Earnings Call Transcript - PLBY Q4 2020

Operator, Operator

Thank you for standing by. And welcome to the Fourth Quarter and Full Year 2020 Conference Call and Webcast for PLBY Group, Inc. The information discussed today is qualified in its 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 morning and the related Form 8-K can be found on PLBY Group’s website at http://www.plbygroup.com/investors. Today's call is also being webcast and a transcript will be posted to our website. Please also note that statements we make during this call that are not statements of historical facts constitute forward-looking statements that are subject to risk, uncertainties and other factors that could cause our actual results to differ from historical results and/or from our forecast, including those set forth in PLBY Group’s Form 8-K filed today and the exhibits thereto. For more information, please refer to the risk, uncertainties and other factors discussed in PLBY Group’s SEC filings. All cautionary statements that we make during this call are applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risk, uncertainties and other factors discussed in PLBY Group’s SEC filings. Do not place undue reliance on forward-looking statements, which we assume no responsibility for updating. Hosting today’s call are Ben Kohn, Chief Executive Officer; Rachel Webber, Chief Brand Officer and President of Corporate Strategy; and Lance Barton, Chief Financial Officer. I will now open the call to Ben Kohn. Ben, please go ahead.

Ben Kohn, CEO

Thank you, Operator. Good afternoon, everyone. It's a pleasure to be speaking with you on our first earnings call, following our listing on NASDAQ earlier this year. I want to start by thanking our employees and management team, who had an unbelievably difficult year. They not only had to enter new ways of working together, but conquered that while achieving major growth, growing revenues by 89% year-over-year. PLBY Group is a pleasure and leisure company, serving consumers around the world with products, services and experiences to help them look good, feel good, and have fun. Our flagship brand, Playboy, is one of the most iconic and valuable brands in the world. Simply speaking, Playboy is huge. Our massive global reach drives $3 billion of global consumer spend, with products sold in over 180 countries. We engage with millions of people every day across our own channels and social media, and our reach continues to grow with our built-in network of ambassadors. No brand gets noticed quite like the Rabbit Head, and in today's increasingly cluttered and fickle environment, Playboy has a special power to both stand out and to last. Our strong resonance with the next generation of consumers around the world sets us up for significant future growth and provides us with a platform that we believe can be synergistic to promote other owned brands and become the leading pleasure and leisure company. PLBY Group is focused on two key revenue models, direct-to-consumer sales and licensing sales. We focus on four product categories with growing multi-billion dollar global markets: Sexual Wellness, Style & Apparel, Gaming & Lifestyle, and Beauty & Grooming. We are still in the early stages of our business model transformation to own and operate within these key consumer product categories. We have seen great traction so far. With the over $100 million we raised to our recent business combination, we now have a robust balance sheet and the capital market currency to make thoughtful, educated and data-backed decisions to accelerate that growth moving forward, both organically and through acquisitions. Our growth plan is comprised of three areas of focus. First, accelerating the growth of our US direct sales business. In 2020, we saw phenomenal growth across our direct sales platforms and believe we are only just getting started. To capitalize on this massive opportunity and momentum, we recently brought on a new Chief Digital Officer, Kevin Diamond. Kevin joins us from Forever 21, where he ran a $700 million business. Prior to that, he co-founded HauteLook, which was acquired by Nordstrom. Kevin joins other research e-commerce and digital hires from global adaptive funds. In the short term, our direct sales efforts will be focused on the domestic market in the sexual wellness and style apparel categories. In the medium to long term, there are huge opportunities to own the relationship with customers internationally as well. For example, in China this year, Playboy branded products generated over $1 billion in sales on digital commerce platforms alone. But based on existing licensing agreements today, we booked less than $40 million in total revenue. Therefore, as we continue to transform our model, the potential upside is enormous. In 2021, we will continue to evolve our hero website playboy.com into a lifestyle shopping experience and to expand our own product offerings. Our recent acquisition of Lovers brings with it strong private labeling, product development and merchandising expertise, which we are already