Playboy, Inc. Q2 FY2021 Earnings Call

Thank you for standing by and welcome to the second quarter 2021 conference call for PLBY Group, Inc. The information discussed today is qualified in its entirety by the form of 8-K that has been filed today by PLBY Group Inc., which may be accessed on the SEC website and PLBY Group's website. Today's call is also being webcast and a replay will be posted to PLBY's website. Please note that statements made during this call, including final financial projections or other statements that are not historical in nature, may constitute forward-looking statements. Such statements are made on the basis of PLBY's views and assumptions regarding future events and business performance at the time they are made, and we do not undertake any obligation to update these statements. Forward-looking statements are subject to risks which could cause PLBY's actual results to differ from its historical results and forecasts, including those risks set forth in PLBY's filings with the SEC, and you should refer to and carefully consider those for more information. These cautionary statements apply to all forward-looking statements made during this call. Do not place undue reliance on any forward-looking statements. Hosting today's call are Ben Kohn, Chief Executive Officer; Rachel Webber, Chief Brand Officer; and Lance Barton, Chief Financial Officer. I will now open the call to Ben Kohn. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to our 2021 second-quarter earnings call. I'm excited to walk you through our recent results as well as to share an update on the significant operational progress we've made, executing against our growth strategy. Before I dive in, I want to share the news that Suying Liu has stepped down from our Board. I want to thank him for his service and his many contributions. I also want to note that with Suying's departure, we have an even greater opportunity to increase the diversity of our Board, a process we kicked off a number of months back. Our ambition is to live up to Playboy's remarkable legacy of fighting for gender equality. With the workforce today that is nearly 75% female even before including Honey Birdette's incredible female-led team and a customer base with significant female representation, we firmly believe our Board should have significant female representation as well. Okay. On to the results. The second quarter of 2021 was our first full quarter as a public company and I'm pleased to report very strong results across all areas of our business. We have been hard at work building and expanding a unified digital commerce platform, optimizing our licensing partnerships, exploiting the natural synergies between and across our Playboy, Yandy, and Lovers operations, and reinvesting in our brand and infrastructure to bring to market fiscal and digital products and experiences that today's consumers are most excited about. Our growth strategy is threefold. First and foremost, we are focused on expanding our U.S. direct-to-consumer commerce business to capture $1.00 of consumer spend versus the $0.05 to $0.06 that has historically been captured through previous licensing arrangements. Second, we are working to optimize our licensing business in key international territories and categories. And third, we are investing in emerging growth opportunities that we believe will accelerate our long-term growth trajectory and generate significant returns over a 3- to 5-year time horizon. I'm very proud of our team's results across our 3 priorities. On the direct-to-consumer side, we grew revenue 88% year-over-year. This is a result of the team's early efforts to ramp up influencer marketing and cross-selling initiatives across our channels. On playboy.com in particular, we are seeing a dramatic shift in consumer behavior. Consumers more and more understand that Playboy offers high-quality lifestyle products and that playboy.com is a place to shop. During Q2, our shopping customers grew by nearly 70%. This shift in consumer behavior is driven in part through our strategic influencer marketing initiatives. Each week, we average 100 influencer posts with influencers selected based on the strength of their product recommendations and their ability to convert our target audiences. Many of these influencers are part of our Playboy network of talent, including our playmates and prominent adult stars. In addition to posting on their own channels and thereby massively extending outreach, these influencers provide a library of content for us to use across our channels, helping us to create consistent and persistent touchpoints for sales and conversion. We have also seen great results from our work with top social media influencers eager to be associated with the Playboy brand. For instance, our Pride collection with Bretman Rock sold out in a matter of hours. Based on their key learnings, we have developed a robust calendar of influencer-driven streetwear and fashion collaborations to roll out in the coming months. Creating our own influencer-driven collections is the future model of Playboy labs. We are now operating as designers and the operational owner of these drops and selling them directly to consumers on our owned platforms versus licensing our brand to talent for sales on theirs. Consumer demand for Playboy streetwear has exploded, as evidenced by our own e-commerce sales and the rapid growth of PacSun's Playboy branded offerings. By working with influencers on a regular cadence of streetwear-oriented fashion drops, we create regular events to increase brand affinity, maintain cultural relevance, and help smooth out the seasonality of our business. As we shared on our last call, the Playboy brand is incredibly strong with the culture driving Gen Z audience, which requires our team to act fast on organic viral moments. Just a few weeks ago, the Playboy hoodie challenge started trending organically on TikTok, and the team acted within a number of hours to launch a brand contest that brought the conversation directly to our channels and allowed us to participate directly in the moment. The entirely organic, quick turnaround contest generated millions of impressions and engagements, and reached over 300,000 unique