Why I’d Still Avoid Naked Brand at These Lower Levels

Investors in Naked Brand Group (NASDAQ:NAKD) and NAKD stock are still up more than 197% year-to-date. Indeed, any stock that sees such capital appreciation in a relatively short amount of time is worth taking a look at.

White undergarments hang on wooden hangers against a white background.
Source: Shutterstock

However, when one considers how far this stock has fallen from its peak, the situation looks a bit less rosy. Indeed, NAKD stock is down nearly 60% from its spike in late January. That’s a pretty brutal blow for investors who bought at the top.

At these levels, some growth investors may be enticed by shares of the New Zealand-based retailer. After all, this is a retail stock. As we’ve seen with other meme stock/reopening trades, once momentum picks up in these names, stocks can skyrocket.

That said, it’s clear NAKD stock still remains a highly speculative play. For investors looking for value, this stock might not fit their profile today.

Here are two reasons why I’m still bearish on this company right now.

Restructuring Efforts Still Weighing on NAKD Stock

As with other traditional brick-and-mortar retailers, Naked Brands is shifting to e-commerce. The company has undertaken a rather aggressive restructuring plan to do so.

As part of this plan, Naked Brands intends to focus on its e-commerce subsidiary, FOH online, divesting a large chunk of its retail assets under its flagship Bendon brand. The company’s Bendon brand is one of the premier lines of intimate clothing Naked Brands has invested heavily in in recent years.

This strategic shift toward e-commerce makes sense from a long-term perspective. However, I have two problems with this move right now.

First, I think the company’s decision to divest of its core retail assets as the global economy is set to reopen essentially nullifies the reopening thesis with this stock. Retail investors want to buy companies in the beaten-up physical retail space. These companies have high leverage to a post-pandemic surge. When shoppers once again flock to the malls, these companies are due for at least a short surge in profitability. Thus, the upside is limited with this stock right now.

Second, questions remain as to whether growing e-commerce sales will be able to make up the difference. Naked Brands still earns the majority of its revenue through physical retail. Accordingly, investors bullish on this strategy need to be plugging some pretty aggressive e-commerce growth numbers into their models. Personally, I don’t see revenue growth as a possibility over the next few years with this stock.

Turnarounds take time. For companies with already declining sales, these turnarounds can be multi-year events. Accordingly, investors in Naked Brands will need to be very patient with this stock. And right now, the market is rather impatient, for those who haven’t noticed.

The Bottom Line on Naked Brands

I’ve been bearish on this stock for some time now. Since my piece on March 24, shares have dropped 27% at the time of writing.

Unfortunately for deep value investors, I think this downside momentum is likely to continue. There’s just no fundamental reason to own a stock like NAKD brands right now.

Why?

Well, the company’s financials paint a bleak picture that’s hard to ignore.

Revenue dropped by 19.5% year-over-year, fueled by declining physical retail sales. Massive declines in the company’s traditional retail and wholesale businesses drove these rather underwhelming numbers.

Given the continuous declines in revenue we’ve seen materialize for Naked Brands in recent years, anticipating some sort of surge coming out of this pandemic is unlikely. Accordingly, investors betting on this turnaround stock are doing so at significant risk today.

My view is that the valuation of this stock right now still prices in too much optimism in terms of long-term growth. Thus, I remain on the sidelines with this one.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective. 


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