applying across categories to capture substantial margins and to expand consumer lifetime value. We will continue to unlock the significant value we see in our network of digital commerce marketplaces, including Playboy, Yandy, and Lovers Destinations, by cross-selling products to our consumers and by using our new data science practice to increase customer lifetime value. Our 2020 test runs of Playboy branded lingerie and costume collections that were cross-sold across channels were very encouraging and helped inform this year's merchandising cross-channel strategy, as well as new growth initiatives. We also started selling licensed streetwear products on our website in late 2020 for the first time. This is just the beginning of our strategy to capture more of the economics of the huge consumer spend on our apparel offerings. Our streetwear offerings have been growing rapidly since 2018. In 2020, our two biggest streetwear partnerships with Pac Sun and Missguided drove more than $100 million in sales. We're excited about this consumer response. However, these licensing models traditionally only generate $0.05 or $0.06 on the dollar for us and don't allow us to build a direct consumer relationship. In 2021, we're making investments aimed at capturing $0.10 on the dollar by building out our in-house design and production teams and taking back the influencer drop operation Playboy Labs to be managed internally as an owned and operated consumer product line. Our second area of focus is strategically expanding our licensing partnerships and targeted categories and regions. Licensing is a tremendous revenue model that provides stable and predictable cash flows. Global diversification and consumer data insights can help inform our owned and operated business development strategies, including our future product roadmap for direct sales. Playboy is already in the top 20 most licensed brands in the world and yet still in 2020, we achieved 20% year-over-year growth, and we see big potential ahead. A few highlights in China, despite the challenges of COVID, the brand performed incredibly well with an uptick in digital spending as consumers spent more than $1 billion in e-commerce sales alone. Part of our China e-commerce strategy involves working hand-in-hand with major e-commerce platforms to enforce our trademarks and capture unauthorized sales. Similar to how we've expanded our addressable market in the US and UK with female customers, we worked with three key influencers in the Chinese fashion industry to launch collaborative lines of women's apparel and accessories, serving as the foundation for us to continue our push into the women's market. We see big growth potential going forward to expand our additional product categories for men such as men's skincare and grooming and to continue to serve a new generation of both male and female consumers with our apparel and fashion lines. In India, we recently announced a partnership with Jay Jay Iconic Brands to adapt our existing streetwear success to meet young Indian consumers, slowing demand for streetwear fashion. We believe India could be a significant contributor to our revenue in the years ahead across all of our core product categories. In gaming, we are focused on expanding our licensing business, having cleaned up significant rights in the category in recent years. In addition to our existing partnerships with micro gaming, Scientific Games and Caesars, we have recently signed new deals to launch poker rooms in Texas and to roll out real money electronic table games with Interblock. We believe there are significant opportunities to expand gaming activities in iGaming, sports gambling, and social gaming. We continue to set up our licensing business to optimize across all territories and product categories by freeing up rights that had been previously encumbered. We are now looking for new partners to exploit those rights. Across all of these efforts, we will balance the trade off between owned and operated offerings and licensing to make the best long-term decisions that drive significant return on investment, revenue growth, and shareholder value. Which brings me to our third area of focus, emerging growth opportunities. Although we have the core business that is growing and highly profitable, we believe there are emerging opportunities to use our capital to accelerate our growth even faster. We are prioritizing new business development initiatives based on consumer insights weekly from our direct-to-consumer and licensing businesses, with a focus on expanding customer lifetime value. These are initiatives that should generate significant revenue over three to five-year time horizons. The return will not be overnight, but we would be remiss not to make the investments today to drive such significant future growth. The driving force of this new business development strategy is to power our flagship brand. I'd like to hand the call over for a few minutes to our Chief Brand Officer and President of Corporate Strategy, Rachel Webber, to share a bit more detail.