users. And most importantly, our product operation has the ability to act fast too. Within 48 hours, we launched an additional 13 cover hoodie designs for sale on our site to capitalize on the product buzz. It's been very exciting to see the continued success of our Playboy and the Yandy integrations. By leveraging shared design infrastructure and multiple owned distribution channels, we brought our biggest Playboy and Yandy partnership to market this April with the spring collection featuring 20 different designs. The collection generated roughly $0.5 million in revenue from sales across both yandy.com and playboy.com, and proved the power of the Playboy mass head in the intimates category. Following this success, we extended our offerings with our first Playboy and Yandy swimwear capsule collection, and we recently rolled out our second Midsummer Night's Dream Playboy and Yandy collection just last month. During Q2, our operational integrations also extended to Lovers where we now have a combined buying team across Yandy and Lovers, an integrated e-commerce and technology team in cross-channel marketing across all of our brands. Lovers also saw its best in-store conversion rate to date in Q2, demonstrating the continued desire for sexual wellness consumers to connect with brands and people they are buying from. We are investing behind these early wins in direct-to-consumer with the expectation that our near-term investments will accelerate and expand our long-term growth. Most crucially, we are hard at work integrating our e-commerce technology platform and investing in the digital consumer experience. Consumer-facing improvements to come include enhanced navigation, streamlined checkout, wishlist that can be shared with partners and friends, reviews, rewards, and more. We have already unified e-mail and communication platforms across brands, and we expect to step into a unified CRM across all brands by early next year. On the back end, we are implementing a new ERP, along with warehousing order management improvements so that next year, every stage of our customer interaction will be unified. Perhaps, most exciting of all on our direct-to-consumer transformation is our acquisition of Honey Birdette, a luxury lifestyle and lingerie brand created for women by women. With Honey Birdette, we are adding over $80 million of high-margin and fast-growing revenue, and an extremely talented team that brings us design, sourcing, and merchandising capabilities we need to accelerate the growth of our existing direct-to-consumer platform. Honey Birdette's superior product design, sourcing, and direct-to-consumer capabilities will also accelerate our Playboy branded lingerie, loungewear, swimwear, and sexual wellness go-to-market plans targeting the mass niche consumer. In addition, Honey Birdette's unique weekly drop merchandising approach provides calendar consistency and helps smooth our PLBY Group's seasonality. We expect to launch new Playboy brands of lingerie and women's lifestyle label designed and operated by Honey Birdette's team in the first half of next year, expanding and accelerating our previous roadmap for these offerings. On the licensing side, in the second quarter, we grew our revenue 12% year-over-year. In China, our partners capitalized on the June 18 online shopping holiday, selling more than 2 million Playboy branded apparel pieces on that one day alone. We also continue working with our partners to expand product offerings for female consumers through a successful Q2 apparel collaboration with the designers at Shin Studio. In India, we signed deals in hospitality for Playboy Beer Garden and venues as well as in digital gaming with partner Gaming Technologies bringing Playboy Rummy to the market in 2022. And in the U.S. and Western Europe, the second quarter marked successful collections from both PacSun and Missguided, and new high-end collaborations with Ameri, Color Bars, Emotionally Unavailable, DefShop, and Duke + Dexter. In gaming, a key licensing category for us, we've made significant progress relicensing our U.S. i-gaming rights for digital casino games. We're very excited by the potential here as the North American expansion of regulated real money gaming accelerates. Across our direct-to-consumer and licensing businesses, our second quarter and year-to-date performance is even more impressive when taking into consideration the continued headwinds from COVID. The supply chain challenges impacting many industries continued to impact our business as well. For example, throughout the quarter, Yandy remained out of stock on many of our top-selling items, and we have seen consistent delays in product launches on playboy.com and with our licensing partners. In advance of the holiday season, we're working proactively to source product in new ways that minimize the chances for disruption. It is also worth noting that ongoing shutdowns have impacted our gaming business in particular, including our London Casino and Live Dealer Studios, and travel restrictions have delayed our ability to implement some of our growth plans, develop new partnerships, and restructure existing licensing agreements. The opportunities have not been lost, but rather shifted in timing. The ability to renegotiate deals, especially internationally, requires our ability to meet face-to-face with our partners, and we look forward to doing so when COVID restrictions ease. The transformation that we have discussed, moving from a licensing business to an owned and operated business in key categories and territories, is well on its way, but it takes time, especially in the face of COVID. I'm extremely pleased with the performance we've delivered across these first two pillars of our growth strategy, and we expect to see acceleration of the business once these headwinds abate. Now on to the third pillar of our strategy, emerging growth. While achieving strong progress across our direct-to-consumer and licensing businesses, we're also prioritizing emerging growth opportunities that we believe will accelerate and expand our growth significantly in the coming years. To deep dive into those initiatives, I'm going to hand the call over to our Chief Brand Officer, Rachel Webber.

