PLBY Group, Inc.
Q1 2021 Earnings Call Transcript

Published: 12 May 2021

[Operator:]

Thank you for standing by. And welcome to the First Quarter 2021 Conference Call and Webcast for PLBY Group Inc. The information discussed today is qualified in this entirety by the Form 8-K that has been filed today by PLBY Group Inc. and may be accessed on the SEC's website. Please note that the press release issued this afternoon and the related Form 8-K can be found on PLBY Group's website at http

[Ben Kohn:]

Thank you, operator. Good afternoon, everyone, and welcome to our conference call to discuss PLBY Group's first quarter of 2021. We are pleased to report a fantastic quarter and excited to share with you today the progress we've made executing against our growth plan. We remain focused on building our business for the long-term superior growth, making decisions that will not sacrifice long-term growth for short-term quick wins. Our U.S. e-commerce business is off to a tremendous start in 2021. Our licensing partnerships are thriving while we've made good progress optimizing the business for greater long-term participation and our team has moved quickly to advance new business development opportunities, including our extremely successful first NFT art drop that took place just last week, generating almost $1 million in sales in 24 hours. While we are still in the early innings of our roadmap and business transformation, I'm very proud of the hard work and progress made by the team globally. As we build on the power of our flagship brand and massive reach to deliver the pleasure of lifestyle to consumers around the world. On last earnings call, we discussed our three-part growth strategy. First, expanding our U.S. direct-to-consumer business, our goal is to capture a 100 cents on the dollar spent by consumers on our apparel, sexual wellness and other lifestyle products versus $0.05 to $0.06 captured through previous licensing partnerships. Second, optimizing our international business through global licensing partnerships in key regions and categories. And third, pursuing new and emerging business opportunities that we believe will accelerate our long-term growth trajectory and generate significant returns over a three to five year time horizon. Across all three areas, we marked strong progress in Q1, driven by the significant momentum of the Playboy brand with a new generation of consumers. In direct-to-consumer, we achieved triple digit year-over-year growth of 114% in Q1. On the Playboy website, update the navigation and homepage design to focus on shopping combined with increasing depth in selection in the product offerings late in Q1, saw an increase in conversion rate by 60% month-over-month from February to March. We are continuing to see an increase in conversion rate as we enter into Q2 and we continue to improve the customer experience. In addition, it's worth noting this growth was achieved despite supply chain and other stock constraints we continue to face as a result of COVID, and we believe D2C would have produced even more growth in the first quarter, were not for the continued global pandemic impacts.

[Rachel Webber:]

Thanks, Ben. It's been such an exciting start to the year and we're thrilled by the opportunities ahead. To follow on from Ben's discussion of NFT's, I wanted to share a bit more on our first drop launch strategy and what we have coming up. As we mentioned in our previous call, Playboy's incredible legacy serving as a platform for artists, positions us perfectly to continue that work today. To that end, we believe the best way to introduce ourselves and the Playboy brands to the NFT community was like having into that heritage and creating a collaboration with a digital artist who has already been doing inspiring and successful work in the NFT art space, but who has also worked with us before in the magazine and shares our sensibility for pushing the boundaries of artistic expression, which is how we chose the collage artist Slimesunday, and Nifty Gateway is of course a premier platform for NFT artists today and provided a great way for us to get to know the amazing community of NFT artists and collectors.

[Lance Barton:]