Rachel Webber, Chief Brand Officer and President of Corporate Strategy

Thank you, Ben. It's such an exciting time at PLBY Group. Over this past year, we've continued to see powerful Playboy brand affection promoted by influencers and the creative community. This has translated to strong sales, particularly with Gen Z and millennial consumers. We're particularly proud of our break the internet moments, including our first digital cover drop with Bad Bunny, which sparked crucial conversations on masculinity today. Our recent International Women's Day partnership with Lana Rhoades, Ellen von Unwerth, and Lynsey Addario, and the work we did with our Playmate community throughout the year to raise awareness for gender and racial equality and body positivity is also thrilling to see, along with the organic influencer promotion for the Playboy brand. From Megan Thee Stallion showing off her Playboy nails to her over 20 million followers, to LaLa Anthony paying homage to the classic bunny suit, to many of the biggest TikTok stars wearing their Playboy streetwear in their dance videos. The key thing that we're working on today is turning our Playboy franchises and themes into huge product lines in contemporary marketing platforms unto themselves. Based on the considerable success we've seen with our tests of Playboy lingerie topical collections on Yandy, we are now investing in building out a significantly more ambitious strategy for a lingerie line that will likely leverage our Playmate franchise. We are collaborating with the Beauty Incubator to accelerate bringing a new cosmetics line to market as well. As Ben mentioned, we are beginning to bring our streetwear business in-house, which includes the Playboy Labs franchise to invest in building an owned platform for influencer-driven product collaboration. We're particularly excited about the opportunity to leverage our Mansion and Big Bunny franchises to activate influencer communities and rollout related product lines. Lastly, we are sitting on almost 70 years of incredible and iconic art and photography. We are actively working on our non-fungible tokens or NFTs, and digital collectible strategy to enter the space in a thoughtful way, designed for long-term growth and community adoption. We are thrilled about the runway ahead and the wealth of opportunities afforded us by our priceless intellectual property. Before I hand the call back over to Ben, I want to touch on our important social impact work, which builds on Playboy’s long history of advocating for personal freedoms and equality. 2020 marked the 50th anniversary of the Playboy Foundation's groundbreaking commitments on cannabis-related social justice and cannabis law reform. We are very proud this past year to announce the reinvigoration of this work, including a grant and mentorship program to support Black and Brown cannabis entrepreneurs and partnerships with grassroots organizations, progressing crucial social justice efforts. Our ongoing social impact programs are core to our Playboy DNA, and in many ways, they are more relevant to our audiences and customers today than ever before. With that, I'll hand the call back over to Ben.

Ben Kohn, CEO

Thank you, Rachel. We are seeing more growth opportunities today than at any time since I took over as CEO. I believe this reflects the brand investments we have made that are clearly resonating with consumers globally. The opportunities we see include initiatives previously identified in our five-year projections, as well as new opportunities that, if successful, will allow us to accelerate and/or exceed the five-year numbers we provided historically. These opportunities require small upfront investments, but we believe they are warranted and can result in significant returns on investment. To recap these growth initiatives: first, continue to accelerate our direct sales growth in the U.S. through increased merchandising, cross-selling, and influencer marketing programs. Second, continue to develop our streetwear business in-house to capture 100% of the retail spend, as well as partner with influencers to launch capsule collections as the licensor. Third, expand our Sexual Wellness offerings with our private label products to increase margins and develop a permanent Playboy lingerie collection. Fourth, continue our growth path into India and women's apparel and lifestyle in China. Fifth, re-licensed rights we have taken back, including opportunities in the gaming space. Sixth, continue to grow our intellectual property portfolio by creating or re-launching new sub-brands that we can exploit domestically and license internationally. Seventh, invest in beauty, color cosmetics, and men's grooming. Eighth, launch our spirits in Asia hand-in-hand with our spirits joint venture partner. Ninth, expand our CBD-based product offerings internationally, as well as launch THC-based products domestically, should they become legal at the federal level, while leveraging our phenomenal archives in the NFT and other ancillary spaces. Lastly, on the acquisition front, we are pleased to announce that we completed the acquisition of Lovers, a leading omni-channel sexual wellness retailer, just a few weeks ago. The Lovers transaction is both financially compelling and perfectly aligned with our sexual wellness expansion plans. With the integration of the Lovers platform, we achieve immediate expanded reach for the cross-sell of some of Yandy's fastest-growing product lines, which we tested last year, as well as our newly launched Playboy Sexual Wellness intimacy offerings, such as their CBD-based products, condoms, and wipes. Lovers also brings us high-quality merchandising, private label product development capabilities, and highly experienced experiential retail leadership. In the sexual wellness category, product discovery and in-person retail education drive significant propensity to buy and consumer brand affinity. With a strong balance sheet and the publicly traded equity, we are actively searching for the most financially compelling acquisition opportunities that will enable us to accelerate our organic growth goals and product category leadership. Most importantly, I am surrounded by a world-class management team that combines the operational and corporate development experience necessary to execute on all of the immense opportunities in front of us. I am now excited to introduce you to the newest member of that senior management team, Lance Barton, our Chief Financial Officer.