Thanks, Ben, and hi, everyone. I'm excited to share an update today on the progress we've made on our highest priority new growth initiatives. First, on NFTs and digital experiences; and second, on Playboy's new label and category plans. We couldn't be more excited about the opportunities we see ahead for the Playboy brand and business in the world of blockchain technology and the digital creator economy. As our physical and digital worlds increasingly converge, we believe the meaningful differentiators in our business today, the badge value of the Playboy brand, our access to a coveted talent network, and our ever-expanding library of content will be increasingly valuable. Q2 marked our foray into the NFT space with our first drop on Nifty Gateway, a collaboration with the artist Slimesunday that sold out in minutes and generated almost $1 million in primary sales in 24 hours. In June, we partnered with Nifty again to release a collaboration with artist Shantell Martin, a series of augmented reality interpretations of David Bowie's 1976 Playboy interview in support of Pride month. Our first two drops demonstrated the immense power and infinite possibilities of our rich archive, and we also learned a tremendous amount about what works and what still needs big improvement in blockchain-based consumer experiences. Overall, we've been thrilled by the enthusiastic community and collector response. This past month, we participated alongside major auction houses, art galleries, and marketplaces at the central and second annual virtual art fair with our Miami Beach art collection. Our collection was minted for sale on the art marketplace SuperRare and most notably contains our first heritage print NFT, a digitized version of a photograph of a Playboy bunny, pictured water skiing outside of the Miami club in 1970. We're very encouraged by the reaction to the archival work and the 19 piece sale price, roughly $60,000 in value today for the single digital print. It's becoming increasingly clear in the world of NFTs and the broader digital creator economy that great success and true differentiation lie at the intersection of content and community. Playboy pioneered the intersection of content and community. We, therefore, have both the right to play and the unique competitive advantage to win in this new world. Our path forward is built upon our ever-expanding library of highly engaging and coveted content. Our 10 million piece archives are built in talent and influencer networks and the proven desire of our fans to be members of Playboy world. What we're working on now is a consumer proposition integrated into our owned ecosystem that leverages NFTs and blockchain technology to allow our fans to truly become members of Playboy today. We are applying the insights we've gleaned from participating with the most early adopter crypto audiences to build offerings that can extend to our mainstream fan base as well. The unique assets we have to offer that integrate physical and virtual goods, access to creators and tools for creators, access to special events and experiences, is what we believe can form our specialized value proposition. Over the weeks and months ahead, we will continue to strategically release digital art and collectibles as we work towards the rollout of this integrated content and community membership offering. We are so excited about everything we have in the works today and we're also inspired knowing that we're still so early in this next era of Internet and technology explosion. We are acting fast to gain early mover advantage while simultaneously building for what we believe will have transformational long-term growth potential. The second new growth area I'm excited to talk about today is how we are leveraging Playboy IP to develop new sub-brands or what we’re calling labels and new high growth categories. On the new labels front, our first new launch will be Big Bunny. Big Bunny is a label designed for the new Gen Z. It combines the ideals of style, travel, and pleasure, and represents the pinnacle of aspiration for the brand. We expect to introduce our first collection of products that tie back to this intersection of style, travel, and pleasure in Q4 this year. An entire range of offerings is expected to be released each season going forward. The reason we are creating labels is that we can appeal to different consumer segments in ways that resonate most with them. Playboy is an incredibly unique brand in its ability to go high-low to offer a range of mass niche, prestige, and luxury, and to appeal across age and gender demographics. By creating specialized labels like the Jordan label for Nike, we can go deep with each consumer segment and build massive new franchises that stem from the Hero Playboy brand. From a price point perspective, Big Bunny is for our upper-tier demographic. While it will feel exclusive, it will not feel out of touch, and we'll sell many accessible offerings to consumers who aspire to participate in the lifestyle of the contemporary Gen Z. In addition to developing new labels, we are also leveraging the Playboy brand to expand into new owned and operated product categories. After recently completing our deal to bring back rights in-house, we now have a robust beauty product roadmap in development. We are currently in the product formulation and design stages for our first collection that we plan to debut in 2022. We've begun some early tests in the category as well with our press-on nails collection and our licensed fragrance products, both of which just rolled out on playboy.com this past week. Our licensed fragrance products have been performing well across European retail over the past few months, and we're excited to now offer them directly to our consumers as well. The investments we are making today to develop new labels and owned product lines intend to propel our U.S. commerce business over the coming years and serve as high-value new offerings to bring to market in international territories by strategic business model. Lastly, before I hand the call over, I wanted to add a warm welcome to our Honey Birdette colleagues. We've been huge admirers of Honey Birdette since we first met on a collaboration opportunity and we couldn't be more thrilled to now be working side-by-side with their immensely talented design team to help us accelerate bringing to market our women's focused Playboy labels. With that, I'll hand the call over to my colleague, Lance Barton, our Chief Financial Officer.