Thanks so much, Rachel. As you've heard, the business is off to a great start this year as we continue to drive strong top line growth through our increased direct-to-consumer revenue. Total revenue in the first quarter increased 34% year-over-year to $42.7 million. Our direct-to-consumer segment continued to stand out as a high growth business, reflecting both the strength of our offerings and sexual wellness and style on apparel. Direct-to-consumer revenue grew 114% year-over-year growing from $10.3 million in Q1 of last year to $22 million in the first quarter of 2021. The growth was driven by improvements at both our Yandy and Playboy e-commerce websites along with one month of revenue contribution from the acquisition of Lovers starting in March. In fact, the improvements that have been made since our new Chief Digital Officer joined us in February ended up leading to March being our highest monthly revenue on Playboy.com yet. March revenue was better than any month during the Q4 holiday shopping season and was 80% higher than our average revenue in January and February. Despite all of the strength, we believe the direct-to-consumer revenue would have been even higher in the first quarter, were it not for the continued supply chain disruptions that we've talked about. On average roughly 15% of Yandy's top selling products were out of stock during Q1 due to congestion at the port that has limited our supplier's ability to adhere to our restocking schedules. These disruptions have persisted into the second quarter but as the ports continue to clear out, we see this issue being remedied and we expect our out-of-stock to return to more normal levels, most likely by the third quarter. On the licensing side, we continue to see tremendous demand for Playboy branded streetwear. Our PacSun licensing revenue grew 426% year-over-year. In China, licensing revenue also grew due to the recent expansion we've had in the kids wear. It's also worth noting that a year ago, we terminated a licensing agreement which resulted in the accelerated recognition of $1.8 million of revenue in Q1 of 2020. This caused licensing revenue to show a $667,000 year-over-year decline in revenue on an as-reported basis in Q1 of this year. If you exclude that impact, licensing revenue would have grown 8% year-over-year and total company revenue would have grown by 42% instead of the 34% that we reported. We're also pleased to say that gross margin improved in the first quarter by 344 basis points. The main drivers of that were the following; the success of our recent in-house designed apparel lines, that Ben had alluded too, and overall increased sales of lingerie which provides better gross margin for us and then also an improvement in shipping cost as a percent of revenue. And while we experienced a net loss in the first quarter of $5 million largely due to $3.5 million of stock-based compensation and $6.3 million of non-recurring items related to the SPAC merger and costs related to setting up PLBY Group as a public company, we reported adjusted EBITDA of $6.7 million. It's important to call out that our adjusted EBITDA was burdened by $1.5 million of M&A related costs, severance costs and the cost of COVID testing at our fulfillment center. While these costs are related to one-time events and what have historically been added back to EBITDA, we believe there an ongoing cost of executing on our business strategy and we have not adjusted for these items in Q1 and don't intend to adjust for items like this going forward. Additionally, our expense base grew on a year-over-year basis just due to the cost of being a newly public company items such as D&O insurance. Turning now to the balance sheet. We ended the first quarter with a cash balance of $70 million and $158 million of long-term debt. I'd also like to report that we've made very good progress on refinancing our existing debt and expect to complete the process soon, which we believe will result in approximately $10 million of annual savings in interest expense and debt pay down. Before I wrap up, I want to briefly touch on our outlook. As I mentioned on the last call, we are focused on our long-term growth strategy and accordingly, we only plan to provide a full year financial outlook at the beginning of each year. We're not going to update our outlook quarterly unless there is a material change in the trajectory of the business. What I will say is that given the strength of our Q1 results and the success of our first NFT art drop, we have even greater confidence that we are well on our way to exceeding $200 million of revenue this year. With that, I'd like to ask the operator to please open the line for questions.

[Operator:]

Thank you. And our first question coming from the line of Austin Moldow with Canaccord. Your line is open.

[Austin Moldow:]

Hi. Thanks for taking my questions. Can you walk through the gross margin profiles of licensing and your D2C segments separately? Just give us a better idea of what that blended rate might look like in the future as the mix changes?

[Lance Barton:]

Sure, I can take that. This is Lance. Thanks Austin. So we don't break it out that granularly, as you might expect the gross margin on licensing is going to naturally be higher than direct-to-consumer. But again as we grow direct-to-consumer, which you saw this quarter, we ended up growing our gross margin profile as well because we're selling more lingerie, we're getting better in terms of the effectiveness of our shipping, we're also selling more of our owned and operated products, our own collection so those things all improve the margin profile of direct-to-consumer. So while direct-to-consumer is going to contribute lower gross margins than licensing, we still think that there is room to improve that over the longer-term.

[Ben Kohn:]

Austin, it's Ben. So I'm only just going to add one other thing too, and I think we've talked about this in the past that, as we grow the company the incremental cost of investing in the brand do not grow alongside the growth in revenue. And so one of the things as we continue to transition this business model from that of only licensing to that of owned and operated is your fixed cost will grow, but they don't grow nearly like your revenue is growing. And so therefore you'll start to see margin improvement going forward as well.