Lance Barton, CFO

Thanks so much, Ben. Let me start by saying how thrilled I am to be here as PLBY Group's newly appointed CFO. I joined this team because I believe the huge organic reach of our flagship brands and 68 years of valuable and one-of-a-kind IP provides us with a multitude of revenue opportunities that we are just beginning to capture. I'm excited to partner with Ben and the fantastic executive team that he has assembled as we embark upon this journey. Now, let's dive into the numbers. We had an incredibly strong fourth quarter and full year 2020, driven by growth in both direct-to-consumer and licensing revenue. Total revenue in the fourth quarter increased 118% year-over-year to $46 million, while full-year revenue increased 89% to $148 million. Direct-to-consumer revenue grew from almost nothing in 2019 to $64 million last year, driven by significant growth in both sexual wellness and style and apparel. Licensing revenue grew 20% to $61 million last year, fueled by our global and diversified portfolio of licensing. Our net loss narrowed to $5 million in 2020, a year-over-year improvement of $18 million, and then the fourth quarter, our net loss was $0.5 million, reflecting a year-over-year improvement of $5 million. Adjusted EBITDA for the quarter was $7 million, and for the full year, it was $28 million. Fourth quarter EBITDA would have been higher, but we booked $2.2 million of out-of-period expenses to clean up historical sales tax and achievement liabilities, along with retention bonuses that should have been accrued for earlier in the year. Turning now to the balance sheet, as many of you are aware, our ending cash position in 2020 of $15 million does not reflect the closing of our business combination with Mountain Crest Acquisition Corp, which occurred on February 10th of this year, capitalizing PLBY Group with over $100 million of unrestricted cash, net of transaction expenses. Subsequently, our cash balance was reduced by $25 million on March 1st when we acquired Lovers. I also want to mention that we intend to initiate a process to refinance our existing debt shortly after earnings. We will work with our advisors to evaluate alternatives and will ultimately decide what to do based on available terms and market conditions. In terms of financial outlook, providing one in the current macro environment is difficult for many companies, and we are no exception. We continue to experience supply chain disruptions due to COVID that impact our revenue, as key ports still face challenges receiving products, resulting in us remaining out of stock on many items. Despite these uncertainties, we've had a great start to the year, so I want to provide some color on our outlook for the full year based on what we know today. We believe that we will exceed $200 million of revenue in 2021. This number raises our prior outlook for Playboy and includes revenue expected from Lovers starting in March, but does not include revenue from any emerging growth opportunities that we may choose to invest in. Similar to last year, we expect much of this growth to come from increased direct-to-consumer revenue in both Sexual Wellness and Style and Apparel. It's also important to note that as we continue to grow our direct sales, there will be increased seasonality in the business, with revenue building throughout the year and the fourth quarter typically being the strongest due to Halloween and the holiday shopping season. As Ben and Rachel described, we currently see more opportunities to invest in the business than ever before. We expect to take advantage of these opportunities by making near-term investments, which we believe will accelerate our path to exceeding our long-term targets of $300 million of revenue and $100 million of adjusted EBITDA. These discretionary investments, along with the increased costs of being a newly public company, may slightly impact the 2021 EBITDA outlook that was previously communicated. But that impact will ultimately depend on the cadence and number of opportunities that we decide to pursue this year. We will evaluate each investment based on its potential to accelerate long-term revenue and profit growth and look forward to updating you on the progress of our growth strategy as we move through the year. With that, I'll ask the operator to please open the line for questions.

