Naked Brand Group (NASDAQ:NAKD) recently issued a prospectus detailing its new financial situation and business model. The bottom line is that NAKD stock is fairly priced at its present price.
As a result of its capital raise (at $1.70), the company brought in $46.9 million and will be able to pay off its remaining $15.2 million in debt. This is seen in the Use of Proceeds Section and Capitalization section (pages S-12 and S13) of its Jan. 29 prospectus.
Market Value of the Business
Moreover, on page S-7 of the prospectus, Naked Brand Group says that it now has 475.998 million shares, including debt-equity conversions from debt and noteholders. Therefore, its market capitalization is $685 million.
However, its net cash is $31.7 million (i.e., $46.9 million in cash minus $15.2 million in debt). Therefore, the net value of its intimate apparel business (both online and in Australia and New Zealand stores) is $653 million.
Now the company announced on Jan. 21 that its executive chairman and CEO, Justin Davis-Rice, would do a management buy-out (MBO) of the retail Bendon store business overseas. This leaves Naked Brand Group with its online intimate apparel business.
In addition, the MBO group will pay off all Naked Brand’s debt of 32.5 million NZD ($23.4 million). That means the online group gets to keep the $46.9 million in recently raised cash. This means the net market value is $638.5 million.
However, we don’t know how well the online business will do as a stand-alone business. Naked Brand announced in Nov. its half-year to July 31, 2020 results. But we don’t know what management’s forecast will be going forward.
What Is Naked Brand Group Worth?
The e-commerce business is “anchored” by its wholly- owned Frederick’s of Hollywood (FOH) exclusive license to sell its apparel online in the U.S., Australia, New Zealand. It also gets to use the website www.fredericks.com to sell those items.
Fortunately, on page 12 of the half-year statement, the company breaks out its online sales and gross margin. During the six-month period ending July 16, 2020, it produced 17 million NZD ($12.97 million) in e-commerce sales. This was up 15.6% from last year. Its gross margin was 33.5%.
Therefore, we can estimate what the online business is worth. For example, the second half of the year likely had good growth. Using a 20% growth rate over the first half, the second half is forecast at 20.36 million NZD, or $14.65 million. Therefore run-rate annual online sales are $27.6 million. It could be as high as $30 million. Let’s say going forward it’s $30 million.
Therefore, the sub value of the online business, after taking away $46.9 million in cash is $638.5 million/sales of $30 million. That represents a price-sales ratio of 21x.
There are no other online intimate apparel stocks. However, Tidebuy is another online intimate apparel company, based in China. Its funding rounds have amounted to about $43.5 million, and I estimate this represents 25% of the value of the company.
But this was in 2017 and I suspect that the valuation has quadrupled since then. Moreover, its sales are forecast at $42.2 million in 2019. Therefore, its price-sales are about 17x.
So Naked Brand Group is at 21x forecast sales and a competitor private market valuation is 17x. However, If Tidebuy ever went public it would likely garner a premium as well. Therefore, I do not believe the NAKD stock valuation right now is too high.
What To Do With NAKD Stock
Lululemon (NASDAQ:LULU), a high-end sports-wear apparel company, trades for 10x this year’s sales and 8x next year’s sales. Moreover, it has a 56% gross margin compared to Naked Brand Group’s 33.5% gross margin. It is also profitable on a net income basis.
By contrast, Naked Brand Group lost money on an adjusted EBITDA basis (earnings before interest, taxes, depreciation, and amortization). This implies that NAKD stock might be overvalued.
Much of the NAKD stock valuation will depend on the company’s forecasts. The same management team in the MBO will be running the public online company.
This also raises the question of how costs will be split. For example, how much of MBO group salaries will be borne by each group? How much of the admin and overhead will be accounted for by the online company? Theoretically, it should not be very high. This will lead to significant profits at the public online company.
Given the uncertainties in the deal, despite the clean balance sheet, it seems that at best NAKD stock seems fairly valued at its present price.
On the date of publication, Mark R. Hake does not hold a long or short position in any of the stocks in this article.