[Austin Moldow:]

Got it. Okay, thanks for that. Within D2C revenue, can you talk about specifically how Yandy grew on a year-over-year basis?

[Lance Barton:]

So again something that we don't disclose that level of granularity, but the way to think about it is that Q1 of last year we didn't have those COVID impacts and Yandy really accelerated as did a lot of e-commerce businesses, right, starting in the second quarter. So year-over-year growth at Yandy was very strong Q1 this year because you hadn't had that acceleration from COVID yet, but you also had huge growth at Playboy.com, pleasure for all, which we've talked about a little bit on the call and an even Lovers, if you look at that on a year-on-year basis, that business grew quite nicely as well. So we're really growing direct-to-consumer across all fronts. In the second quarter, the comp for Yandy in particular gets tougher because that's when it really started to ramp revenue last year, as shifting, or sorry, as spending shifted from in-person retail to online, but we still think there is a lot of room for improvement in growth there.

[Austin Moldow:]

Okay. And then lastly, you mentioned influencer marketing in the press release, is that a paid initiative or is that more like earns marketing and can you just talk about how you think about your advertising investment more generally?

[Ben Kohn:]

Yeah so, Austin, it's Ben Kohn. It really depends on the platform and so we've done drops with on the roads. We've done the Playboy collection at Yandy. Well, I would say is, we're really excited moving forward by the influencer and celebrity outreach to us and there are certain things that we'll talk about it in the future with partnerships going forward as we look to expand our collaborations with celebrities. We've talked previously about taking back Playboy labs in-house and doing collaborations where we really become the licensor versus licensee. And so I'm not answering that question directly because it's not something we disclose, but what I would say, is that we're very encouraged by what we're seeing from the artist and celebrity community.

[Lance Barton:]

But, Ben, correct me if I'm wrong when - you alluded to the TikTokers that you see. I don't believe we're paying for that. That's all organic, all right.

[Ben Kohn:]

That's correct. We don't pay today for the celebrities what you know the Bella Hadid and everyone else wearing or clothing, that is all organic today.

[Austin Moldow:]

Got you. Okay, thanks for taking my questions and congrats on the quarter.

[Lance Barton:]

Thank you.

[Operator:]

And our next question coming from the line of George Kelly with ROTH Capital Partner. Your line is open.

[George Kelly:]

Hey, everyone. Thanks for taking my questions. So just to start, you gave a lot of metrics about Playboy.com, I think and I don't have them all written down, but about the acceleration you saw through the quarter in this big March. So curious if there was a certain collection or product or something that was leading that and what have you seen post the quarter, has that kind of momentum continued?

[Lance Barton:]

Thanks, George. So the momentum has continued into April and there's really no specific drops, I mean, Ben, correct me if I'm wrong, if there were any specific drops on Playboy.com, but I don't believe there was anything driving that. We think it's really attributed to, what I'd say, a renewed focus on this as we brought on a new Chief Digital Officer, really started to work on optimizing the platform and the customer experience. So just saying there's like, hey, we think, if you like this, maybe you should try buying this as well and that drove real meaningful growth, like I said, March with our highest revenue yet on Playboy.com, higher than any month during the holiday shopping season, April was even better than that. So really, it's around optimization and just continuing to get better at what we do.

[Ben Kohn:]

George. I'll add to that, it's Ben. It's continued to expand our product offerings. So again, Kevin joined us recently, already great navigation improvements, there is a lot more room to grow there and then we will continue to expand our product offerings. As Rachel alluded to in her comments, also integrating blockchain and NFT opportunities throughout our own website moving forward. But what's great to see is the conversion as we've migrated our audience from that as a media audience to that of e-commerce audience that we're beginning to hit our stride. In fact, one of the frustrating things for me, as CEO actually and I think, Lance talked about this at Yandy, but we have the same issue even at Playboy.com where we sold out of a lot of items and so demand far exceeded the amount of supply that we had. And those are things that, as we continue to transition and add more SKUs and develop the internal data that we'll get better at better out in the future. So it's great to see that our audience and the customer spend and demand is there. It's now just making sure that we match the right product quantity with them.