Operator, Operator

Thank you. Our first question comes from George Kelly of Roth Capital Partners. Your line is open.

George Kelly, Analyst

Hi, everyone. Thank you for taking my questions and congratulations on a great quarter, well done. I have a few inquiries. First, I wanted to discuss your U.S. business. You mentioned a statistic about over $100 million in retail sales from two key partners in the U.S. That caught me off guard; it's quite a significant number. My question is, as you start to expand on your own e-commerce platforms like Playboy and Pleasure for All, how quickly do you anticipate those businesses to grow? Considering that $100 million, I'm curious about the product similarities. If you could provide any insights based on what you've experienced so far, I would appreciate any guidance to help manage my expectations.

Ben Kohn, CEO

Hey, George, it's Ben Kohn. Thanks for the question. So the products aren't dissimilar to things we have planned, including taking back Playboy Labs, which historically have been outsourced, which really transitions us into the licensor rather than the licensee. We've had really successful drops in the past year with Steve Aoki, et cetera. The opportunity in front of us reflects the consumer demand for the brand. You're right, the number with PacSun and Missguided for retail sales exceeded $100 million. That's up over 15 times since 2018. The challenge with the business model, and this is really where we're in the bottom half of the first top half of the second evolving it is in that deal, we only see $0.05 to $0.06 on the dollar. So if you think about the consumer spend versus what we're booking as revenue, the opportunity is absolutely huge to grow our revenue moving forward, where we can book $0.10 on the dollar. We believe, based on the product category that should translate to a very nice net margin somewhere in the 25% range, and we're excited. As far as the ramp on that, we just brought in Kevin Diamond, and we're very excited about him joining the team. He is continuing to build out the team underneath him. I think it will be an evolution. So it's not like we're getting rid of the other revenue overnight. We have partnerships with these brands that we think are great partners. Long term, we believe, not only domestically but internationally, given that $3 billion is spent, we look to capture a much larger percentage of that over time. That will not only increase our revenue growth, but also our EBITDA growth long-term.

George Kelly, Analyst

Okay, excellent. And then maybe just to sort of follow-up on that conversation. How quickly do you expect to launch into? I think you gave a bit of a timeline, but the first real push is in Sexual Wellness and Apparel. Should we start to see cosmetics later this year? What do you think the timing is on that?

Ben Kohn, CEO

Yeah. So obviously, our ramp that we're projecting internally today on Apparel is slow. However, if things work, we will exceed those targets. We'll talk more about that as the year proceeds. As for Cosmetics, we have signed a partnership with a beauty incubator. We see a massive opportunity to cross-sell products with Yandy and Lovers customers. Most likely, our first color cosmetics will launch at the beginning of 2022. There's a long lead time with this, but we believe it's a warranted investment.

George Kelly, Analyst

Okay, excellent. And then a separate topic on your international license business. Can you help me understand just the kind of normalized, if I just look over the next two to three years, in China, you're introducing – recently introduced women's apparel and you talked about e-commerce and growth in India? If you just sort of gave it a normalized growth rate, should this be kind of high single-digit revenue growth for the foreseeable future? Am I crazy saying that?

Lance Barton, CFO

Well, I think what we've talked about is in 2020, our licensing business grew 20%. Again, it's not linear growth. It will be a step function as we continue to accelerate our growth in international markets. But I would say, long-term, I'm a firm believer from a macro perspective in the India market. Our first product will be launching there in October with Jay Jay Iconic Brands right before the festival season. There are big opportunities in gaming, in the spirit sector, and craft beer, specifically, men's grooming and sexual wellness. In fact, we just parted ways with a small partner in India that was focused on lingerie and innerwear to take that back in-house. I think India will be a combination of owned and operated in licensing. We also see big opportunities in Brazil and Russia, as well as other places, including China, where one of the biggest categories is men's grooming, and we're not in that today.

