In the era of the novel coronavirus pandemic, it’s not easy to build a case in favor of owning a stake in intimate apparel and swimwear retailer Naked Brand Group (NASDAQ:NAKD). Frankly, I don’t blame anyone for being skeptical about NAKD stock.
However, I’ll actually be taking the bullish side of the argument today. Still, there’s no denying the downsides of owning NAKD. There are risks involved as Naked Brands’ fiscal data has been less than ideal over the past year.
So, in the interest of being fair and balanced, I’ll present the risks involved with buying NAKD stock. On the other hand, there might actually be compelling reasons to consider holding the stock.
Without further ado, let’s take a look at the recent price action in NAKD stock, which has certainly been exciting.
A Closer Look at NAKD Stock
It’s no exaggeration to say that the onset of Covid-19 threatened to push NAKD stock to zero. On March 23 of last year, the share price declined all the way down to 40 cents.
And that wasn’t the end of the horror story. Even as at least two drugmakers were preparing to distribute Covid-19 vaccines, NAKD stock recorded a new 52-week low between 6 and 7 cents in November.
So evidently, NAKD didn’t turn out to be the vaccine-stock success that some folks might have hoped it would be in 2020. Unfortunately for the long-term shareholders, NAKD stock ended the year at around 19 or 20 cents.
Thus, the goal of getting NAKD stock above the $1 mark seemed like a pipe dream. In January, however, an apparent miracle happened as the share price suddenly rocketed up to a 52-week high of $3.40.
NAKD stock retraced to the $1.70’s after that, but the overall price surge was stunning nonetheless. Could this be a sign of good things to come?
Acknowledging the Risks
For one thing, it must be understood that a sudden price spike of hundreds of percentage points presents the risk of further retracement to the downside as investors might engage in some profit taking.
Second, Naked Brands recently issued and sold 29,415,000 of its ordinary stock shares to institutional investors. It’s a good thing, perhaps, that the company generated aggregate gross proceeds of approximately $50 million from this.
However, printing up so many stock shares presents the risk of dilution. After all, supply is a major component of the supply-and-demand equation in the markets.
Furthermore, Naked Brands’ most recently published financial data, which goes all the way back to May of last year, isn’t particularly encouraging.
In particular, the company reported that its fiscal-year 2020 net sales declined by more than 20% on a year-over-year basis. In dollar terms, that decline was from $72.7 million to $58.5 million.
So, now you have an overview of the main risks of buying and holding NAKD stock. Now, we can address the idea that it might be worthwhile to own the stock despite those risks.
First of all, there’s the possibility that NAKD stock is a pump target of the powerful Reddit group r/WallStreetBets. That’s the same group that allegedly engineered the meteoric rise in GameStop (NYSE:GME) stock.
But even if you’re not interested in riding the wave of Reddit sentiment, there’s another potentially positive development in the works. Specifically, Naked Brands recently announced a transformative business restructuring.
This involves the company divesting its unprofitable brick-and-mortar operations through the sale of its Bendon subsidiary. That’s probably a smart move as physical apparel stores haven’t always been profitable during the Covid-19 pandemic.
Moreover, Naked Brands intends to shift its focus to e-commerce and its online platform. In order to make this happen, the company plans to “make highly accretive acquisitions of existing e-commerce brands as well as develop and acquire technologies that create a better user experience for the consumer.”
That’s somewhat vague, I’ll admit. Yet, at least it offers the prospect of a turnaround for Naked Brands as it shifts toward a potentially more lucrative business model.
The Bottom Line
NAKD stock holders should be glad to learn that the company is undergoing a major transition.
Undoubtedly, there are risks associated with owning NAKD stock. But the prospect of a comeback is there, so a small position in the stock could be justifiable.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.