The last time I wrote about Naked Brand Group (NASDAQ:NAKD) was on Jan. 8, 2020. At the time, NAKD stock was trading around $1.68.
My headline: Why Is Naked Brand Group Still a Public Company?
“In a nutshell, Naked Brand generated net sales of $27.6 million in the first six months of fiscal 2020, losing $10.1 million on an adjusted EBITDA basis. In terms of its financial strength, the company has an Altman Z-score of -3.19. Anything below 1.81 suggests it could go bankrupt within the next 24 months,” I wrote in early January.
“Needless to say, when it comes to the NAKD stock price, there’s little I can see that merits further investigation. In the meantime, here are two low-priced stocks worth taking a closer look.”
In case you’re curious, the two stocks under $2 that I chose were Aurora Cannabis (NYSE:ACB) and Hexo (NYSE:HEXO). They’re down 77.7% and 54.0%, respectively, through Nov. 2. As for NAKD, it’s down 95.4% in the same period.
So, despite the disastrous performance of both my picks, you still would have done better taking one of my dogs.
That’s not a good thing.
So Why Is NAKD Stock Still on Nasdaq?
On July 8, the Nasdaq stock exchange’s Listing Qualifications Department granted Naked Brand Group an extension to Nov. 10 to regain compliance with minimum stockholder’s equity requirement for continued listing.
As I write this, it’s a little over a week from the deadline. If it fails to comply, Nasdaq will delist its stock. Naked Brand can appeal the decision.
What many companies do to avoid delisting is to do a reverse split.
Hexo is one of those companies. On Oct. 30, InvestorPlace’s William White discussed 12 things investors needed to know about the cannabis company’s stock split. My colleague’s major point is that it would issue one share for every eight shares owned.
Based on its 64-cent share price, that would put it around $5.12, well over the $1 minimum 30-day average trading price required for ongoing listing on the New York Stock Exchange. Its shareholders will vote on the split in mid-December.
On the Nasdaq, things appear a little less stringent.
On Oct. 8, Naked Brand issued a press release stating that it was back in compliance with the stock exchange, based on Listing Rule 5550(b), which states it has met the minimum market capitalization requirement of $2.5 million. To meet this requirement, holders of many of the company’s convertible promissory notes had them converted into NAKD stock.
On Aug. 20, it entered into an equity distribution agreement with Maxim Group LLC to buy up to $18.5 million of its stock at market prices. So far, Maxim’s bought $4.3 million worth of stock at an average price of 15 cents.
That’s good news. The bad news is that Naked Brand’s shares have to trade above $1 under NASDAQ Listing Rule 5550(a)(2). It has until November 23, 2020, to meet that minimum bid price. If it doesn’t, it can remain a Nasdaq-listed stock for an additional 180 days.
It’s not the first time Naked Brand’s stock’s been under the gun with Nasdaq. The company went through the same process in 2018.
According to Gurufocus.com, the company’s Altman Z-Score is -3.69, which means it’s only gotten worse in 2020.
A Better Option
In my January article about Naked Brand, I discussed why I much preferred a risky play like Nautilus (NYSE:NLS), which was trading at $2.82 at the time.
“On Dec. 11, Nautilus announced that it had hired Aina Konold as the company’s CFO. Konold’s latest job was vice president of finance for Gap (NYSE:GPS). Nautilus CEO Jim Barr believes Konold’s understanding of omnichannel business models will help the company return to profitability and reignite its growth story,” I wrote on Jan. 8.
“I like Nautilus’ risk/reward profile and will continue to watch its progress over the next few months.”
Well, anyone who’s followed Peloton (NASDAQ:PTON) knows what’s happened to fitness equipment stocks during Covid-19. Share prices have gone through the roof. NLS is up 685% from January through Nov. 2.
The entire Naked Brand situation is a big reason why I don’t bother with low-priced stocks. Shareholders could be in limbo for years.
Frankly, not only do I not understand why Naked Brand is a public company, but I also don’t get why Nasdaq has such loose rules for listing eligibility. It should be a privilege to trade on a U.S.-listed stock exchange.
And besides, it can always trade over-the-counter if it wants to maintain some liquidity.
The Bottom Line
In September, InvestorPlace’s Ian Bezek made an excellent argument why Naked Brand won’t make a comeback.
“The company did sell off its Naked brand earlier this year to try to forestall insolvency. That’s obviously a blow for a company called Naked Brands to lose its flagship brand. Even so, it’s not clear that this sale raised enough cash to turn anything around,” Bezek wrote on Sep. 10.
As Bezek pointed out, the company’s best solution is that it goes bankrupt, rightsizes its debt, and emerges as a private company way out of the investor spotlight.
Unfortunately, NAKD stock is a bad example of a micro-cap. If you’re smart, you won’t spend a minute on it.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.