George Kelly, Analyst

Okay.

Lance Barton, CFO

I’d just also add to that, you know, I think we've mentioned this before, but we've got $400 million of revenue contracted with us through 2029. Those numbers that we report don't even consider renewal rates on those contracts. Historically, we've had a 95% renewal rate on that. The nice thing is you've got stable cash flow coming from that. To the extent that we decide to, you know, obviously, we didn't demonstrate it over the last few years an ability to really grow that licensing stream, we can do that by expanding into more partnerships, or as Ben talked about, by bringing some things in-house, which could generate a multiple of that revenue and EBITDA for us.

George Kelly, Analyst

Okay, excellent. I have one last question about NFTs. I'm not an expert in this area, but could you share a bit more about your plans? I understand you have a large media library with magazines and covers. Are there other items that might be suitable for NFTs, and what do you own that you believe could make the most sense for potential NFT opportunities?

Ben Kohn, CEO

Sure. So George, I'll take this and then I want to turn it over to Rachel Webber to talk more about it. We’ve been looking at the NFT space for several months now. We’ve received multiple proposals for licensing, which we have passed on because we believe the long-term opportunity is huge. We are going to be launching here in the near term and Rachel will talk about that, with more announcements coming. It is not forecasted to contribute revenue today in our projections for the balance of this year, given that the NFT space is emerging and our presence in that space will be emerging. Let me turn it over to Rachel to talk more about our excitement around it.

Rachel Webber, Chief Brand Officer and President of Corporate Strategy

Great. Thanks, George, for the question. As you described, we're very excited by the NFT art space, in particular. We have this incredible art collection and our iconic archive of photography, alongside some of the world's most famous artists. We have a wealth of material. We also have a long history of partnering with artists to create new material, which will definitely be part of our plan. In addition, we see this as a long-term strategy for leveraging blockchain technology across categories. We plan to partner with talent relationships to create NFT ownable experiences. There’s also the opportunity to apply our streetwear to blockchain technology. Streetwear is something that consumers want to feel ownership over, making that part of our comprehensive plan. Lastly, the Playboy brand has this inherent sense of once-in-a-lifetime experiences, so there’s a way to pair that and turn performances into collections of experiences or things that we can leverage with blockchain and the gamified elements on top. As Ben described, we have some first announcements coming in the very near future, and we're planning this comprehensive long-term strategy.

Ben Kohn, CEO

Yeah. So George, I think we have an unbelievable archive spanning 68 years. There are about 5,000 pieces of art, magazine covers, and photography that are incredibly deep and rich. But it's also the relationships we've built over 68 years with artists; for example, LeRoy Neiman was on staff at Playboy, and we commissioned works with Andy Warhol. It is going to be a combination of leveraging the archives and art collection, commissioning and working with emerging artists for new works. This will give us great opportunities for NFTs and other digital collectibles with them.

George Kelly, Analyst

Okay, excellent. That's helpful. I'm going to hop in the queue. Thank you. Thanks for answering all my questions.

Ben Kohn, CEO

Thanks, George.

Operator, Operator

Thank you. Our next question comes from Alex Fuhrman of Craig-Hallum Capital. Your line is open.

Alex Fuhrman, Analyst

Great. Thanks very much for taking my question. Nice to speak with you all. It sounds like there are a ton of investment opportunities in front of you that you're looking at. I'd love to ask about a couple of them. In particular, emerging markets seems like a big opportunity just given how big the Playboy brand is in China. Can you talk a little bit more about your timeline and strategy to go after additional markets? It sounds like, Ben, you mentioned that we're going to see the first Playboy product in India in October; can that potentially be a significant business in 2022? Can you talk about what the ramp is going to look like there as well as maybe any other countries you're thinking about?

