Naked Brand Looks to Be Too Far Gone For a Reasonable Turnaround

News regarding its digital transformation strategy has recently sent shares of Naked Brand (NASDAQ:NAKD) stock over 70 cents. NAKD stock has become a hot favorite of Reddit traders who have become part of the short-squeeze trend of this year.

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

Source: Shutterstock

The shares started 2021 around 20 cents, hit a 52-week high of $3.40 on Jan 28. By mid-April, they were below 50 cents. Put another way, in a matter of days, NAKD stock returned close to 50%. Shares are trading at around 70 cents today. 

The market now wonders whether NAKD stock can once again go over the psychologically important dollar-per-share level. Also, as per the requirement of the Nasdaq stock exchange, a company’s share price has to stay above $1.

For example, in February 2021, the company complied with the listing requirement. However, it is hard to know how or when NAKD stock can go over $1 again.  

Before committing capital into the shares you might want to conduct detailed due diligence on the company, which specializes in intimate apparel and swimwear. Unless you are a short-term trader who is able to take on considerable risk, NAKD stock does not belong in a long-term portfolio. Here’s why.

Naked Brand Goes Fully Online 

The company was formed following a 2018 merger between the 72-year-old New Zealand company Bendon Limited and Naked Brand Group. Its main operations have consisted of selling merchandise at company-owned retail stores in Australia and New Zealand.

In addition, it has e-commerce operations covering Australia, New Zealand and the U.S. On a more limited basis, it has wholesale partners and distributors in several other countries, mainly in Europe.

In January, Naked Brand announced it would divest its unprofitable Bendon brick-and-mortar operations. Instead, management will put resources solely on its e-commerce platform that sells the Frederick’s of Hollywood brand. In late April, shareholders voted to approve this proposed divestiture.

On Apr. 23, CEO Justin Davis-Rice talked of his excitement about the “available cash of $270 million, a clean balance sheet with no debt and a re-invigorated management team and board of directors.”

According to him, management is “currently evaluating several synergistic acquisition targets that could position Naked as a strong player in intimate apparel” with Frederick’s of Hollywood. The group might consider purchasing other brands to grow operations.

Market participants have shown their approval of this development in the second half of April. Businesses in the e-commerce retail sector typically have a higher margin than brick-and-mortar stores. The potential for increased revenue and less loss has been behind the interest of short-term traders in NAKD stock.

Poor Financial Metrics

The pandemic has meant that revenues and share prices of online businesses have increased significantly. However, behind the excitement and hype, potential investors need to look at the financial health of a given e-commerce company.

Naked Brand announces results semiannually. The latest results for the six months ended July 31, 2020 were published in November 2020.

Net sales came at $34.6 million, down 17.9% year-over-year (YoY). But they had been $42.1 million in the six-month period ended July 31, 2019.

Analysts have been concerned that about the declining revenue over the past several years. Such a negative trend is a big concern. The net comprehensive loss during the period was $19.7 million. A year ago, it had been $27.2 million. It’s important to note, however, that the decrease in net loss was mainly due to extreme cost-saving measures.

According to the semi-annual report, management worries about its “ability to continue as a going concern.” The culprit is ongoing losses. Furthermore, adding to analysts’ concerns, the company has been raising capital through share offerings. That is how it was able to pay off debt and purchase inventory to continue operations.

Despite the spectacular run-up in NAKD shares in the past several months, potential investors should remember that Naked Brand’s business is not in good shape.

The Bottom Line on NAKD Stock

Shares of the New Zealand-based intimates and swimwear manufacturer are too choppy for most retail portfolios. Seasoned investors would possibly concur that before Covid-19, given its poor fundamentals, a stock like NAKD would not be seeing such high returns.

But the pandemic has created a trend whereby unprofitable businesses with poor financial metrics see retail interest that translates into incredible share price gains in a matter of weeks.

Potential investors whose portfolios cannot afford daily price swings might want to avoid investing in NAKD stock. There are plenty of other high-growth opportunities on Wall Street.

For instance, they might buy exchange-traded funds (ETFs) that invest in high-growth, small-caps, online shopping, or retail. Examples include the Amplify Online Retail ETF (NYSEARCA:IBUY), the iShares Morningstar Small-Cap Growth ETF (NYSEARCA:JKK), the SPDR S&P Retail ETF (NYSEARCA:XRT), the Global X E-commerce ETF (NASDAQ:EBIZ), or the Vanguard S&P Small-Cap 600 Growth Index Fund ETF Shares (NYSEARCA:VIOG).

However, if you are a short-term speculator, you could potentially want to ride the wave in speculative NAKD shares as long as you are within your well-defined risk parameters.

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

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.

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