In November, Naked (NASDAQ:NAKD) stock was just another failed penny stock — a brick-and-mortar lingerie and underwear company destined for the scrapheap of bankrupt companies. But then the improbable happened: in less than two short months, a fairy godmother in the form of Reddit users drove the microcap stock from $0.07 to $1.65, breathing a second life into this once-dying company.
Naked’s management reacted accordingly, raising $50M of fresh capital, replacing its CEO and vowing to move operations online. In other words, Cinderella (i.e., Naked Brands) accepted the invitation to the ball.
Now for the hard part. Dressed in its finest, can NAKD stock now woo Prince Charming (i.e., customers) and see long term success? It won’t be easy — among other roadblocks, Robinhood restricted buying shares earlier this week. But in the fast-moving world of fashion, even unlikelier stories have happened before. So, hop in that pumpkin-shaped carriage and let’s see what Naked needs to do to reach $10 from here.
NAKD Stock: An Improbable Series of Events
It certainly hasn’t been an easy two years for NAKD stock.
As losses mounted from flagging revenues, the New-Zealand-based company saw its stock sink from $84 to pennies. In July 2020, the company had just $2.4 million of cash left in the bank — barely enough for a month or two of operations.
Brand-management companies like Naked Brands aren’t anything new — companies like U.S.-based Iconix (NASDAQ:ICON) have been around for decades. (Rocawear, Umbro and Joe Boxer, for instance, are all part of the Iconix stable). And for these companies, going bankrupt is also nothing new — as fashion brands fall out of favor, they tend to take their brand management companies down with them.
In the fall, Naked Brands seemed destined to that fate. The company was caught in a “death spiral” where small losses meant the company didn’t have enough marketing budget. That reduced their future sales, made losses even more extensive, and so on. But Reddit changed all that. As several posts on subreddit r/wallstreetbets and other forums started encouraging users to buy NAKD stock, the hapless firm’s share price started rising. And given NAKD’s small size, it didn’t take much to drive its price up 2,000%. Suddenly, our Cinderella had a way out.
Turnaround Time For Naked Brands
Naked Brands wasted no time. As its share price started to rise, the company replaced underperforming CEO Anna Johnson with insider Justin Davis-Rice. A week later, the company issued 29.4 million new shares to raise $50 million in cash. That provides a much-needed change. No matter how far Reddit pumps up your stock, it will come crashing right back down unless you make a business from the proceeds.
With $50 million now in the bank, the company can now create a business rather than stemming its negative -$15 million/year cashflow.
NAKD Stock: What Will It Take To Reach $10?
There are two critical factors in whether NAKD stock hits $10.
Firstly, there’s the Reddit factor — how far speculative investors can pump the stock in the short-term. That alone could send NAKD to $10; at a $600 million market capitalization, the company would still be just 5% of GameStop’s size.
Secondly, there’s underlying company value — the amount that Naked could earn to justify a $10 share price. To get a sense of that figure, consider Bonobos, another online-only clothing company. In 2017, Walmart (NYSE:WMT) bought the fast-growing retailer for a 2.3x price-to-sales multiple. That suggests Naked Brands needs to hit around $2 billion in sales. Faster growth could see NAKD hit that valuation even sooner.
Can that happen? Of course. Naked Brands is entering an underwear/lingerie market just as the #1 player L Brands (NYSE:LB), owner of Victoria’s Secret, is busy fighting internal issues. But will NAKD succeed? That depends far more on management’s ability to execute.
Problems Persist For NAKD
There’s plenty of bad news for the Reddit bulls too. For instance, the company has issues with self-dealing — in January, Naked Brands agreed to sell its physical retail business to its CEO and executive chairman. Once that completes, the company will find itself buying services from the same people who run the company.
The company also has a relatively inexperienced e-commerce team. The firm’s CEO, Justin Davis-Rice has already been with the company for a decade. The rest of its senior management has experience at The Warehouse Group (OTCMKTS:WHGPF), Cotton On and HP (NYSE:HPQ) — no powerhouses in e-commerce.
But still, there’s hope for the future. With Reddit providing $50 million to the company, Naked Brands can now experiment in an area underserved by e-commerce. And if you find yourself buying one of Naked’s brands someday, make sure to consider its stock too. That’s a sure sign the company has finally gained traction.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.