Q3 Earnings Call
Much of DTC's revenue growth has been inorganic to date through the acquisitions of brands like Yandy and Honey Birdette. But already we have seen this arm grow from approximately 32% of revenues (Q1 2020) to 62% of revenues (Q3 2021). It is my belief that whilst licensing is the high-margin cash cow, the DTC business is going to be the driving force in this company for years to come.
The potential of Centerfold (PLBY's yet-to-be-launched digital subscription platform) is appealing too as a second-fiddle. Maybe even the leading business segment in the most optimistic of outcomes. However, without the data or the proof of product-market fit, this is all speculation, and is certainly not something to underwrite should you wish to be conservative.
Margins and Earnings
As the PLBY business begins to scale, there are early green shoots of gross margin expansion flowing into the income statement. PLBY's 57% gross margin in Q3 (+270bps YoY) represents a 430bps increase from last quarter. Much of this comes from the impact of Honey Birdette, which has a higher margin profile than both Yandy and Playboy.
Both the costs of becoming a newly public enterprise and the various "non-recurring" expenses from PLBY's various acquisitions have caused margins to dip into the red in 2021. This quarter, it was remarked that approximately $9.8M of such costs drove the net loss of $7.7M.
What I am most interested in looking forward is the ROI on PLBY's Opex spend and the composition at which they reinvest through their income statement (OpEx) and their balance sheet (CapEx). Transparency isn't great with respect to the former, as PLBY only refers to one line item underneath the gross margin line, which is "selling and administrative". Encompassing everything from distribution costs, IT, personnel, freight, fulfillment, marketing, and SBC, I would like to eventually see this broken out further on the income statement for greater clarity and understanding.
For Q3, the company cites that the 167% YoY increase in S&A stems primarily from DTC related costs (via acquisitions of Lovers and Honey Birdette) and the costs of becoming a public entity. As an investor, I am left with no material information on their marketing ROI. I can see that PLBY are reinvesting well above the rate at which they collect gross profit dollars, but am left in the dark as to how that is granularly distributed.
Liquidity
The most notable change in PLBY's balance sheet this quarter is the decline in cash from $255M in Q2 to $68M in Q3. Most of which was moved over into the non-current asset segment in the way of Goodwill ($17M→$237M) and Intangibles ($343M→$418M) after the Honey Birdette acquisition closed.
In Q2, PLBY refinanced their existing term loan ($160M capacity) until May 2027. In Q3, that same term loan was amended (now with a $230M capacity) to allow the company to partially fund the Honey Birdette acquisition. This explains the approximately $70M incline of debt outstanding from last quarter. This should now amount to ~$3.3M in interest payments per year for PLBY.
Overall, the quality of the balance sheet has declined from Q2 with more leverage and a greater composition of intangibles (which I consider low-quality assets). However, much of what we are seeing is the transitory nature of building a business, and PLBY's liquidity is not yet in a position that is concerning to me as an investor.
Cash Flow
For the 9-months of 2021, PLBY has recorded outflows of $42M from their operating activities, demonstrating that this is a business primarily funded through its financing activities, which have recorded inflows of $369M YTD after several rounds of stock issuance ($203M) and issuance of LT Debt ($66M, net of repayments and fees). The proceeds of which have largely been attributed towards M&A activity. In total, PLBY has witnessed outflows of $253M afforded to acquisitions, with a grand total outflow of $268M from investing activities after accounting for CapEx.
I remarked earlier that I would like to see PLBY reinvesting through the income statement and balance sheet. Thus far, there have been few signs of attentive CapEx with the majority of their PP&E being evenly distributed across fixtures and fittings, leasehold improvements, and an aircraft that the company purchased for $12.7M in April. I suspect that Centerfold will require some incremental CapEx contribution, so I am awaiting further guidance on what kind of outlay that project entails. As a reminder, PLBY opted to acquire the assets through M&A for this project at the outlay.
