A Covid-19 Slowdown Is Not Why You Should Skip Naked Brands

Advertisement

It’s been a crazy year of trading, marked by irrationality, speculative behavior, and the market slowdown triggered by the novel coronavirus. Shares of struggling intimate apparel company Naked Brands (NASDAQ:NAKD) are up 153% for no explicable reason. On a year-over-year basis, NAKD stock was down 94% and is now worth just 21 cents. The obvious blame would go to Covid-19, but as my colleague, Chris Markoch, wisely points out, that it only acted as an extension for its troubles.

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

Naked Brands recently regained compliance with Nasdaq’s minimum equity requirements. The company fortified its balance sheet and streamlined operations to ensure that it remains in compliance. However, its stock price is down in the dumps, and it needs to be worth at least $1 per share. It has been granted 180 days, or until May 24, 2021, to claw back its share price. Though a snapback seems likely in the post-pandemic world, the problem with Naked Brands is more structural.

Inability to Evolve

It’s convenient for Naked Brands to blame its current predicament on Covid-19. After all, the crisis has heavily impacted the apparel industry, forcing industry experts to revise their estimates dramatically.

However, if we look at the last 11 quarters, we see that the company’s revenue had a consistently negative growth pattern. Revenue tanked more than 20% from the third quarter of 2019 to the fourth quarter of 2020. The pandemic was not even close to being a factor during this period.

One of the big problems with the company is that it failed to evolve. It continues to rely on higher margins with lower volumes, which was unsuccessful. Moreover, the company failed to innovate and was late in adopting many emerging trends and business models.

For instance, Naked Brands was late in developing its e-commerce presence, which allowed its competitors to establish a foothold online.

The fashion industry’s state is changing, and Naked Brands needs to get with the program quickly. Fashion players will have to rethink their strategies as traditional engagement channels are struggling. Social media presence is of paramount importance, along with elements of diversity and sustainability. Naked Brands seems slow in reacting to the rapidly evolving fashion industry.

Streamlining Operations

With losses mounting, the company needed to employ belt-tightening measures. Management talked about several initiatives to curb costs and increase liquidity in the last quarterly report. Its global strategic review resulted in an estimated NZD $10.54 million in cost savings.

Moreover, it also announced a strategic brand divestiture initiative in hopes of becoming more asset-light. The company was also to negotiate a $10.85 million credit facility agreement with the Bank of New Zealand through debt-restructuring transactions. Additionally, trade payables were also down NZD $13.1 million.

Despite these efforts, the current and long-term debt figures amount to 43% of the total liabilities and equity balance. That number goes up to 64% if you include other long-term liabilities. Therefore, the company’s financial health remains a significant concern despite the commendable efforts of the management.

The initiatives mentioned above helped boost the company’s working capital balance. Its current ratio is up 20% from 0.60 in the first quarter. However, without a turn-around in revenue, it’s only wishful thinking to hope that things get substantially better with a strategic review.

Bottom Line on NAKD Stock

Naked Brands has been in a spot of bother for a very long time. Covid 19 has massively added to its troubles, but it has only exposed the company’s long-standing weaknesses.

Revenue and profitability continue to get hammered, and the company’s inability to evolve is a significant cause for concern.

Naked Brands is trying to get its house to meet its listing requirements, but its business model is concerning. Therefore, avoiding NAKD stock is a no-brainer at this point.

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

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.


Article printed from InvestorPlace Media, https://investorplace.com/2020/12/a-covid-19-slowdown-is-not-why-you-should-forget-about-nakd-stock/.

©2024 InvestorPlace Media, LLC