Thanks, Rachel. Q2 was another great quarter that demonstrates the growth potential of this company. I'm not going to waste time reporting all the numbers that are disclosed in our 8-K, but I do want to hit on some of the highlights and provide additional context on the investments that we're making. Total revenue growth accelerated in the second quarter to 44% year-over-year, a nice step-up from the 34% growth we achieved in Q1. We saw strength in both direct-to-consumer, where revenue grew 88% year-over-year to $28 million, and licensing, where revenue grew 12% year-over-year to $15.4 million. On the direct-to-consumer side, we've made tremendous progress transforming playboy.com into an e-commerce destination. Our Hero website achieved 130% sequential revenue growth compared to the first quarter, driven by traffic growth along with improvements in both conversion and average order value. We expect to continue driving conversion and AOV higher as we begin to integrate Honey Birdette products exclusive to playboy.com, coupled with the upcoming launch of Big Bunny in our own private label Playboy lingerie. On the licensing side, the demand for Playboy branded streetwear remains evident as PacSun once again delivered significant revenue growth of nearly 300% on a year-over-year basis. Although licensing revenue managed to grow 12% year-over-year, ongoing COVID-related closures and impacts have led to a 75% year-to-date decrease in revenue from our three largest gaming partners compared to what we would expect to see under normal circumstances. We expect that our licensing revenue on the gaming side will ultimately recover once conditions improve, leading to improved growth prospects for our licensing segment. As Ben mentioned, we are investing behind the traction we continue to see as we build our direct-to-consumer business with the expectation that these near-term investments will accelerate our long-term growth trajectory. These investments fall into a few key areas. The first is technology investments that provide a superior and unified customer experience across all of our brands, including Honey Birdette. The team is hard at work putting in place best-in-class infrastructure today in order to optimize and scale our business going forward, with a focus on empowering the customers' engagement with us on-site, in-store, and across the globe. These investments fall under a Customer 360 strategy to take their omnichannel shopping behavior into account, providing a better experience wherever they choose to shop with us, and increasing our ability to match them with the right product at the right time. We're investing today so we can realize operational synergies down the road across the company. Second, our product and brand investments we are making to develop and launch new labels and own product lines, that Rachel discussed, such as the creation of Big Bunny and upcoming beauty and grooming products, along with the creation of new digital revenue streams that we are currently incubating. And third, increased costs related to being a newly public company, such as material increases in insurance costs and professional service fees as we implement the required systems and processes to scale this business as a newly public company. As part of this transition, we also recently announced that we engaged BDO as our auditor. In total, we expect that these investments, along with the resulting increases in headcount to support our transformation, will increase our fixed operating expenses by roughly $15 million this year. That's resulting in short-term impacts to margin. But as our revenue scales, these incremental costs remain fixed and, in some cases, go away entirely, providing us with opportunities for margin expansion. Additionally, we expect that the implementation costs will result in approximately $4 million of higher CapEx over the next 3 to 4 quarters until it returns to a more normal level, which brings me to M&A. We closed on the acquisition of Honey Birdette on August 9 for total consideration of approximately $235 million in cash and 2.16 million shares of PLBY stock. We expect $70 million of incremental debt to fund tomorrow in connection with the acquisition, which would increase the size of our term loan from $160 million to $230 million, which will leave us with approximately $85 million of cash on our balance sheet after completing the transactions and payment of transaction fees, giving us plenty of flexibility to pursue future M&A and growth opportunities going forward. On a pro forma basis for 2021, we are now a company with $280 million in revenue and 40% annual growth with 70% of our revenue now coming directly from the consumer. On an as-reported basis, we believe that Honey Birdette will add an incremental $25 million to $30 million of revenue for the remainder of this year on top of the more than $200 million of revenue that we already expect to generate from our existing businesses for the full year. The biggest uncertainty to our outlook, especially the outlook for Honey Birdette, remains the ongoing impact from COVID. As it stands today, shutdowns in Australia have resulted in most Honey Birdette stores closing temporarily, which has a material impact on revenue for each week they have to remain closed. Fortunately, Honey Birdette has been performing extremely well in the U.S., helping to offset some of the softness caused by the acute impacts felt in their largest market today. When we think about the near-term investments that we're making, combined with the growth potential we see for both Playboy and Honey Birdette, not to mention our excitement for building incremental digital revenue streams leveraging our IP, we believe that our prior target of $300 million of revenue by 2025 should be closer to $600 million of revenue. If we find more opportunities to deploy our capital for accretive M&A or internal investments, we would look to further accelerate that timeline. Before I wrap up, I'd like to clear up some confusion that persists each time we file our registration statements with the SEC. In short, our resale registrations that are filed with Form S-1, including any supplements, and also an upcoming filing that we intend to make via a Form F-8 do not represent new issuances or new sales of shares by PLBY to the public. These registrations simply allow recipients holding restricted shares and equity grants the ability to sell their shares in the market. We currently have two resale registrations on Form S-1 filed with the SEC for the 27.25 million shares that were issued in connection with de-SPAC merger, PIPE, and certain other pre-merger arrangements. These shares, plus the 6.5 million shares that were already registered in connection with the Mountain Crest IPO, get you to the 33.8 million shares that were outstanding as of May 12, 2021. Then on June 14, we completed a public offering of 4.7 million shares, bringing the total number of outstanding and registered shares to 38.5 million. In connection with the consideration paid to acquire Honey Birdette, we will soon file another resale registration on Form S-1 to register the restricted shares privately issued to the Honey Birdette sellers. That resale registration will be similar to the resale registration that we've already filed. Similarly, as I mentioned, we'll soon file a Form S-8 to register the 9.9 million shares that are already reserved for issuance under our approved equity plans. The S-8 is a typical filing by newly public companies and for recently adopted equity plans to register those plans. It simply allows recipients of company equity grants to receive registered shares. The S-8 will not result in the immediate sale of a material number of shares by employees. Approximately 18.9 million of the 38.5 million shares currently registered and outstanding are subject to a lockup through September 7, at which point 8.6 million shares will come off the lockup and 10.3 million shares will remain on lockup through February 10, 2022. It's important to note that as a recently de-SPAC public company, we are not yet eligible to use Form S-3 registrations or Form S-1 registrations that incorporate by reference. So we generally have to file prospective supplements to our resale registrations when we file new disclosures with the SEC, and those 424 B3 prospective supplements simply incorporate the 10-Q, 8-K, or other disclosures into the resale registrations already on file. The prospective supplements do not register new shares or evolve the issuance of new shares, which is another reason you see us filing so many of these supplements. Hopefully, this eliminates much of the confusion we hear any time we file a new registration statement. I'd refer everyone to the pro forma shares outstanding table we included that's on Page 10 of the Honey Birdette presentation we filed on June 29 for a good detailed breakdown of our shares outstanding that ties back to all the numbers that I've just read here today. With that, I'd like to ask the operator to please open the line for questions.

