Naked Brand Group (NASDAQ:NAKD) stock has left its shareholders feeling a stiff chill. Since 2015, adjusting for reverse splits, NAKD stock has plummeted from $2,000 per share to just 7 cents today. That’s a greater than 99.9% wipeout of value.
After this sort of plunge, you might think that there’d be value, or at least the prospect of a technical bounce. But in the case of Naked Brand Group, there’s little reason to suspect that the underlying trend will change.
This is a massively unprofitable company that got hit by a pandemic that it could ill afford to deal with. Now, with its balance sheet in desperate straits, Naked must sell stock to fund its day-to-day expenses. As long as that continues, shares will continue to face severe pressure.
A Downward Spiral
It’s not too unusual when investors lose money betting on a penny stock. What is surprising with Naked Brands, however, is the speed with which everything has come unraveled. For example, in September I explained why it wasn’t prudent to bet on a comeback for Naked. Just since that article was published, NAKD stock has plunged from 20 cents to 7 cents per share. That’s a more than 60% loss in two months.
And the underlying cause, Naked Brand’s tattered balance sheet, hasn’t improved significantly. Naked will continue to have to sell stock to the public to cover its operating losses. And with the retail business already steeply unprofitable prior to this year, its outlook has only worsened with the pandemic.
This isn’t just a matter of waiting until the economy recovers. It’s unclear that Naked had a viable business model even if the economy were firing all on cylinders. Naked certainly isn’t built to deal with the current situation.
Shareholders Are Getting Crushed On All Fronts
Incredibly, as if shareholders hadn’t suffered enough, Naked Brand Group launched another stock offering last month. And get this, the proceeds aren’t even going to the company. Rather, Naked is offering 47 million shares of its existing stock to the public so that existing shareholders can get out of their positions. This is in addition to its at-the-money offering of new shares to the public. With Naked furiously rushing to sell shares to the public, is it any wonder why the share price is collapsing?
In any case, the market hasn’t received this news kindly; NAKD stock has been tumbling since the filing came out. If you read the prospectus for this 47 million share offering, it’s not hard to see why folks are running for the exits.
Among other problems, Naked warns that it may be delisted from the Nasdaq stock exchange by the end of November. In fact, under normal rules, it would already be off the exchange. It’s only lasted this long because companies received extra time to get back in compliance with listing standards thanks to the coronavirus.
Yes, the company did recently issue an update that it had regained one tenet of listing compliance. That is that Naked now has more than $2.5 million in shareholder equity after issuing more stock. However, its share price is still far short of the $1 per share level to remain on the stock exchange. Thus, it needs another reverse split or something to regain adequacy on that front.
And don’t count on the company’s equity holding over the $2.5 million figure all that long either. Recall that Naked lost $17 million last year and that was before the coronavirus. The red ink can get even worse.
NAKD Stock Verdict
Naked Brand’s management can say that Covid-19 is responsible for the current mess. And that’s true to a certain extent. The company had to close some of its retail stores for an extended period in response to the virus and that didn’t help matters.
However, the company’s problems were apparent long before the pandemic spread around the world. For the last full year of operations, for example, Naked lost $17 million on revenues of just $59 million. Disturbingly, that revenue figure had plunged 22% from the prior year.
As you can see, pandemic or no pandemic, this was a business that was trending rapidly in the wrong direction. Now, with the virus, existing shareholders dumping their stakes, and no signs of any improvement on the horizon, NAKD stock is an obvious avoid for the foreseeable future.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.