There is a good chance of making money with Naked Brand Group (NASDAQ:NAKD), the intimate and swimwear group from Australia and New Zealand. I went over these odds in my last article on NAKD stock on Nov. 30, and I want to update you on my analysis. I will use an expected return (ER) approach using probability analysis.
My contention is that the ER for an investment in NAKD stock is at least 20%. And it could be significantly higher. This takes into account probability estimates of a complete failure of the company, as well as a major turnaround.
By the way, it might not appear that this is going to be such a good idea right now. At the time of writing, NAKD stock trades for just 34 cents per share. However, the company has made it clear recently they are going to do a reverse stock split. They have about 150 days or so to get this done.
So, for example, if they do a 1-for-10 reverse split, NAKD stock will trade automatically at $2.00 per share. If they do a 1-for-100 reverse split, the stock will be at $20 per share.
But why am I so sanguine about the prospects for investing in this stock?
For one, I think upcoming results will bring cause for optimism. I expect to hear fairly soon about Naked Brand’s latest quarter ending Nov. 30.
During their last quarter, the company reported it had 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).
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 reopened. 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 also held exclusive online licenses with the Frederick’s of Hollywood and Heidi Klum brands, but the latter license is now canceled.
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 the year 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.
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 NZD 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.
Prospects for Investing in NAKD Stock
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 assume the company can make a turnaround of sorts within the next year or so. 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. If there is a 1-for-10 reverse split, that would be 13.33 cents per share.
At 20 cents per share today (or $2.00 with a 1-for-10 reverse split), NAKD stock will be at just 15x earnings. The market is likely to see NAKD stock rise 2 or 3 times, in anticipation of even higher profits.
The Expected Value
Here is where probability analysis comes in. We can paint a threefold scenario and assign probabilities to each scenario to derive the expected return.
For example, let’s estimate that there is a good chance, but less than even, that NAKD stock will rise threefold over the next year or two. At a 40% chance, for instance, there is a 120% expected return on investment (i.e., 40% times 300% equals a 120% ROI).
Next, let’s get realistic and assume there will be a 30% chance that the stock will crater to zero. Therefore the ROI in this scenario is -30% (i.e., 30% times negative 100%).
Finally, let’s assume there is a 30% chance that the stock stays flat. Therefore the ROI will be 30% (i.e., 30% times 100%).
Notice that I made sure that each probability scenario adds up to 100% (i.e., 40% plus 30% plus 30%).
Adding all these up equals 120% (i.e., 120% plus -30% plus +30%). Therefore the expected value (EV) for investing in NAKD stock is 20% (120% return on the investment of 100% of funds). This EV takes into account a reasonable estimate of the company failing.
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.