I’ve been a longtime critic of Naked Brands (NASDAQ:NAKD) stock., but not because I think its management has done badly. The management team was dealt a terrible hand, as it has had to steer a tiny, heavily-indebted collection of retail brands through a tough environment. Since the company was losing more than $10 million per year even prior to the pandemic, Covid-19 served as a knockout blow for NAKD stock.
Over the past few years, on a split-adjusted basis, NAKD stock has fallen from as high as $1,000 per share to just 60 cents now. That makes sense because the company’s brick-and-mortar retail business hasn’t been profitable for ages, while its e-commerce business is still tiny. With stores closing down due to the pandemic, it appeared Naked might go bankrupt, as it was running out of cash. Further, the Nasdaq threatened to delist NAKD stock.
Now, though, things have changed. Thanks to the excitement created by Reddit’s r/WallStreetBets, NAKD stock surged earlier this year. That rally allowed Naked Brands to issue hundreds of millions of shares of new stock and bring in $270 million. As a result, it was able to pay off all of its debt. Naked is also looking to ditch its physical stores entirely. So is Naked finally ready to turn the corner?
Pivoting to Online Apparel
With its brick-and-mortar stores poised to be shut down soon, Naked needs to find a new business model. The path forward, for the time being, appears to be selling apparel online. Naked already has a small but reportedly profitable e-commerce business and hopes to expand it going forward.
Naked recently provided interesting information about its future capital allocation strategy. Explaining why it is shuttering the retail stores and moving online, Naked said that:
“The board believes [our capital] is better deployed in complimentary growth businesses in the high margin e-commerce sector. This could also involve investment in technologies that strengthen the Company’s offering and customer experience, that could include but not be limited to the e-commerce platform, body scanning and artificial intelligence.”
Naked’s potential investments in body scanning and artificial intelligence are particularly interesting. Naked’s tiny e-commerce business clearly isn’t substantial enough to benefit much from investments in those sorts of technology yet.
So management’s embrace of body scanning and AI could foreshadow a much broader shift in the company’s business model than simply selling its products only online. If the company, for example, acquires a company that greatly enhances AI through e-commerce, Naked’s outlook could shift greatly.
A Turnaround Is Already Priced In
The issue with NAKD stock now is that the shares are already pricing in a successful transformation of the company. You might wonder how that could be the case when the share price is well below $1. However, the market capitalization is more important than the share price.
Naked now has more than 600 million shares of stock outstanding. Even at the current share price, that adds up to a market capitalization of nearly $382 million. The company’s cash pile of $270 million is impressive. However, as you can see, there’s still an extra $100 million of value or so that the market is giving to Naked, even though it doesn’t have a successful business model yet.
Perhaps Naked will acquire a good e-commerce company that increases the value of its business by $100 million or more, the current price of NAKD stock would be justified. However, if it fails to do anything exciting with its cash, shares would fall. Just based on the company’s treasury, a current share price in the 40-50 cent range seems more appropriate. That’s still a meaningful drop from the current 61 cent quote.
The Verdict on NAKD Stock
Naked Brands has avoided the worst-case outcome. And that’s something. But there’s still very little to justify investing in its shares at this point. With its brick-and-mortar business disappearing and its business model not yet successfully revamped, it’s unclear what Naked Brands will look like going forward.
Perhaps the company will find a merger target that turns Naked’s fortunes around or perhaps it won’t. It’s way too early to tell at this point. Thus, right now, the owners of the shares are simply hoping for the best.
If Naked’s valuation drops to the value of its cash , it would be easier to make a case for buying the stock. Until then, however, expect the shares to remain under pressure, unless the company announces a transformative merger.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.