Business Context and Reporting Period
PLBY Group, Inc. is a global consumer lifestyle company marketing the Playboy brand through licensing, direct-to-consumer products, digital subscriptions and content, and location-based entertainment. The company reports three segments: Licensing, Direct-to-Consumer, and Digital Subscriptions and Content.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Comparability is affected by the February 2021 business combination, the March 2021 acquisition of TLA/Lovers, and the August 2021 acquisition of Honey Birdette.
Financial Performance and Position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net revenue | $58.4 million | $35.0 million | $150.9 million | $101.3 million |
| Gross profit | $33.1 million | $18.9 million | $83.0 million | $49.6 million |
| Gross margin | 56.8% | 54.1% | 55.0% | 49.0% |
| Operating income (loss) | $(5.5) million | $4.2 million | $(13.5) million | $8.7 million |
| Operating margin | (9.4)% | 12.1% | (8.9)% | 8.6% |
| Net income (loss) | $(7.7) million | $1.3 million | $(21.6) million | $(4.8) million |
| Adjusted EBITDA | $5.2 million | $7.3 million | $17.8 million | $21.8 million |
| Diluted EPS | $(0.18) | $0.05 | $(0.60) | $(0.22) |
Revenue increased 67% in the quarter and 49% year to date. Direct-to-Consumer revenue rose 139% in the quarter to $36.0 million and 114% year to date to $86.1 million. Licensing revenue increased 14% in the quarter and 7% year to date, while Digital Subscriptions and Content revenue increased 5% in both periods.
Cost of sales increased 57% in the quarter and 31% year to date. Selling and administrative expenses increased 167% in the quarter and 139% year to date, reflecting acquisition-related expenses, public-company costs, higher direct-to-consumer expenses, and other corporate investment. Corporate operating expenses were $18.6 million in the quarter and $54.8 million year to date.
Cash and cash equivalents were $67.8 million at September 30, 2021, with total cash and restricted cash of $74.2 million. Total assets were $849.4 million, including $418.1 million of intangible assets and $236.9 million of goodwill. Inventories increased to $35.7 million from $11.8 million at December 31, 2020.
Net cash used in operating activities was $42.0 million for the first nine months, compared with $6.1 million used in the prior-year period. Investing cash use was $268.4 million, primarily for the TLA and Honey Birdette acquisitions and an aircraft purchase. Financing activities provided $369.1 million, including public offering proceeds and debt issuance.
Outstanding debt was $238.2 million before unamortized debt issuance costs and discounts, or $229.3 million net, at September 30, 2021. Debt consisted primarily of a $230.0 million senior secured term loan facility and an $8.8 million aircraft term loan. The senior secured facility matures in 2027 and the aircraft loan matures in 2026. The company stated that liquidity was sufficient to fund operations, lease obligations, debt service, capital expenditures, and working capital requirements for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by the acquisitions of TLA/Lovers and Honey Birdette, as well as continued e-commerce growth.
- Direct-to-Consumer shifted from $1.0 million of segment operating income in Q3 2020 to a $2.5 million operating loss in Q3 2021. Year-to-date segment results shifted from $0.1 million of income to a $1.4 million loss.
- Licensing and Digital Subscriptions and Content remained profitable and increased operating income in both the quarter and year-to-date period.
- The company moved from operating income and net income in Q3 2020 to operating and net losses in Q3 2021, despite substantially higher revenue.
- Adjusted EBITDA declined to $5.2 million from $7.3 million in the quarter and to $17.8 million from $21.8 million year to date. The metric includes substantial adjustments for acquisition costs, inventory step-up amortization, stock compensation, and other special items.
- The company refinanced its prior term loan in May 2021 and added $70.0 million of term debt in August 2021 to help fund Honey Birdette.
- The company completed a $202.9 million net public equity offering in June 2021 and issued shares as consideration for Honey Birdette and a licensing agreement.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide a clear quantitative revenue, earnings, or Adjusted EBITDA guidance figure. Management expects strong fourth-quarter seasonality from Halloween and holiday sales, particularly in the Yandy business, but notes increasing competition in costumes and the need for continued investment in consumer products and distribution.
Management expects to pursue additional merger, acquisition, and investment opportunities and believes operating cash flow and balance sheet flexibility may support such activities. The October 2021 acquisition of GlowUp Digital, renamed Centerfold Digital, occurred after quarter-end and involved approximately $16.4 million of closing consideration, primarily in stock, plus potential additional consideration.
- COVID-19 continues to create supply-chain disruptions, product launch delays, out-of-stock conditions, temporary retail closures, and pressure on certain licensing and gaming operations. The company stated that online sales and U.S. licensing growth had offset these effects through the filing date.
- Honey Birdette results are included only from August 9, 2021. The acquisition generated $7.4 million of revenue and a $1.2 million net loss in the reported nine-month period.
- Honey Birdette purchase accounting remains preliminary. The transaction created $222.8 million of goodwill, a $77.2 million trade name, and $22.6 million of deferred tax liabilities. Contingent consideration was $23.7 million at September 30, 2021 and is subject to future true-ups based on financial performance and share value.
- The company recorded $1.2 million of loss on extinguishment of debt and $0.7 million of gain from settling UTA convertible notes during the first nine months.
- Foreign currency translation produced a $3.7 million comprehensive loss, primarily related to Honey Birdette and the Australian dollar.
- Future minimum operating lease commitments were $45.0 million, partially offset by $1.0 million of expected sublease income.
- Key risks include acquisition integration and execution, leverage and debt covenants, dependence on consumer demand and licensing partners, COVID-19 and supply-chain conditions, foreign exchange exposure, competition, litigation and regulatory matters, and the ability to maintain Nasdaq listing.
Important Facts for Investors to Verify
- Verify the sustainability of revenue growth and whether recently acquired businesses can improve profitability after purchase accounting, integration, and public-company costs.
- Reconcile Adjusted EBITDA to GAAP results and assess the recurring nature of the excluded acquisition, inventory step-up, stock-based compensation, and other items.
- Monitor operating cash burn, working-capital requirements, inventory levels, and the company’s ability to service approximately $238.2 million of gross debt.
- Review Honey Birdette’s preliminary purchase-price allocation, contingent consideration, true-up provisions, and contribution to consolidated results.
- Assess the impact of fourth-quarter seasonality, supply-chain constraints, retail-store performance, and international currency movements.
- Review the terms, collateral, interest rates, amortization requirements, and covenants of the amended senior secured credit facility.
- Consider potential dilution from outstanding options, 2.0 million vested but unsettled RSUs, acquisition-related share issuances, and subsequent GlowUp consideration.