The last time I wrote about Naked Brands Group (NASDAQ:NAKD) stock it was trading below $1; right where it belonged, I reasoned. In the six weeks or so since it has lost 35% of its value and looks ready to return to pre-February prices below 50 cents. 

It strikes me that the Reddit-fueled party is just about ready to come to a close. Am I right? Let’s consider the possibilities. 

InvestorPlace contributor Louis Navellier’s April 9 headline says it all: Naked Brand Primed for Growth, With E-Commerce Transformation and No Debt. 

If Navellier were any more confident about its chances to rebound off 50 cents, I’d load up on NAKD stock myself. I’m definitely intrigued by the “no debt” part of the headline. 

As anyone knows who’s followed NAKD stock over the past year, CEO Justin Davis-Rice has done an admirable job cleaning up its balance sheet and transforming it into a pure-play intimate apparel e-commerce company. 

A Closer Look at NAKD Stock

Navellier points out some of the highlights of Naked Brand’s March 29 business update. High on the list of accomplishments is eliminating 100% of its debt while filling the coffers with $270 million in cash. That’s no small feat. 

However, you have to walk before you can run. It still needs to execute its game plan on the e-commerce front. According to its business update, it appointed mergers and acquisitions (M&A) specialist Simon Tripp to the board to assist with building the company’s e-commerce platform.

As part of the divestiture of its Bendon brick-and-mortar operation, seven of its nine brands are leaving the company with only Frederick’s of Hollywood and Naked brands remaining.

This means acquisitions will need to be made to broaden its e-commerce apparel offerings.

“The acquisition environment is rich with opportunity at attractive valuations and we have already begun working with Justin and his team to identify potential opportunities,” Tripp stated in Naked Brand’s business update. 

He went on to say that the company’s focus on AI and other innovative technologies will help it be a disruptive force in its sector. 

If spent wisely, the $270 million in cash on its balance sheet could deliver a growth brand or two, providing investors with an alluring speculative proposition.

The Reality Is Much Murkier

As I stated in my March article about the company, there is virtually zero chance that the company’s e-commerce business is mature enough to get one of the 26 spots in ProShares Online Retail ETFs (NYSEARCA:ONLN) portfolio.   

The most recent financial results we have for Naked Brand are its six-month results through July 31, 2020. It had overall sales of $24.6 million, 17.9% less than a year earlier. According to Morningstar.com, that puts its trailing 12-month sales at $58.9 million. 

According to its six-month results, e-commerce sales were $12.1 million (49% of sales), up 16% from a year earlier. 

Let’s annualize those sales to $24.2 million. On top of that, let’s add 20% growth in 2021. That brings us to theoretical sales of $29.0 million through January 31, 2021, its fiscal year-end. Actual numbers are expected in May.

Based on 641.5 million shares outstanding as of March 10 and a 57-cent share price as I write this, it has a market capitalization of $366 million.

That’s a price-to-sales ratio of 12.6. 

You can buy Nike (NYSE:NKE) less than 6x sales and it’s undergoing a major move to e-commerce. It now generates 38% of its sales online with quarterly growth of 20% year-over-year. 

I don’t know about you, but given a choice, I know what mine would be. Frederick’s of Hollywood or Nike? Seems pretty straightforward.

The Bottom Line

The optimist will look at Naked Brand’s situation and surmise that the addition of future brands will only accelerate the company’s rebirth as a pure-play e-commerce company. 

The pessimist will conclude that M&A transactions rarely go well for the buyers. The synergies and cost savings aren’t nearly as large as imagined, and the prospects turn out to be far less than anticipated. Therefore, Naked Brand’s future revenues are anything but guaranteed to grow 20% per quarter as Nike’s do.

The realist will conclude that Nike or the ONLN ETF are much better options than NAKD stock.

I’m a realist. Which are you?     

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

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.