Shares of intimate apparel and swimwear company Naked Brands (NASDAQ:NAKD) are up more than 10% this month. NAKD stock has been keeping up its volatile ways, primarily fueled by the meme-stock mania.
The company has been looking to turn things around with the divestiture of its physical store business to become an e-commerce pure-play.
However, there are multiple strings attached with its divestiture deal as it continues as a purely online business with little upside.
NAKD stock was in the doldrums before the pandemic. Then a Reddit-induced short squeeze happened, which took the stock to as high as $3.40. However, the stock is now back trading below the $1 mark and faces the threat of delisting.
The restructuring news has done little to lift the stock as investors see little upside with its strategic shift. Analysts are also not that hopeful about a possible bump in the stock’s price.
Hence, it’s a stock that you should definitely avoid for now. With that being said, let’s go into a little more detail, uncovering the naked truth about Naked Brands.
Bendon Divestiture and NAKD Stock
Naked’s e-commerce business, Frederick’s of Hollywood (FOH), will continue to have a close relationship with the divested Bendon.
Bendon will provide a wide variety of FOH services, including advertising, product design, customer service, inventory management, stock adjustments, and other services. In return, it will receive a 5% administration fee and a rate of return.
Naked Brand will be taking 10% to 30% of Bendon’s profits in the next three years. Moreover, it will also receive a sizable percentage of proceeds if Bendon is sold off. However, the likelihood of a successful sale is low, as it has been posting a loss in the last three years.
Naked also paid off a handsome NZ$14.5 million debt facility that Bendon owed to the Bank of New Zealand. An intra-company loan worth NZ$40 million will also be forgiven as part of the deal.
Additionally, it would also provide Bendon with a five-year loan of NZ$7 million with an interest amount of 5%.
These conditions will have an extremely negative impact on Naked Brand’s asset and equity value as we advance. Estimates suggest that its net asset value would decrease by at least 43%.
Equity Dilution
NAKD stockholders have suffered from massive dilution of their shareholdings in the past few years.
Outstanding shares were 230,000 a year ago but have now skyrocketed to over 781 million. In the same period, total assets grew by a modest 16%.
Back in March, the company had sold 117.65 million units for $95 million. These units constituted a five-year warrant and an ordinary share, which enabled investors to buy one share for $1.13.
Hence, with more capital infusions, the company’s cash balance could rise to $250 million.
However, the dilution doesn’t stop there because all warrants can potentially be exercised. According to company estimates, there could be an additional 176.47 million shares if the Feb 2021 warrants are exercised. If that is the case, then the share count could easily exceed $810 million. Therefore with so much dilution on the cards, it leaves little incentive to invest in the stock.
Bottom Line on NAKD Stock
NAKD stock has been a target of the Reddit retail trading crowd. The short squeeze took its stock to new heights but is now back where it belongs.
Its e-commerce transformation could pay dividends but might not be able to lift out its penny stock status, at least in the near term.
Its share count has risen dramatically in the past few years and could rise to an even greater height, further repressing existing equity holding. Therefore, NAKD stock is a definite no-no at this stage.
On the date of publication, Muslim Farooque 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.
