Naked Brand (NYSE:NAKD) has given investors a thrill lately. NAKD stock went from literally selling for pennies at the beginning of the year all the way up to $1.35 at the time of writing. But it seems like the moment has passed, although the stock is still holding above the psychologically important $1 level.
I knew that the recent run-up in NAKD stock was due to retail investors looking for another object of their affection after GameStop (NYSE:GME). But I have to admit to a bit of a chuckle when I heard that Naked Brand was a target.
However, whatever the motivation of the Reddit crowd, they did Naked Brand a huge favor. And to their credit, the company has used the increased share price to raise badly needed capital. The company is also divesting its brick-and-mortar business and embracing a 100% e-commerce model.
But is the stock a good long-term bet? I still don’t think so. The reason is fundamental, and you could even say foundational.
Lingerie Had a Great Year
Buyer behavior does not always conform to what seems like perfectly logical assumptions. This was the case when I was considering what to make of the company’s fortunes. Case in point, sales of lingerie soared last year. And this included the “barely there” category of lingerie. This is where Naked Brand’s most recognizable asset, Frederick’s of Hollywood, resides.
Women’s Wear Daily (WWD) cited several lingerie brands, such as Adore Me and Journelle, reporting a marked increase in sales in 2020. Adding fuel to the narrative, the global market size for intimate apparel is projected to reach over $90 billion by 2026. That kind of growth factors in a compound annual growth rate (CAGR) of 2.8% from this year through 2026.
Helen Mears, chief design officer at Adore Me, adds credence to this growth trend in the WWD article. Mears forecasts sales to remain high after the pandemic because, “The world has gotten used to this work-from-home, flexible lifestyle — and all the clothes that go with it.”
Naked Brand Is Not Capturing That Growth
The last time Naked Brands gave investors numbers to work with was in May of last year. The company reported that for its fiscal year 2020 (which ended on Jan. 31, 2020), the company had full-year revenue of $58.5 million, which was down from the $72.7 million they recorded the prior year. And Todd Shriber wrote recently that the company’s trailing-12-month sales are coming in at approximately $54.7 million.
What this tells me (and hopefully tells you) is that there may be a pretty big pie for the products Naked Brand sells. However, for whatever reason, the company is not capturing it.
It doesn’t get much more fundamental than that for me. There is a lot of competition in this sector. Naked Brand does have a recognizable brand name in Frederick’s of Hollywood (FOH). But the power of that brand name is not currently supported by sales.
And as Matt McCall noted, the company doesn’t even own the FOH brand. Rather, Naked Brand holds the exclusive online rights for the FOH website.
NAKD Stock Is a Trade and Nothing More
By the looks of some message boards, there are some determined traders who are bullish on NAKD stock. With the cash the company received, bankruptcy may be off the table in the short term. And as McCall noted, with a couple of good breaks, Naked Brands could turn free-cash-flow positive sometime this year.
So if you’re looking for a quick trade target, NAKD may be the stock for you. But without a defensible niche in a market that is showing both a lot of growth and a lot of competition, there’s nothing to get excited about with NAKD stock.
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 five years. He has been writing for InvestorPlace since 2019.