Your first question is from Austin Moldow of Canaccord.

I have two questions on cross-selling. First, can you talk a little about specific cross-selling successes you've had thus far? And second, can you talk about how the three different entities will fit together: Yandy, Playboy, and Honey Birdette, and how they'll each be positioned in the market given there will likely be some product overlap like in lingerie?

Let me address the second question first on how the brands fit together. Honey Birdette is a fast-growing 40% plus luxury lingerie brand that has unbelievable design and sourcing capabilities. As Rachel mentioned in her prepared remarks, Playboy really goes high-low. We have products for the mass niche, the prestige, or the luxury segment. The lingerie that we're designing with Honey Birdette that we expect to launch next year is really geared towards the mass niche market where, given the highly fragmented nature of the lingerie business today, really the position that Victoria's Secret has abandoned, we think there's a huge opportunity for Playboy and Honey Birdette moving forward. On the Yandy and Lovers side, we are now integrating those two companies as one and we're thinking strategically long-term about how to position, leveraging the Playboy rabbit head masthead and how that works in there from a private label perspective moving forward. On the cross-selling, we talked a little bit about the Yandy and Playboy lingerie and swimwear collections where we generated about $500,000 of revenue on the first drop. We see similar success on others. Moving forward, you'll see as we approach the end of this year, we'll be cross-selling in anticipation of launching Playboy lingerie next year as a full-time business, and you'll start seeing us sell Honey Birdette products at playboy.com in the fourth quarter of this year. Rachel, Lance, anything else you want to add?