[George Kelly:]

Okay. Okay. And then you also mentioned in your prepared remarks that you're getting ready to take back certain businesses, I think cosmetics and grooming there were a few others. So curious what's the current size of those businesses, the license deals, how much revenue are they producing for the licensees? And what are you doing to get those businesses ready, I'm guessing it's hiring and just to kind of where are you in that process?

[Ben Kohn:]

Sure. So actually - it's really defined as Class 3 products. And so this is an old licensing deal that predates me where all of these rights around outside of color cosmetics, everything else around skincare, beauty et cetera were all tied up, and that was really with our fragrance partner. And so the fragrance line of products will continue with our partner, but we've taken back all of these other categories and we're now looking to exploit those. If you look at our five-year business model that we have published when we raised the pipe and did this destocking transaction, the growth in that which I believe was about $11 million or so over five years was deemed to be all licensing revenue. And as I think we said in the remarks, we see that as multiples of that moving forward on a global basis around these categories and what we know is the demand of our consumer for these products from us. So to start with, color cosmetics, and I can have Rachel chime in here, but we have already started the development of our color cosmetics line and we expect that to launch in the first quarter of - in 2022. And so we're excited about that and really what long-term taking out $11 million of forecasted revenue growth and turning that into multiples moving forward.

[George Kelly:]

Okay. Thank you.

[Rachel Webber:]

Hey, George, it's Rachel. Just to add on there. It's really the creative development of the product lines figuring out exactly which SKUs we're launching with developing our distribution strategy. So we're underway on that and excited to bring this to market in 2022.

[Lance Barton:]

Yeah, and George, I mean just so these are products that have superior gross margins moving forward. And so we know we have a customer base digitally today through our licensing partners et cetera that want to buy these products from us.

[George Kelly:]

Okay, great. And then last question from me, a modeling one, the core OpEx in the quarter, SG&A, is that a good run rate going forward, were there any kind of one-time stock-based comp things as you're hiring people or can you help it all there?

[Lance Barton:]

Yeah, I mean obviously there was a lot of one-time events in the first quarter, just given the SPAC merger at that point in time. The SBC, really, I think, $3 million - a little over $3 million of that SG&A in the quarter was directly related to the acceleration of all the old grants, so that happened really at completion of the merger. So that is obviously a one-time in nature. You had around $6.3 million of SPAC related costs, everything from deal fees to retention bonuses and alike. So that was also unique and one-time. We also closed on the Lovers acquisition in the first quarter. So when you think about costs there related to rep and warranty insurance, legal costs, diligence costs, all of that, that was running you $1 million, $1.5 million there. So there was a lot of stuff in the first quarter because we had just completed the business combination. So I don't expect the run rate to be high going forward. Now having said that, there are obviously other things that we need to do going forward that we intend to do as we kind of set ourselves up for future success. Like we've said, we're investing now for future growth. So going back to what Ben was talking about in terms of developing our color cosmetics, we're going to have to ramp spend there, where obviously as we continue to make these improvements across Yandy, Lovers, and Playboy.com on the e-comm side, we're going to be upgrading and building out those systems and our marketing capabilities, so that we can become more efficient and more optimized. Same thing on the financial reporting side. I discussed here a couple of months ago, and we want to work on upgrading our systems there get us better, get us ready because the quicker we grow, we're going to become an accelerated fighter quite quickly and we need to be responsive to that. We've also got a compliance cost around SOX and 404 compliant. So there's a lot of different things that will be coming up that didn't hit in the first quarter. So I'd say, what you saw in the first quarter, there was a lot of one-time items, but I do see more expense kind of coming down the pipe this year as we set ourselves up for future success. Ben anything else you want to add?

[Ben Kohn:]

Yes. George, the only thing I would add to that too, this is a decision we've made as a senior team, and I think Lance alluded this too in his remarks is, we are doing everything for the long-term here and trying to make the right long-term decisions. It's the same reason, we could have easily added back like we did as a private company $1.5 million of those one-time costs to EBITDA, but we're not. We are literally trying to run this as clean as possible and the only thing being added back to EBITDA is really extraordinary events or SBC.