The Centerfold Launch
Centerfold is being labelled as a platform that facilitates the 2-sided interaction between creators and fans that brands like Cameo, OnlyFans, Patreon, and Twitter have pioneered over the past 5-years. Albeit, Twitter is the only one to fail at monetising this relationship.
Each of these platforms targets different forms of relationships between fans and creators, but I would look to OnlyFans as the closest comparable in PLBY's case. Whilst Centerfold has not been explicitly branded as a "sexy content" platform, the connotations of the name imply as much. When I think of the word, 'centerfold', I imagine a magazine spread open with both pages showing, and some iteration of a portrait (often a pin-up style nude) displaying a model across the two pages. Whatsmore, the technology from which this platform will be built hails from the assets of a nascent Onlyfans/Instagram replica, Dream, acquired by PLBY in October in a $30M all-stock deal.
Creators on the platform will be able to set up their own subscription/membership services, directly message their fans, and have some form of commerce-based tools from which to merchandise their following. Giving creators the tools to generate revenue for themselves outside of content.
More than just providing the platform from which to monetise their audience (or build one for emerging creators) there will also be opportunities for these creators to tap into PLBY's merchandise design, production and distribution capabilities, engage in artist and merchandise collaborations with Playboy and Honey Birdette, and utilise NFT and blockchain tools. I would assume that for some creators, the prospect of potentially being featured on the Playboy media machine (whether an editorial, social media exposure or interview) and the distribution that comes with that is quite appealing.
With a launch pending in December, and the cast of creators they are working with under wraps, all I know is that they hail from multi-disciplinary segments like music, art, fashion, former playmates, adult stars, actors, celebrities, and other influencers. It was announced on December 2nd that Cardi B (a famous musician) will be serving as the Founding Creative Director for the project.
The 'founding team' of creators apparently boasts a social media following of 300M followers combined and are generating "hundreds of millions of dollars in GMV in the creator economy" currently. Some creators are exclusive to PLBY, but as you can imagine, others will want to leverage across multiple sites.
Centerfold is a call option. It did not exist at the time of PLBY's re-entry into the public market and was absent from their SPAC marketing materials. As such, it's also not included in the company's 2025 guidance of $600M in revenues.
For now, I think this has the potential to become a material, high-margin, and highly scalable segment for PLBY and one which presumably drives a majority of its revenues on a recurring basis. I did find Lance's remarks about the potential for Centerfold to outsize their consumer product business interesting.
I'm also not giving guidance today for Centerfold or membership as we've not fully launched these initiatives. What I can say is that if we are successful in working with our creators to build a sizable ecosystem, the long-term recurring revenue opportunity on Centerfold alone could be larger than our Consumer Products business, not to mention the potential of membership. There are a few proof points we're sharing that lead us to believe there is tremendous upside potential here. - Lance Barton, PLBY Q3 Earnings Call
Like all call options the upside is potentially explosive, but so do is the possibility of it becoming a zero.
The NFT Business
This quarter, we got a glimpse of just how 'material' the revenues that PLBY collect on NFTs can be. Rabbitars are 3D rabbit characters minted on the Ethereum blockchain. There are 11,953 uniquely designed Rabbitars, and each was priced at 0.1953 ETH, or roughly $900 at the time of their launch in October. At the time of writing the floor price currently sits at 0.125 ETH.
Whilst there was no impact on fundamentals during the third quarter (the launch occurred in Q4), management shared a range of material data during the call, worthy of discussion. After PLBY's maiden NFT experiment in Q1 (earning $1M in revenue from a collection) and the second probe in Q2 ($60K in revenue from one item), the Rabbitars represented their first comprehensive NFT project.
The project was successful, with over $8M in revenue generated at the initial launch (some items selling for as much as $50K), and a further $8M of resale volumes post-launch, which PLBY collects incremental revenues on thereafter.