The only other thing I would add is that there's obviously the cross-selling that the consumer sees and then there's the shared infrastructure behind the scenes too. For example, for the Playboy Yandy Midsummer Night Dream's collection, we now have shared marketing efforts. We create a campaign together. We create an influencer strategy together. We produce one set of content that goes out across all of our channels. We gain efficiencies that way and we have one unified message as well to the consumer.

Yes. I think also it’s a really good point Rachel makes, part of the investments we’re making right now are that we can run this as one big company. On the digital side, with the hiring of Kevin, we are now building an e-commerce business all under Kevin, whether independent of the brand. These investments to re-platform and everything on the same technology stack will benefit us long-term. We’re working in our mind to make those investments today to realize the synergies down the road.

Your next question is from Alex Fuhrman of Craig-Hallum Capital.

Congratulations on closing on the Honey Birdette acquisition. I wanted to ask about your strategy for that brand and how you're going to be managing it. That brand, obviously, has grown very quickly over the last two years and it's also been tremendously profitable with very strong double-digit EBITDA margins. How should we be thinking about how that brand is going to be contributing to your results over the next couple of years? Is it likely to remain as profitable as it's been, or are you considering perhaps sacrificing some profitability in order to really accelerate the growth strategy there in Europe and the United States?

Yes. Let me start with the strategy, Alex, and then I'll turn it over to Lance. Look, we're thrilled about Honey Birdette. This is a brand that really resonates with all audiences. This is a company that's growing 40% year-over-year and I believe we can accelerate that growth going forward. When I look at the prospects and what's happening in the U.S. e-com market and opportunities in international markets in Europe, even going into Russia and other places around the world, I think this is a brand, as I previously stated, that — long-term could be a $1 billion revenue business. More importantly, from a strategic perspective, lingerie is a very technical product. When you look at the product roadmap that is coming out for Honey Birdette, it's staggering, with everyday essentials and swimwear they just launched in Miami. We've now started, now that we've closed, to integrate that centralized design function, which is really leading to the expediting of the launch of the Playboy lingerie as a full-time business moving forward with a much better product than we have at Yandy today. This speaks to the design and sourcing capabilities that Honey Birdette has. Moving forward, I'm very confident in the growth of Honey Birdette, but I'm really excited by the look books and what we're seeing coming forward for Playboy lingerie. You have to remember, Honey Birdette is a company that's been around for a little while in Australia. They've only been in the U.S. and in other places more recently. There's a ton of designs to leverage, that can come to market much quicker. I believe, as I said, with the hole left in the marketplace by Victoria's Secret, they have lost their footing in the market, and I'm really excited by what Playboy lingerie can do on a global basis. You couple that with loungewear and swimwear, a whole host of things, and I think it's going to be a huge growth driver for us going forward.

And on the margin side, a few ways to think this through. First of all, as a stand-alone business, Honey Birdette was putting up incredibly impressive margins well north of 35% EBITDA margins. A big part of that, remember, is the fact that over 80% of their traffic is organic. This is such a brand that engenders so much loyalty from their consumers, but they really don’t have to spend that much on marketing like a lot of other brands do. I think that will continue to be the case for them on a stand-alone basis. The other thing is that as you continue to scale this business, they’ve managed to launch new retail brick-and-mortar stores effectively as a — I’ll call it a profitable billboard for driving growth on the e-commerce side. You’ve seen tremendous e-commerce growth from the business over the last few years. What they see is that every time they open a new store in a region drives — the halo effect really drives e-commerce growth. The cost of opening these stores isn’t that significant. It’s in the hundreds of thousands of dollars, and they can pay that back in a matter of 18 to 24 months, and even within the first year, target 30-plus percent 4-wall EBITDA margin. So from a stand-alone perspective, we think this business can continue to be quite profitable. We’ve mentioned the investments we’re making across the company in technology, warehousing, and marketing; all of these things will really integrate our platforms. When we think through the synergies that we can drive in all of these areas, we think that will actually drive some cost synergies and help make their business even more efficient. We also see combined buying power by integrating across all of our brands and platforms, which could boost margin value as well. On a stand-alone basis, we think they can continue to drive that margin, and we think that there’s actual real upside in terms of cost synergies that we can achieve by making these tech investments now across all of our platforms. We’re really optimistic about the ability to continue driving cash flow and profitable growth for the business.