Ben Kohn, CEO

Yeah. Thanks, Alex. One of the reasons I took this job is how huge Playboy is and how valuable it is. I've spoken to this, but I believe that like the Nike swoosh, we are sitting on one of the most valuable pieces of IP that exists in the world. Not only do we sell product domestically, but we’re also seeing a 15x increase in our domestic product. Internationally, we sell product in 180 countries. In China, we are one of the largest men's fashion brands with 2,500 brick-and-mortar stores and 1,000 e-com stores. Historically, our focus has been on men's apparel; however, we just launched women's apparel. There are significant opportunities in men's grooming and other categories as well. In India, I believe long-term could match China's current size for us. It features the youngest consumer base in the world and is projected to become the largest consumer base as well. It can adopt a hybrid model as I mentioned before with both owned and operated, along with licensing. South America presents another great opportunity because of brand recognition, especially in Brazil, where we can enter the CBD and beauty markets. Russia presents a similar avenue of expansion. The unique aspect of this brand is the global awareness that opens many doors and presents a wealth of opportunities for future growth, allowing us to capitalize on existing spending and exponentially expand it. I'm optimistic about our prospects in India, and we now have a team dedicated and focusing on that market. The same applies to China, where we can continue to launch new products and services. There is also an opportunity in China because we've made significant investments in tracking our online sales, enabling us to identify and collect existing spend that is being underreported to us.

Alex Fuhrman, Analyst

Great. That's really helpful. Thanks, Ben. And then I also wanted to ask about Lovers. You've been in this business for a couple of weeks now. Have there been any surprises? Since you've owned the business, curious, what your thoughts are having had a more in-depth look under the hood? I know it's obviously early days right now, but as you look out, having this network of brick and mortar stores, what's the opportunity for Playboy-branded products from Yandy? Do you envision a pretty substantial overhaul of the current Lovers store, or is it going to be more tweaking around the edges? We'd love to hear more about your strategy there.

Ben Kohn, CEO

Yes, I think let's start with our M&A strategy. We have a robust pipeline of M&A opportunities. Both Lance and I, along with other team members, have considerable experience in M&A. One deals need to be financially compelling. I put on my private equity hat when analyzing these opportunities. However, one reason I left private equity to pursue this full time was the chance to realize synergies between companies. Deals can provide financial appeal but also require real synergies that can come from cost savings. Acceleration of our organic path is crucial, and we believe that exists at Lovers today. We tested bedroom accessories at Yandy last year, and we saw unbelievable traction with a minimal number of skews. We will actively market a complete assortment of Lovers products to our Yandy customer base. On the flip side, about 20% of Lovers' revenue comes from lingerie, which presents similar issues as we encountered at Yandy—with minimal skews. We are now able to take that full Yandy merchandising and market it to the Lovers audience while cross-selling across all of our e-commerce platforms. In the fourth quarter, for the first time, we sold Halloween costumes and lingerie under Playboy, which achieved impressive sales figures. The first capsule collection with Yandy sold out almost immediately, and the second collection performed well. We see that data as an opportunity to launch our own lingerie business under either the Playboy or Playmates brand, which we believe has immense global potential in the lingerie market with excellent margins. Our products will also be embedded in many Lovers stores, including our CBD products, condoms, wipes, etc. This integration will enhance product visibility and help grow sales, especially because 70% of Sexual Wellness store sales still stem from retail environments. This gives us greater insight into how to market products effectively and educate consumers. I envision evolving the Lovers storefronts, especially as Sexual Wellness has become mainstream in the past few years. This trend is evident in popular culture with various high-profile discussions about these products. We have a tremendous opportunity to merge the stores to drive additional growth. Barbara Cook, who is joining us as Lovers' CEO, has extensive experience in retail. We even see the potential for Playboy-branded experiential retail, whether on a permanent or pop-up basis. We believe we'll continue building brand awareness effectively through both of these channels.

