Naked Brand Stock Falls Bellow $1 as Fundamentals Pull It Back Down to Earth

After Redditors temporarily breathed new life into it, Naked Brand (NASDAQ:NAKD) stock returns to trading under $1 again.

a man and woman wear plain white underclothes from Naked Brand (NAKD)

Source: Shutterstock

In the past month, shares of the intimate apparel brand have fallen 23.8%. Normal business is resuming after a wild couple of months, during which the r/WallStreetBets subreddit forum took a liking to the New Zealand-based company.

It’s not tough to see why. Since November last year, you can see a clear increase in short interest. Hence, Redditors looking for the next GameStop (NYSE:GME) or AMC Entertainment (NYSE:AMC) were in luck.

It allowed NAKD stock to surge to a 52-week high of $3.40 a pop. On its part, the company did not sit idle.

Management announced a restructuring, which we comprehensively covered here. In a nutshell, the intimates and swimwear manufacturer said it was looking to focus more on e-commerce. However, the markets don’t seem to be biting.

There is a slim chance of FOH Online, its e-commerce platform that generates roughly $20 million in annual revenue in the U.S., becoming a tonic for its woes, but markets seem to think the chances of that happening are slim. Hence, we see the eventual drop back to pre-Reddit values.

With a combination of an unpopular product suite, lack of positive catalysts and lackluster prospects, it’s better to dump NAKD stock as soon as possible.

Dilution Is a Major Problem for NAKD Stock

As I mentioned in my intro, NAKD stock has Reddit to thank for its resurgence. Nothing has changed from a fundamentals perspective. Its top line has consistently gone down in the last three years. Operating margin, net margin, return on assets, and ROIC is all in the red.

Regardless, the stock’s surge in recent months allowed the company to dig itself out of a hole. It has issued massive amounts of equity that is highly dilutive. Most recently, it received gross proceeds of approximately $100 million from the direct placement of restricted ordinary shares and warrants.

As Mark Hake points out in an excellent article, the warrants in this private placement can force Naked Brand to issue a lot of equity in a cashless exercise.

Apart from this private placement, the company completed an at-the-market offering of 29,415,000 for nearly $46.9 million in gross proceeds in February.

NAKD has earmarked funds from these offerings to develop its e-commerce platform. However, all of these will come at the expense of existing shareholders. For now, the funds should help to provide the company with some much-needed finance for its operations.

A Comeback Is Looking Tougher

In addition to raising more capital, Naked Brand announced a comprehensive restructuring. Part of that means divesting its Bendon segment to focus squarely on FOH Online, its e-commerce platform. That makes sense, considering how large and ubiquitous e-commerce has become.

However, capturing a sizeable portion of that market is easier said than done. Naked’s gross margin stands at 37.60%, comparing poorly with the industry average of 49.60%. To scale that up will take some time and require a lot of effort and more capital raises.

Plus, not having Bendon will contribute to a slump in the top line as well, for the time being.

At the start of 2020, management outlined substantial doubt over continuing as a going concern. According to an SEC filing:

Despite the ongoing losses, and the other negative financial conditions, the Directors are confident that the Group will continue as a going concern. However, while the Directors are confident of continuing as a going concern and meeting its debt obligation to its bank and creditor commitments, the going concern is dependent upon the Directors and Group being successful in generating sufficient sales and increasing gross margins while the Company has already made significant overhead reductions. If required, the Company has the shelf facility to raise additional capital.

Fundamentals have not changed. The only thing that has changed is that the company now has funds to pursue a revival. However, it would help if you had an exciting product suite, excellent growth prospects, and a solid operating model to keep growing. Unfortunately, Naked has none of those at the moment.

My Bottom line

So, what’s next for this company? The most likely course is that the NAKD stock will continue to limp along, eventually delisting. Mark Hake makes an excellent point that the company could be the prime target of a management buyout (MBO) — management could take it private to streamline operations and improve profitability.

To sum it up, it would be best to avoid NAKD stock at every turn. Redditors may find it interesting down the line if its short float increases. However, at its heart, NAKD is a deeply flawed enterprise.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.


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