At the moment, Naked Brand (NASDAQ:NAKD) is an awful business. But that’s not necessarily a death knell for NAKD stock.
The state of the business isn’t good news, certainly. Naked consists of Bendon, a mostly brick-and-mortar business in Australia and New Zealand, and FOH Online, the company’s e-commerce operations. Neither looks particularly attractive.
Indeed, it’s almost impossible to see why Redditors sent NAKD stock soaring along with GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC) in late January. The NAKD ticker might be the most logical explanation. This is a company that before the rally seemed on a straight path to bankruptcy. In late 2019 and early 2020, the company was borrowing money at a 20% interest rate compounded daily.
Whatever the cause, NAKD stock soared. And management wisely capitalized. It sold shares and warrants to raise cash. Not only has it skirted bankruptcy, but it has nearly $200 million in cash with which to hunt for acquisitions.
The problem is that NAKD stock still has a market capitalization over $300 million. And the existing businesses don’t fill the gap. But if management can spend the cash wisely, Naked Brand at least has a chance. That’s more than could have been said just a few months ago.
The Bendon Exit
There’s little value in Bendon, which not long ago was Naked’s crown jewel.
In fact, according to a fairness opinion cited in a recent proxy statement, Bendon has negative value. FTI Consulting estimated its worth as negative 61.4 million NZD ($44 million) in a best-case scenario.
That’s why FTI gave a positive opinion toward Naked’s brand to sell Bendon for 1 NZD to a group led by existing management. Per the proxy, Naked hired two investment banks to look for a sale of one of Bendon’s brands, or the company as a whole. Neither found any interest.
The only other option was to liquidate that business. That would entail its own costs, leaving the sale to management as the best choice.
That leaves FOH Online. This is supposed to underpin the business going forward, and a pivot to an e-commerce-only model.
But FOH is not a terribly attractive business. Per filings with the U.S. Securities and Exchange Commission, e-commerce segment revenue for Naked for the 12 months ending Jul. 31 totaled 34.2 million NZD, or $25 million.
All of that revenue comes from a license to the Frederick’s of Hollywood lingerie brand. And after the Bendon sale, Naked will only have the right to sell in the U.S., Australia and New Zealand.
There’s yet another problem. Without Bendon, FOH doesn’t have much in the way of infrastructure. And so the Bendon sale includes a services agreement.
Under that agreement, Bendon essentially will operate FOH. Naked will reimburse Bendon for the costs, and pay 5% of revenue on top of budgeted expenses.
Yet the current NAKD stock price of 52 cents values FOH at around $150 million, even before the impact of mostly out-of-the-money warrants are considered. That’s about 6x revenue for a business with no infrastructure and minimal growth.
That seems like too much.
The Case for NAKD Stock
That said, at 52 cents NAKD stock looks notably different than when I recommended against it last month above $1. Notably, the value assigned the operating business has compressed from over $400 million to the more reasonable $150 million.
Again, I still think that latter figure is too much. But smart management moves can close the gap.
Indeed, we have seen with PLBY Group (NASDAQ:PLBY) that older brands can create value. I’m skeptical Frederick’s has anywhere near the same cachet or recognition, but there are perhaps turnaround hopes. Indeed, FTI noted in its fairness opinion that Naked’s pre-2021 financial troubles themselves hurt the business by causing supply chain disruptions.
The 5% fee paid to Bendon isn’t ideal. But Naked can get out of that agreement with three months’ notice. That adds to the case for Naked making an acquisition with its newfound cash: it can buy a company that has the required infrastructure. That hopefully would add to the value created by a wise acquisition.
The hiring of a new (and experienced) chief financial officer this week further boosts the hopes for such a deal. Bulls would also point to the stake taken by Ault Global Holdings (NYSEAMERICAN:DPW), though Ault’s long history of value destruction suggests some caution on that front.
So too does Naked’s own long struggles. The novel coronavirus pandemic obviously was a factor, but Naked was in trouble before it arrived. A better balance sheet gives Naked to permanently change its fortunes — but it’s now that the hard work begins.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.