Positioning for more Toys R Us fallout to be had
- We will continue to hold the GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000)that closed last night at 0.70.
- We will continue to hold the Mattel (MAT) April 2018 13.00 puts (MAT180420P00013000) that closed last night at 0.75.We are boosting our stop loss on the calls to 0.55 from 0.30.
- We are issuing a Sell rating and instilling a short position in Funko (FNKO) shares and setting a protective buy-stop order at $10.00.
- We are maintaining our Sell rating and short position in Target (TGT) shares.
While the market’s eyes were waiting for the Fed’s March monetary policy meeting, which concluded yesterday afternoon, it’s been a busy week for the holdings on the Tematica Options+ Select List. Lenore Hawkins and I tackled the key points to be had from the Fed meeting fallout here, so let’s cut to the quick and move on to the week’s happenings and add a new short position to the Tematica Options+ Select List.
Dropbox boosts IPO share price
One of the reasons we added call option position in GSV Capital (GSV) was the company’s investment in cloud storage company Dropbox, which is set to price its IPO later this week. As we get closer to that event, it’s being reported that reception for the offering is strong and that has led the company to boost its offering price by $2 to the $18-$20 range from the prior $16 to $18. This is a positive for GSV’s investment portfolio as it increases its holdings in Dropbox by more than 11%, and that paves the way for a step up in GSV’s net asset value per share. In short, that’s a positive for our GSV calls, which closed last night up 25% from our initial buy-in price of 0.56 in mid-January.
Soon after Dropbox prices its IPO, we’ll get more details on the Spotify offering ahead of its first trade as a public company in early April. Given the shift toward digital streaming services like Spotify that are part of the intersection of our Connected Society and Content is King investing themes, and Spotify’s pure-play status on streaming music we suspect a favorable reception that should also help elevate GSV’s net asset value per share.
- We will continue to hold the GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000)that closed last night at 0.70.
Sticking with Mattel puts
Last week we talked about the fallout to be had with the bankruptcy and eventual liquidation of Toy R Us on its competitors as well as key suppliers such as Mattel (MAT). That led us to add a put position on Mattel shares and so our short thesis on that toy company is panning out rather well as our Mattel (MAT) April 2018 13.00 put (MAT180420P00013000)position has risen more than 35%, closing last night at 0.75.
Given the move, let’s look to minimize any downside to be had by boosting our stop loss to 0.55, which is in line with our entry point for the puts, from 0.30. As we do this, there will likely be some question as to whether our bearish conviction has abated but with Toys ‘R’ Us asking the U.S. Bankruptcy Court for approval to stop paying all of its suppliers while it tries to line up buyers for its international business ahead of a planned liquidation of its U.S. operations my answer is a firm “no.”
- We will continue to hold the Mattel (MAT) April 2018 13.00 puts (MAT180420P00013000)that closed last night at 0.75.
- We are boosting our stop loss on the calls to 0.55 from 0.30.
Funko shares – We’re not falling in love with this collectibles company
One other company that could come under pressure is pop culture consumer products company Funko (FNKO). For those unfamiliar with the company, Funko designs, sources and distributes licensed pop culture products across multiple categories, including vinyl figures, action toys, plush, apparel, housewares and accessories for consumers who seek tangible ways to connect with their favorite pop culture brands and characters.
FNKO shares became public in November 2017 at $12 per share and quickly fell to the trading range between $6-$10. As one might expect the company simply knocked the cover off the earnings ball for its debut quarter as a newly public company as well as the follow up one. From our perspective, reading the tea leaves of pop culture can be a challenge given the arguably fickle nature of consumers. As we pointed out last week, toy sales associated with Disney’s (DIS) most recent Star Wars film fell short of expectations. This could make for a volatile business quarter to quarter for Funko, especially if its content partners have a dry content spell. Case in point, last year Disney had a dry spell with its film business between June and November of last year.
Digging into the company’s business we find its licensing relationships include a number of well-established content providers, such as Disney, HBO, LucasFilm, Blizzard Entertainment (ATVI), Marvel, the National Football League and Warner Brothers (TWX). On a positive note, no one licensee accounted for more than 10% of Funko’s revenue last year.
In terms of its revenue, Funko’s products break down into two categories – Figures (81% of 4Q 2017 sales), which includes ones that celebrate pop culture icons in the form of stylized vinyl, bobble heads, blind-packed miniatures and action figures, and Other (19% of 4Q 2017 sales) that is primarily plush products. These products are sold across a variety of retail customers that include Amazon (AMZN), Barnes & Noble (BKS), Entertainment Earth, GameStop (GME), Hot Topic, Target (TGT) and Walmart (WMT) in the United States, and Smyths Toys and Tesco internationally. As noted in the company’s recently filed 10-K, Hot Topic was roughly 9% of sales in 2017 followed by GameStop and Underground Toys at 8% each. Keeping in mind our Connected Society investment theme and the shift to digital commerce, having these three as key customers is not exactly a positive.
And this brings us full circle to the Toys R Us liquidation. While Funko’s list of top customers in its 10-K didn’t mention Toys R Us, the reality is ToysRUs.comlists over 600 different Funko products, 90 of which are exclusive to Toys R Us. This means that while Toys R Us may not have been one of Funko’s larger customers, it was still a customer and that is bound to have an impact on Funko’s business in near-term. Given the timing, it looks to fall in the seasonally weakest part of the year for Funko – the first half of the calendar year. Moreover, we have yet to see any of the 8 analysts covering FNKO shares adjust their 2018 EPS forecasts in the last 30 days to account for the Toys R Us factor.
Toys ‘R’ Us Inc on Thursday asked the U.S. Bankruptcy Court for approval to stop paying all of its suppliers while it tries to line up buyers for its international business ahead of a planned liquidation of its U.S. operations.
Aside from the Toys R Us related fall out, given the continued increased in consumer credit card debt, which has now eclipsed $1 trillion, is likely to weigh on discretionary purchases, particularly in rising rate environment that thus far has been characterized by tepid wage growth. If consumers look to cut back spending, we could see the dollars allocated to collectibles come under some pressure.
For those avid collectible fans, we are also seeing the collectibles market get in tune with our Connected Society investing theme as it leverages Blockchain, one aspect of our Disruptive Technologies investing theme. Last night it was reported that rise of virtual collectible company CryptoKitties is on the receiving end of a $12 million funding round led by Andreessen Horowitz and Union Square Ventures. Currently, CrytoKitties offers virtual collectible kitten game built on top of the Ethereum Blockchain and its widely expected the company will use proceeds from this investment round to expand into other collectibles. While this may sound somewhat far-fetched, let’s not forget the shift we have seen in the kinds of toys being played with by children of all ages these days compared to just a few years ago.
As if those concerns weren’t enough, FNKO shares are also staring down the pending IPO lock up expiration that lands on May 1, 2018.
From an options perspective, the puts associated with FNKO shares are very thin in terms of trading volume and this means to capitalize on the expected challenges to be had at the company we’ll enact a short position in FNKO shares. Understanding that even though we can be right on the thesis, but a market rally can move the shorted shares in the wrong direction, we’ll set a buy-stop order at $10.00.
- We are issuing a Sell rating and instilling a short position in Funko (FNKO) shares and setting a protective buy-stop order at $10.00.
Keeping our Target short position in play
Given the Toys R Us fallout, ongoing challenges being faced by brick and mortar retail, and concerns over consumers ability to spend as described above, I’m keeping the Target (TGT) short position in play on the Tematica Options+ Select List.