[George Kelly:]

Okay. Thank you.

[Lance Barton:]

The other thing I'd just to add on top of that, if you strip out kind of all of those kind of one-time cost, I alluded to the SPAC, the acceleration of the SBC to M&A related costs here, your actual SG&A costs grew less than your revenue. I think it grew something around 24% year-over-year. So the actual costs, I mean, while they're growing, they're not growing as fast as revenue.

[George Kelly:]

All right. Thank you.

[Lance Barton:]

Thanks George.

[Operator:]

Our next question coming from the line of Alex Fuhrman with Craig-Hallum Capital. Your line is open.

[Alex Fuhrman:]

Great. Thanks for taking my question. Wanted to ask about the supply chain issues that you mentioned in your prepared remarks you, it sounds like you can see a light at the end of the tunnel there. When do you envision being fully back in stock? And then looking ahead a little bit, are there any concerns about your ability to have the right inventory in stock ahead of the key Halloween season for you?

[Lance Barton:]

So we've been looking at it. We see good signs that the supply chain issues will improve as we enter Q3. The hope right now is that kind of in July, we should be in much better shape and that obviously puts us in good shape ahead of Halloween. Arguably, we'd be in much better shape than we were last year for Halloween 2020, which ended up being a tremendously successful season for us. So we feel good about it as these issues resolve. But we're still facing some challenges here in the second quarter. We have - it's not a huge category on Yandy, but one of our drop ship shoes suppliers on Yandy has effectively shut down for right now due to COVID. And so we're really out of stock on about 75% of our shoes. If you actually go and I was looking at earlier today, we have around 1,300 shoes available on Yandy, you start sorting by size and that number dwindles quite quickly. So we're really constrained in certain areas right now, shoes kind of being the most acute one on Yandy, but again, the hope is that these will kind of resolve themselves in the coming months.

[Alex Fuhrman:]

Great. That's helpful Lance. Thanks. And then just I guess thinking kind of to the direct-to-consumer theme, it seems like all of your brand, Yandy, Lovers, Pleasure for All, Playboy.com, all seems to be showing some really nice growth. We haven't really seen a whole year of quarters historically for the whole business, certainly not for Lovers. Can you just kind of frame up for us a little bit, I would imagine, all of fees businesses do a lot of business around Halloween and Valentine's Day, the holiday season. How should we be thinking about kind of their contribution to the business in the middle quarters of the year where you don't have these holiday boosting the results?

[Lance Barton:]

Sure. Yeah, I'll take that as well. And you are right. And I'll break it down kind of by channel here. So Lovers usually sees its biggest month in January and February, leading up to Valentine's Day and then also December. Yandy as we talked about certainly really big around the Halloween season, also big leading up into Valentine's Day, similar to Lovers. And then the holiday shopping season not surprisingly, across everything Playboy, Yandy and Lovers is always strong. Look, it's our goal to create more occasions for the Yandy and Lovers businesses going forward to try to pick up more revenue in the second and third quarters. One of the things I'd also point to is that when we do more frequent product drops or when we do these Playboy branded collections like we did with Lana Rhoades, we actually can have holiday like buying patterns because these are unique one-time event that can really drive growth. So to the extent that we can do more of these collaborations, more of these drops, those have been nice for us to launch and what I'll call the off season. Also on Playboy.com as we continue to ramp that and we haven't really talked about it as much on this call, but I know we mentioned that last quarter, you look at our streetwear business, PacSun and Missguided our partners there have been continuing to experience tremendous growth on Playboy branded products and we are now selling those through Playboy.com. So again you would expect us to also increase in the fourth quarter in the holiday buying season, but it's still one of those things that could be strong year round and again could be supplemented if you do collaborations or drops or the Playboy labs.

[Ben Kohn:]

And Alex, it's Ben. I'll just add - I'll add two things. We also just launched Playboy swim. And so as we move forward, we have Midsummer Night's Dream that we're planning something for this summer in July as a driver to historical very famous Playboy party that works fine, thinking about it both from a digital or virtual perspective as well as for in-person now that COVID restrictions are easing in this country. And then just to add one other thing on the stock issues that we talked about, the other area of the business that was impacted in the first quarter by that was still our gaming business both for online gaming as well as our physical casino. And so hopefully as COVID continues to improve in most of the world, that business will continue to normalize and return to a growth business moving forward as well.