Your next question is from Jim Duffy of Stifel.

Guys, can you give us some perspective on how Yandy and Lovers performed during the quarter versus the prior year? Specifically, I'm interested in performance in aggregate, but also store performance versus e-commerce performance, just how the channel mix shifted.

Sure. So starting off with Yandy. Yandy, obviously, a year ago in the second quarter saw a tremendous unlock in terms of growth as things shut down and buying shifted online. So it had a huge quarter a year ago. That growth has really continued for the business. It's come off the highs they saw a year ago, but we've actually seen the business, when you look at it compared to 2019, we’ve really been able to sustain a lot of that COVID pop. So Yandy continues to perform quite well. As we mentioned, a lot of the collaborations we're doing through Playboy and Yandy collaborations, we're also seeing improvements which has been nice. From a Lovers' perspective, again the stores had been shut down a year ago, so Lovers has actually seen a nice bump year-over-year because of the stores being able to be reopened, and we've seen a huge lift there. Their e-commerce business right now is quite small at Lovers. I think we mentioned too Lovers having one of the best conversion quarters that they've seen to date. Those businesses continue to perform quite well for us; we think that through this integration that we're working that can drive further efficiencies for those businesses going forward.

Jim, it's Ben Kohn. The only thing I'll add to what Lance said is the COVID impacts are still impacting especially Yandy where we've been continuing to be out of stock on several of our top-selling items. That even extended to Playboy, as we mentioned in our prepared remarks. On playboy.com for our summer collection, we only got about 50% of the sales that we had ordered in, and it's just because of what's happening with the COVID issues around the world, especially on the shipping and port system. But very encouraged long term that they've been able to maintain that COVID growth. When supply chains normalize and the work that we're doing strategically on brand and how to leverage this mass awareness that we have with Playboy, we are very encouraged by that. Really is, as the previous question asked about how you segment, Yandy and Lovers is really our mass product; at the end of the day, Playboy can play a little bit more into the prestige market, and obviously Honey Birdette as a luxury.

The supply chain impact is evident too, it looks like. Out of stocks are prevalent, I think certainly more so than you probably planned. I want to talk about the $600 million revenue objective. Thanks for that. I want to think about it in the context of capital structure. Can you give us a sense for how this splits between organic growth and acquisitions? And I’m curious, threshold for pro forma net leverage; do you have a high bond that you won’t cross?

Sure. On the $600 million, as I mentioned, we view that really as organic growth. There are a lot of different ways you could get there, but rough math, if you think through the strategy that we've laid out for all of you, which is driving the growth through our direct-to-consumer revenue and then continuing to optimize and grow the licensing business. If you're able to grow licensing in the high single-digits and then grow the direct-to-consumer business north of 20% over the next four to five years, you get there. We think that that's quite achievable given that we've been growing well north of that and for all the reasons we've talked about in terms of our ability to bring more of this in-house and drive our direct-to-consumer revenue, not to mention all of the growth potential we see on the Honey Birdette side. Obviously, the mix of that could change if we decide to bring more licensing to own and operate. You may grow direct-to-consumer faster and licensing slower. Those decisions will evolve over time, but certainly something that we think makes sense. I’d also say another way to put it into perspective is to talk about $3 billion of consumer spend against our brand and Playboy branded products globally. If you believe that you can get to 5% to 10% of penetration of that through direct-to-consumer sales, I don't think that would put much of a dent on our ability to generate licensing revenue and could generate anywhere from $150 million to $300 million of that increase over the next few years. So yes, that's all through organic growth. Like I said, we would look to accelerate that by deploying our capital, whether that's through more accretive M&A or internal investments as we see fit to the extent that our digital offerings start to get traction and this NFT strategy really starts to evolve. That could be an area of investment and that could be a nice area of upside for us as well, but we'll have to see what we learn and how this evolves over time. In terms of leverage, I'd say we're at a comfortable level of leverage right now, pro forma for the Honey Birdette deal, once we had on this incremental $70 million that we'll be doing this week. I wouldn't want to take leverage really higher than that necessarily. I think we can delever as we generate cash and grow our EBITDA over time. Our preference, I think over time would be to continue delevering and get that down even further. We're at a very comfortable level; it gives us a lot of flexibility on the balance sheet to do what we need to do going forward, especially as it relates to M&A.