When factoring in rounding, PLBY has generated $10M+ from their NFT projects this year, which on a full-year revenue stack of ~$225M (estimated 2021) is hardly immaterial at ~4%. How much more incremental revenue follows, however, I again am comfortable asserting I have no idea. Whilst it is true that Playboy has a deep repository/collection of legacy 'art' from which they can utilise outside of the Rabittars (similar to their Slimesunday launch in Q1), I have no confidence forecasting what comes from that.
I am more comfortable with the idea that these Rabbitars may play a more prominent role in the community side of Playboy's brand. Ben Kohn (CEO) alluded to Rabbitar ownership unlocking "VIP Status" for Playboy's contemporary lifestyle experiences (Clubs, Gatherings, Parties, Discounts for their commerce sites, and other Membership services). Essentially granting perks for ownership.
There is an argument for NFTs catering to the demand for exclusivity, vanity, status, flexing, social inclusion. These are all primal human instincts and, for some people, NFTs feed those desires. I am not sure to what extent the Rabbitar community will mimic the success of more sophisticated NFT collections like the Cryptopunks or the Bored Ape Yacht Club. Nor am I sure about whether this is end-of-cycle speculation or genuinely some new 'paradigm'. Much of this discussion goes outside of the scope of this memo, and quite frankly outside of my area of understanding.
With all of this said, I think NFTs are another call option, but one which doesn't represent the same upside potential of Centerfold.
Key Risks to Thesis
The most prominent detractor in my PLBY thesis is execution risk. The ambitions and intentions of the management team are somewhat explicit. We know they wish to hit $600M in revenues by 2025, and we have a rough idea of how they intend to do that. By building the DTC network, improving the licensing business, adopting aggressive M&A, and launching the Centerfold platform.
However, the success of each of these projects is not to be assumed. There is a 'Day 1' feel about PLBY, and much of the positive return is going to come from continuous evidence of execution across the next 3-5 years. This is particularly important as the company intend to engage in M&A often. Thankfully, the management team is packed full of experienced members with bountiful experience in private equity and M&A.
Secondly, I would consider the PLBY bull thesis to be a turnaround story. Implicit in that turnaround is reshaping the brand in the general public's eyes. Playboy is a well-known brand, but so too is their affiliation with the controversial Hefner family. Failing to shake their historic image may lead to a redundant brand.
However, the tailwind for PLBY, in this case, is the fact that their target market for DTC is primarily younger generations between Gen Z and Millenial, most of whom don't associate them with Hefner, but more so as an apparel brand. Over 2/3 of Playboy.com customers are under the age of 34, which goes some way to demonstrate who is actually shopping at Playboy.
Competitive Scene
PLBY's competitive scene is interesting as it doesn't require all that much interpretation. Here we have one of the most visibly recognisable brands in the world. What is unique is that Playboy is flexible in that they can utilise licensing to be present in many markets (both geographic and industry-specific) that they have no intention (or resources) of entering on their own.
Therefore, whilst it may be easy to cite competing brands for apparel (of which there are thousands), the emphasis should be placed on Playboy's ability to strengthen its own brand. Whatsmore, the company are no longer just a Playboy company, they also extend outwards into categories like lingerie (through Yandy and Honey Birdette) and sexual wellness (through Lovers and Big Bunny). They are slowly becoming a conglomerate of brands, each appealing to different customer segments across age, wealth, and various interest graphs.
Valuation
Below is a table of conservative, back of the napkin, estimates that show just how frivolous management's prior guidance for $300M in revenues by 2025 was. Under modest assumptions (exclusive of any M&A, Centerfold, or NFT revenues), PLBY would have cleared the $300M mark by a handsome margin.
Source: Constructed by the author using estimates
This second table (below) is more so to highlight how the gap to $600M can be filled, as opposed to my solidified beliefs as to how much revenue Centerfold brings in. I will only have a stronger grasp on that once data begins to trickle in.
