Don’t Be Left Exposed to Naked Brands Stock

Take profits if you have them because NAKD stock's pop is likely to fade quickly

Don't Be Left Exposed to NAKD Stock

Source: Shutterstock

Unlike many low-priced stocks that surge on news, Naked Brands Group (NASDAQ:NAKD) has a large business. For the 12 months ending January 2018, Naked Brands racked up ~$90 million in revenues.

Unfortunately, like all too many low-priced stocks, NAKD stock is likely to slump as the initial hype fades. In Wednesday’s trading, traders dumped NAKD stock, and losses could continue.

That’s because while Naked Brands brings in plenty of revenues, its costs are out of control. The company has consistently lost major sums of money over the years, and if anything, the rate of losses has been trending in the wrong direction. While NAKD stock isn’t a typical penny play, its business model still leaves much to be desired.

A Pattern of Losses

Naked Brands recently came into its present being via a merger. Naked, itself, got its big break in 2009. It appeared on Dragon’s Den, a Canadian equivalent to Shark Tank where businesses pitch themselves to venture capitalist investors. As a result of that publicity, Naked’s business took off. The company brought in more prominent management and moved to New York.

Seeking more publicity and easier access to capital markets, last year, Naked decided to merge with New Zealand’s Bendon Group. A new holding company put the two apparel makers together. The combined entity became Naked Brands, trading as NAKD stock on the NASDAQ.

It’s not clear that this match will bring prosperity for shareholders, though. Bendon consistently lost large sums of money in operating its business. For full-year 2015, the company lost 13 million, with that growing to 21 million in 2016, and 37 million of losses for the 12 months ending in January 2018 (figures in New Zealand dollars).

And, in the most recent year, Bendon’s revenues dropped from 152 million to 131 million. All that while its cost of goods sold actually increased. That’s not a good mix.

More Capital Needed

As the company’s most recent annual filing noted, it needs more money to pursue its business plan. And it likely won’t be coming from operations because, as noted, it consistently loses money. Naked Brands stated that it is:

“[L]argely dependent on outside capital to implement our business plan and support our operations. We anticipate for the foreseeable future that cash on hand and cash generated from operations will not be sufficient to meet our cash requirements, and that we will need to raise additional capital through investments to fund our operations and growth. We cannot assure you that we will be able to raise additional capital as needed on terms acceptable to us, if at all.”

I’m deeply skeptical that a company of such limited size and resources can manage a far-flung global business. The Naked division is rooted in North America, but the Bendon operations are primarily based in Australia and New Zealand.

As of January, for example, the company operated 36 stores in New Zealand. It’s hard to see what sort of synergies you get between that and Naked’s business on a faraway continent.

Additionally, the company is planning even more international expansion into yet more markets. Generally, it’s advisable to do well in one market and generate recurring cash flow before launching risky new ventures elsewhere.

New Deal Likely Won’t Change Much

NAKD stock briefly popped as much as 50% on Tuesday following the company’s latest news announcement. It stated that it has an agreement with CVS (NYSE:CVS) to distribute the Heidi Klum line of products in 4,000 stores.

It appears, from reading the company’s latest annual filing, that this was already in the works. The company reported that it was in 5,204 U.S. stores in January 2018, as opposed to just 1,595 stores in the U.S. in January 2017. Given that Bendon’s overall revenues dropped sharply in 2017, it would seem that the effects of these new store locations came on late in the year, if at all.

Naked’s press release states that: “Under the terms of the agreement, Bendon’s master licensed Heidi Klum Intimates Solutions line has been featured in over 4,000 CVS locations across the United States.”

Thus, it would seem that it was already in these stores, given the specific wording. In any case, it remains to be seen how much impact adding one product line to one retailer will have for the overall company.

It’s worth noting that in the prior year, the Heidi Klum collection earned a smaller margin than the company’s revenues as a whole, so the volume uptick would probably need to be sizable to move the overall bottom line. According to the latest filing, Heidi Klum products produced 25% of revenues but just 19% of gross margin. This isn’t necessarily Naked’s best business in terms of profitability.

Interestingly, the following day after the CVS press release, Naked filed a shelf offering to sell NAKD stock. The sales would be from existing shareholders, rather than new stock that would raise capital for the company.

As a result, a skeptic might look at Naked’s press release about the CVS partnership and suggest it was timed in coordination with the potential stock sale. Hence the focus on when exactly those 4,000 stores came online.

In any case, the shelf offering proposes to sell shares at $4.02/share. If this CVS deal were about to turn the company’s fortunes around, it’s unlikely that existing shareholders would be so eager to sell their stock at a major discount to the current $4.56 price.

Industry Struggles

Even if Naked Brands were making solid profits now, its outlook would still be cloudy. That’s because its industry is in a slump.

Take a look at Hanesbrands (NYSE:HBI). Hanesbrands manufactures and sells apparel brands including Champion, Hanes, Playtex and Wonderbra. HBI stock dropped 19% on Wednesday following a weak earnings report. It’s far from the first stinker for the company. Hanesbrands has lost nearly half its value since 2015.

While some of Hanes’ issues have been specific to the company, much has come from the retail apocalypse. Hanes relies on selling much of its inventory through its own stores.

As consumers increasingly move from malls and other physical locations to the internet, it makes it harder for the apparel makers such as Hanes to maintain their profit margins. Unless you have a strong direct-to-consumer e-commerce retail channel, like Nike (NYSE:NKE), it’s been a tough time for this sort of apparel company.

Hanesbrands isn’t the only one struggling. Another industry leader, L Brands (NYSE:LB), has gotten pounded in 2018. Since the holiday season last year, LB stock is down from $62 to $30. When investors don’t want to own industry leaders, it will be hard for money-losing smaller players, such as Naked, to attract much interest.

NAKD Stock Verdict

For now, NAKD stock seems like a clear and easy avoid. The stock jumped sharply on a press release relating to the CVS partnership that gives little in the way of financial detail. The fact that existing shareholders are eager to sell stock should be a major red flag. And the industry as a whole is facing difficulties. It’s not a good combination for Naked.

At the time of this writing, the author held no positions in the aforementioned securities.

Article printed from InvestorPlace Media,

©2020 InvestorPlace Media, LLC