If you are a gambler, or even someone who is prepared to take calculated risks, buying Naked Brand Group (NASDAQ:NAKD) stock might appeal to you. It’s a long shot, for sure.
For one, NAKD stock is a penny stock, with all the risks that come with those kinds of tiny, illiquid, and often untransparent stocks. NAKD stock trades for just 19 cents per share. By the way, this is after the company did a 100-for-1 reverse stock split on Dec. 20, 2019, designed to jack up the stock price.
In fact, the company only just recently regained compliance to keep its shares listed on the Nasdaq stock exchange. It had fallen below the minimum $2.5 million shareholders’ equity level.
Moreover, Naked Brands is also a foreign company, based in Auckland, New Zealand. In fact, when reading their financial reports be careful to not make the typical mistake of assuming their dollar figures are U.S. dollars. Everything in their reports is in New Zealand dollars (NZD), currently at about 70% of the US dollar.
Hard Times in Retail
Naked Brands sells lingerie items, mainly under the Bendon brand in Australia and New Zealand. Most of its sales are now online since it had 60 Bendon stores in Australia and New Zealand that only recently re-opened. It also owns several other brands, including Pleasure State, Davenport, Lovable, Fayreform, VaVoom, Evollove, and Hickory.
The company also closed all its U.S. stores, although it sells lingerie online in the U.S., Australia, and New Zealand. The company has exclusive online licenses with the Frederick’s of Hollywood and Heidi Klum brands, but the latter license is now canceled.
Moreover, even though the company is the Naked Brand Group, it sold the trademark in January 2020 for the “Naked” and “NKD” brands to raise cash. It’s not clear yet if the company will have to change its name.
On Nov. 10, the company filed a Form 6-K with the SEC that detailed its struggle to stay alive as of the first half ending July 31, 2020. Red ink is everywhere. People just simply aren’t in the mood to buy lingerie, at least like they used to.
Financials Suck Now But Could Turn Around
As of July 31, the company lost NZD 18.5 million (about $12.95 million). It also reported negative EBITDA (earnings before interest, taxes, depreciation, and amortization) of NZD 9.76 million ($6.83 million).
But, the good news is the company seems to be “right-sizing.” It has dramatically cut costs, applied for government aid, converted debt into shares and raised equity. In fact, for the six months to July 31, it reported a small positive cash flow from operations (CFFO) and had NZ 3.8 million in cash.
Moreover, the company signed an equity raise agreement with Maxim Group on Oct. 20 that will allow it to raise up to $50 million.
That is both good news and bad. The capital raise will severely dilute existing shareholders unless NAKD stock starts to rise. But the good news is that raising more cash will allow the company to survive until things return to normal.
A Simple Forecast
The theory, if you are a gambler, is that a turnaround will occur. People might start buying intimate apparel and swimwear once again. Naked Brands will be right-sized to make good profits. The dilution won’t matter.
Let’s just do a simple forecast.
Right now there are 41.6 million ordinary shares outstanding. Let’s assume it sells $10 million of equity at 19 cents per share. That would more than double the shares outstanding by 50 million. Let’s assume 19 million warrants or so become “in-the-money” as NAKD stock rises.
Therefore, there will be 111 million shares outstanding. If Naked Brand Group makes NZD 3 million in profits (U.S. $2.1 million) earnings per share (EPS) will be 1.9 cents. That works out to 1.33 cents in U.S. dollars.
So at the price of U.S. 19 cents, the EPS of 1.33 cents implies it trades at nearly 14 times forecast earnings.
Naked Brands will likely do another 100 for 1 reverse split before May 23, when it must get the price above $1. Therefore, with NAKD stock at $19 per share and $1.33 EPS the stock might seem a bargain.
But if the company only raises $5 million, the dilution is less (85.6 million shares), and effectively NKD stock is at just 7.8 times earnings.
Gambling Odds With NAKD Stock
Depending on how much the company raises, how quickly sales turnaround, and how much dilution occurs, NAKD stock could double or triple from here.
Moreover, if Naked Group completes a reverse stock split, NAKD stock might seem like a normal retail play. For those willing to gamble here is how the odds look.
Let’s say there is a 49% chance of a stock triple from here and a 51% chance the stock stays flat. Those odds (not the leverage) are typical of what you get with craps and blackjack versus the house edge.
The net expected return is a double in NAKD stock (i.e., 49% x 300% plus 51% x 100% = 198%). That is a great calculated return. But you could lose it all, since there is a huge risk the company could go under as well.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.