Don’t Blame the Pandemic For the Problems With Naked Brands

Whenever I’m asked to write about a troubled penny stock like Naked Brands (NASDAQ:NAKD), I immediately look for breaking news. But in the case of NAKD stock, there’s not much to see. Muslim Farooque recently wrote that the company was no longer under an imminent delisting threat. But other than that, there doesn’t appear to be anything new with the company.

a man and woman wear plain white underclothes from Naked Brand (NAKD)
Source: Shutterstock

And in this case no news is not good news. The company’s stock is down over 95% for the year. And I suppose it’s easy to blame that on the Covid-19 pandemic. The pandemic is hitting Naked Brands particularly hard because New Zealand and Australia have each taken aggressive measures (some would call them draconian) to mitigate the spread of the virus. And even with restrictions beginning to ease, there’s no telling what this will mean for the reopening of the company’s brick-and-mortar stores.

However I think this narrative ignores a bigger problem with Naked Brands. NAKD stock had dropped 74% in the two months prior to the pandemic. And that was just another leg down in what has been a series of drops.

Just two years ago at the time of this writing, NAKD stock was trading at $140. That was November 2, 2018. Within a year, the stock was down to $4.07. And consider that around that same date in 2017, the company’s stock was trading at $625 per share. This is massive deterioration that suggests significant structural problems.

Consumers Aren’t Buying Luxury Undergarments

I wrote back in July that Naked Brands was relying on a strategy of getting higher margins with less revenue. It doesn’t appear to be working. The company was late to adopt the e-commerce model. As a result, although it has an e-commerce presence, the company is finding it hard to generate sales.

And the company was forced to sell off its Naked brand to avoid insolvency. So the company is going to have to forge ahead without its namesake brand. And as Josh Enomoto wrote, right now the world is devoid of romance, which means new lingerie is not a priority.

And as Farooque pointed out, Statista Research forecasts the intimate apparel market to be valued at $194 billion by 2023. This is not a niche market and Naked Brands has many competitors. All of which creates a bleak outlook for NAKD stock.

The Company Is in Deep Financial Trouble

The Australian-based company is not bound by U.S. securities exchange laws. And it appears that Naked Brands is taking full advantage of that. The company hasn’t filed an earnings report since December 2018. However, I did look at the company’s most recent annual report that it filed in May. And the news was not good. Here’s something from it that investors need to strongly consider.

We currently have substantial indebtedness … If we are unable to obtain additional financing or our cash flow from operations declines, we may be unable to service or refinance our current debt. If we are unable to service or refinance our current debt, we may not be able to continue as a viable entity, in which case you may lose your entire investment. Any additional debt we incur in the future could intensify this risk.

It doesn’t get any clearer than that. And even if Naked Brands can refinance their current debt, it feels like the company is just kicking the can down the road.

NAKD Stock is a Trade And Nothing More

After seeing a fairly passionate group of traders on Stocktwits discussing a potentially bullish move for NAKD stock, I checked the chart. Sure enough, since the delisting threat passed, traders are taking a spin on a cheap stock. And as I wrote in the summer, day traders may be able to make money with an ultra-cheap stock.

Have at it, I say. Because right now Naked Brands is just a gamble. And if you’re lucky, you’ll avoid being the greater fool. But it’s not a stock to trade with serious money.

On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.

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