Let's assume Centerfold does ~$22M in revenues in year 1 (2022). Alongside the rest of the digital subscription business (which, for simplicity, I suggest 0% growth in 2022), the aggregate segment would grow 100%. Two years of 50% growth and one final year of 35% growth, and the $600M revenue guide looks more achievable.
Source: Constructed by the author using estimates
Now, PLBY subscriptions could end up doing only 50% of that revenue. It could even bring in 2x as much. To be quite honest, I have no idea. Neither do management.
We've at least got a little bit more data points to go off of, but it would be pure speculation for me to come on here and tell you when I think that's going to drive next year. So it's kind of hard, but we'll continue to work with you to be as transparent as we can once we see data points - Lance Barton PLBY Q3 Earnings Call
It's not exactly a 'free' call option (the company has already allocated $30M towards the project, as well as an unknown fee to acquire creators), but it has the potential to become a material aspect of the consolidated business. Concluding on all of this, the point I make here is that the core business (DTC and Licensing) is an attractive asset in its own right. The rest is where the potential for market-beating upside comes in.
What do you pay to own an asset like this?
It's difficult because the rate of change in PLBY's fundamentals is highly unpredictable on account of its infancy into becoming a DTC brand. An issue that is exacerbated by the infusion of a newly minted subscription business with presumably higher margins.
Given that PLBY are not profitable, and likely won't be for the next 12 months, I have used a sales multiple to convey the current valuation.
| Metric | PLBY Group (PLBY) |
| Market Capitalisation | $1.45B |
| Revenue (TTM) | $197.2M |
| Price to Sales (TTM) | 7.35x |
| 2021 Revenue Estimate | $225M+ |
| Price to 2021 Revenues E | 6.4x |
| 2025 Revenue Estimate | $600M+ |
| Price to 2025 Revenues E | 2.4x |
| Gross Margin (TTM) | 53% |
| Gross Margin 2025 E | 60% |
| Operating Margin (TTM) | -12% |
| Operating Margin 2025 E | 15% to 20% |
Source: Koyfin
At current levels, the investor is paying ~7.3x TTM sales for this unprofitable, financing-dependent business that possess an inherent amount of execution risk. Zooming out, and assuming management delivers on their FY25 revenue target, that looks more like 2.4x 2025E sales for a business which should ideally have:
A vastly or moderately improvement gross margin profile.
An established DTC business.
Profitability on both an EBIT and net earnings basis. If I were to hazard a guess at LT EBIT margins I would speculate somewhere between 15% and 20%.
A legacy licensing business that, despite slowing growth, should provide ample cash flow relative to its size.
Various call options with the most tantalising being the prospect of Centerfold.
I think that there is tremendous value in PLBY at levels of between $22 and $26 per share if the investor wishes to take a 3-5 year outlook.
Concluding Remarks
To restate my thesis for PBLY to readers, PLBY is a misunderstood business enduring a significant turnaround effort to re-establish itself as a global brand, powered by a fledging high-growth DTC business, a legacy high-margin licensing arm, and several call options which could be explosive to the upside.
I believe that PLBY represents an attractive risk to reward profile at levels of $22 to $26 per share. At these levels, I think the opportunity, speculative as it may be, is worth a smaller allocation size.
What should the investor do?
Whilst I believe there is attractive value for PLBY in the $22 to $26 range, I would urge investors to consider PLBY as an investment with airs on the side of speculation. In 'turnaround' businesses, there is often a great deal of execution risk, and the dispersion of potential outcomes is wide and unpredictable. Thus, I feel it best to size the position appropriately relative to your other bets, allowing it to expand organically. Personally, I weighted PLBY at 3% at initiation, and will only add further weight should I see continued evidence of execution across their DTC and Digital Subscription segments.
I am confident that, over a 3-5 year time horizon, PLBY will be a business valued at well above $1.4B, and demonstrate market-beating returns. This is assuming that the thesis I have laid out today continues to hold strong.
As an investor, I will be monitoring the execution of PLBY's various initiatives, and so long as they remain on track, with promising data, I will hold through volatility.
