In the world of penny stocks, you have a bunch of high-risk, high-reward stocks. Some of those penny stocks are worth the risk, since there is a visible pathway for a brighter future and multi-bagger returns. For most of them, though, there is no visible pathway to a brighter future or multi-bagger returns, and as such, they should be avoided.One penny stock which should be avoided for the foreseeable future is Naked Brands (NASDAQ:NAKD). Naked Brands is an intimate apparel company with a diverse portfolio of men’s and women’s underwear brands. But those brands aren’t selling that well, the company has run up big losses in the past few years, and the NAKD stock price presently trades hands around 4 cents — versus a $1.20 price tag a year ago.
Why should investors steer clear of NAKD stock? Because there is no clear and convincing pathway here for the company to strike a profit. Without profits, the stock may as well be worthless.
As such, I think it’s best to avoid NAKD stock.
Naked Brands Is Struggling
NAKD stock is trading hands at four cents for a reason. In a nutshell, Naked Brands owns a bunch of men’s and women’s intimate apparel brands no one wants to wear. These brands include various Heidi Klum brands, Hickory, Bendon, and others — and they simply cannot compete in the crowded intimates marketplace which is dominated by L Brands (NYSE:LB), American Eagle (NYSE:AEO), Hanesbrands (NYSE:HBI), and many, many more.
Last year, Naked Brands’ sales dropped 15% year-over-year, against the backdrop of a U.S. retail sales market that was growing at a steady 3-4% clip.
Worse, there’s no clear reason why this sales decline will stop anytime soon. The company is trying to lean itself up, divest some brands, and focus on direct-to-consumer growth. All those sound like great ideas. But will they actually reinvigorate sales growth? Probably not. The writing appears to be on the wall here. Consumers don’t like Naked’s intimates brands, and so long as competitors keep giving consumers what they want, there likely won’t be a demand bounce anytime soon.
Worst of all, Naked Brands operates at just 30-35% gross margins on a tiny revenue base. That doesn’t give the company much gross profit from which to produce a net profit. Operating expenses have consistently been larger than gross profits, and NAKD has consistently printed a net loss.
NAKD Can’t Strike a Profit
The big problem with NAKD stock is that, without renewed sales growth, the numbers imply that Naked Brands won’t strike a profit.
Revenues measured about $77 million in fiscal 2019. Let’s assume that, as opposed to dropping more, sales stabilize in this $75 million range. Let’s also assume optimistically that steady demand drivers drive margin improvements, and gross margins hit 35%. That gives Naked Brands about $26 million in gross profits.
Operating expenses at Naked Brands have been running north of $50 million per year. Sure, management is hyper-focused on cost-cutting and leveraging a direct-to-consumer pivot to cut fat from the operating model. Still, the company would have to cut opex by more than half in order for $26 million in gross profit to be enough to produce a net profit.
The only way this company does produce a profit is if revenues roar higher, gross margins move towards 35%, and operating expenses drop significantly. It’s very unlikely that all three of these things happen over the next few years. As such, it’s equally unlikely that NAKD stock rebounds.
Bottom Line on Naked Brand Stock
NAKD stock is a penny stock for a reason, and it’s not a good one. The likelihood things turnaround for the company is small. As such, for the time being, steer clear of NAKD stock.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.