Alex Fuhrman, Analyst

Great. That's really helpful. Thanks very much.

Operator, Operator

Thank you. Our next question comes from Austin Moldow of Canaccord. Your line is open.

Austin Moldow, Analyst

Hi. Thanks for taking my questions. Can you talk through the underlying drivers of that 20% licensing growth?

Ben Kohn, CEO

Yes. So Austin, it's Ben Kohn. How are you?

Austin Moldow, Analyst

Good.

Ben Kohn, CEO

The underlying growth was really broad-based. We signed a new licensing deal for kids’ products in China, which only benefited us minimally last year. Our apparel business in the U.S., which included PacSun and Missguided, performed very well, moving from roughly $6 million in 2018, to $29 million in 2019 and over $100 million last year. The way to view our licensing businesses is that it's very decentralized. We have contributions from all over the world. We've formed new gaming partnerships that haven't yielded immediate revenue, but will begin contributing this year as poker rooms and other projects come online. We've also identified numerous new licensable products we want to focus on.

Austin Moldow, Analyst

Great, thanks for that. Can you walk us through the puts and takes for near-term direct-to-consumer operating margins? What do you think that D2C operating margin could be long-term?

Ben Kohn, CEO

Yeah, look, in the near term, we're still ramping up. What is unique about this brand is our engagement with 50 million people daily. Unlike other brands that spend significantly on customer acquisition costs, we have a built-in audience. I'm really enthusiastic about what Kevin is going to do moving forward. Long-term, as we mentioned, we should be aiming for a 30% margin company-wide, depending on product category. For D2C, I would project that we would be in the 25% range. We also possess unique assets such as our art collection, leading to high-ticket opportunities in e-commerce that could further amplify those margins.

Austin Moldow, Analyst

Got it? And lastly, could you sort of refresh us on your relationship with Walmart and CVS as it pertains to your Sexual Wellness products?

Ben Kohn, CEO

Yeah, the motivation behind entering Walmart and CVS was about increasing awareness in the Sexual Wellness space. They're not major revenue generators for us, as margins are thin after retailer fees are covered. Strategically, it's beneficial for brand recognition, but our main focus remains on owned and operated and D2C efforts, where we can drive superior lifetime value. This is an important advantage in today's competitive landscape, where the Rabbit Head brand stands out. We need to keep investing in that brand, and we are starting to see results with our streetwear business growing significantly year-over-year, especially among Gen Z. We will continue to invest in the brand and our unique competitive advantage.

Austin Moldow, Analyst

Great. Thanks for the color.

Operator, Operator

Thank you. Our next question comes from Greg Pendy of Sidoti. Your line is open.

Greg Pendy, Analyst

Hey, guys, thanks for taking my questions. Just one on Lovers, it looks like you're acquiring 40 plus stores, while I don't believe Yandy had any store footprint. Just kind of wondering, what type of lease exposure are you taking on, in light of some of the trends that are going on in retail right now? And what is your appetite I guess, for further stores as you think about acquisitions going forward?

Ben Kohn, CEO

Look, first we’ll start on our appetite for expanding stores. The startup cost of expanding these stores is relatively minimal, about $100,000 or a couple of hundred thousand dollars. We view this as beneficial because they are omni-channel retailers, and the in-store experience can drive online sales too. One of the appealing aspects of Lovers is their strong in-store experience. We're not focused on expanding our footprint immediately, but it could be done with minimal capital outlay. Regarding lease exposure, I believe it's not substantial enough to warrant major concern; most of the leases are set to expire within four years. In fact, I think half of them will run out within two years or less.

Lance Barton, CFO

And just to add, Greg, I think I've said the leases expire over the next four years. In fact, half of them are scheduled to expire in two years or less.

Greg Pendy, Analyst

Okay. That makes sense. That's helpful. Thanks a lot.

Operator, Operator

Thank you. Ladies and gentlemen, that does conclude today's conference call. Thank you for participating. You may now disconnect.