[Alex Fuhrman:]

Great, that's really helpful. Thank you, both.

[Lance Barton:]

Thanks, Alex.

[Operator:]

And our next question coming from the line of Gregory Pendy with Sidoti. Your line is open.

[Gregory Pendy:]

Hey, guys. Thanks for taking my questions. Just real quick on the balance sheet, just looking at inventory up, I guess, sequentially from year-end. Just trying to get a grasp on that, I'm sure Lovers accounts for some of that, but you're mentioning lean stock-outs as well. So just trying to - as you are growing your D2C business, how should we be thinking about inventory I guess on a go forward basis throughout the rest of year?

[Lance Barton:]

Yeah. Thanks for that, Greg. So you're absolutely right, I mean we brought on a new business with inventory in the first quarter. So that's why you see the increase there. When you think about kind of the inventory patterns, right, we do start to build inventory around this time of the year and kind of through the summer as we prepare for the holiday shopping season and for Halloween. So inventory does build and then you end up selling a lot of that through the end of the year.

[Gregory Pendy:]

Great. And then just one more, I guess just on the beauty and grooming products, did you guys say earlier you - the fragrance side of things is going to continue as a licensing partnership and the rest is going owned and operated. Did I hear that correct?

[Ben Kohn:]

That's correct. So our fragrance partner SADP relaunched their product last year in Europe, but the rest of the category, which is really historically just defined as Class 3 products had all been encumbered but they were not exploiting them and so we took those all back in-house now. And then we will look to exploit them and that's obviously a pivot in our business model from what was previously put out there with the five-year forecast as part of the SPAC transaction, which I think at the time called for about $11 million of revenue growth over five years in that category. That assumption at the time was all that would all state licensed and today we believe there is an opportunity to grow the revenue of that multiples to what we had previously been forecasting moving forward and as we roll out these products.

[Rachel Webber:]

And on the fragrance, we expect that the new Make the Cover fragrance line, the relaunched collection will enter the U.S. in the coming months as well.

[Gregory Pendy:]

Okay. And then just on that topic just real quick. So was relaunch, I think if I'm not mistaken, in Germany. And is it at a higher price point and can you just kind of talk a little bit about it if that is correct how it went in Europe before it comes to the U.S.?

[Ben Kohn:]

Right. So it was relaunched in both Germany and the UK and it was at a higher price point and given COVID it did very, very well and we're encouraged by what we're seeing from a data perspective on it. But again, I think as they come to the United States, it's going to be great for not only our business for everyone to get pass this COVID issue and have things return to normal. So we're encouraged by the early success in it so far.

[Gregory Pendy:]

Okay, great. That's helpful. Thanks a lot.

[Lance Barton:]

Thanks Greg.

[Operator:]

And our next question coming from the line of George Kelly written ROTH Capital. Your line is open.

[Lance Barton:]

Maybe George dropped off there. You there George?

[George Kelly:]

Sorry about that. Can you guys hear me now?

[Lance Barton:]

Yeah.

[George Kelly:]

Okay, great. So thanks for taking a quick follow-up. Just wanted to make sure I heard you right when talking about the refinancing. So is it $10 million of interest savings and does that mean you're looking to pay down a substantial portion of your debt through this refinancing?

[Lance Barton:]

No. The bulk of it, I mean, interest is part of it, but it's also just the amortization requirements. So the total debt service is going to be around $10 million savings interest and the required pay downs every year.

[George Kelly:]

Okay.

[Ben Kohn:]

George, it's Ben. The only other thing I'll add to that with the facility is it's a much simpler facility than what we had as a private company. We also have an accordion feature built into the facility given that M&A is part of our strategy moving forward where we can obviously prudently borrow more money to fund certain M&A deals should we want to, depending on the deal, the size of the deal et cetera. So it's a facility that will result in not only interest savings but also amortization savings moving forward.

[George Kelly:]

Okay, thank you.

[Operator:]

And that's all the time we have for questions and answers for today. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.