Jim, the one thing I’ll also add, just for Lance’s comments on the organic side, is again there’s a huge opportunity down the road that we’ve talked about previously, taking back other licensing businesses or other licensees out there. What Lance was talking about in the $600 million is the organic growth and still growing licensing. Obviously, given the $3-plus billion of consumer spend, the $600 million could be a very different number to the upside to the extent we decide to take back other categories ourselves.

Your next question is from George Kelly of ROTH Capital Partners.

I have a few questions regarding the $15 million of additional investment you plan to implement over the next few quarters. Have you already begun to see the impact of this in the Q2 results? Are you on track with this initiative? What does the progress look like? Additionally, when this investment is fully realized, considering the various channels within your direct-to-consumer business, how should we expect to assess the incremental margin that will result from it?

Sure. It was starting to hit in the second quarter, but certainly not all of it, and I'll give a little bit more context on that. In the first quarter, we weren't public for the entire quarter, so from an insurance perspective, those costs weren't fully baked in the first quarter. They're now fully baked in the second quarter and those costs will be the same and be ongoing. When you think about it compared to when we were a private company, about $4 million more than we were back when we were private. The other costs that you didn't have in the first quarter started to hit in the second quarter were some of the product development costs and some of the initial Big Bunny costs that we were starting to layer in. Some of this other brand development stuff that we've done as well, that has started to hit in the second quarter and will ramp up a bit more in the third and fourth quarter. We’ve started to implement some of these costs. When you think about the licensing and ongoing subscription costs that we'll have, those will come more clearly into the view as you hit kind of the fourth quarter and then perhaps end of the first quarter as well next year. It's going to continue to build over time, but I wanted to bucket this as a way to think through the incremental cost that we're layering on to the business. In terms of how this transitions over time, you're going to have what I'll say is a temporary impact to margin, because you're layering on new technology on top of whatever existing systems and processes you have and you're going to have to roll that off over time. In a way, you're being hit twice in the near term and then you can roll off those older legacy systems and roll off those costs. Similarly, we're launching new brands and building out new products right now. Those are, call it, one-time or start-up costs in nature. Going forward, it will just be around the inventory buying and the revenue that we expect to generate from that. I do think that these costs, you're putting on more costs in the near term, and we expect that the revenue would follow from that, and you get operating leverage out of this over the longer term. In the near term, it does have some impact on margin because you're layering on extra costs. But from the synergies we expect to generate from combining all of these platforms from our acquisitions, getting more efficient, we think all of those things will return a very positive ROI for us. The other thing in terms of costs that we're also ramping up; we have regulatory and compliance costs around SOX compliance and the like. Those costs really didn't start so much in the second quarter and will start ramping in the third and fourth quarters. You should see all of this ramp as the year progresses.

Okay. For my last question, I’d like to discuss playboy.com. I know there are many other aspects of the DTC business to consider, but do you have plans to provide more information about the size of that specific website as it becomes increasingly significant? Are we at a point where you can share a figure, or at least help us understand how large of a part it plays in the DTC business? That’s all I have.

Yes. As we continue to scale the businesses, especially direct-to-consumer, giving more transparency around the components and the growth drivers of that is important. If you think about playboy.com, it really wasn't much of a commerce destination historically. People were going there for content and we've really transitioned that over the last year into becoming a commerce destination. It's driving quite impressive growth off of a small base, but that base is getting bigger and bigger. I don't think we're ready right now to start breaking that out in any level of granularity. But as we continue to scale it, we can certainly give some more guidance or thoughts around how we think of the contribution there. When you do look at the growth of direct-to-consumer, playboy.com is playing a key part of that, as is the growth we're seeing at Lovers and others as well. I don't know, Ben, anything else or any concluding remarks before we wrap up because I think we are out of time?

Yes, George, just really quickly. What we're really impressed by is the AOV growth there. Also, if you look at the number of customer growth — historically, Playboy was a content site. It's now a shopping site. As we continue to build that and integrate what Rachel talked about with blockchain and NFTs into that membership and into our ecosystem, we’re really encouraged by what that has. Overall, we're thrilled with the quarter, especially given the challenges we face with COVID. We're really excited by the prospects we have moving forward. What Rachel alluded to, we'll be talking more about it in the coming months with the membership around blockchain and other fees and then what we're seeing with the premium lingerie collection, beauty products, etc., as we move into the fourth quarter and next year.

That's all the time we've got today. Thanks everyone for joining the call, and we look forward to reconnecting next quarter.

And this concludes today's conference call. Thank you for participating. You may now disconnect.