Naked Brands Stock Looks Primed For a Rally

In the last two quarters, Naked Brands (NASDAQ:NAKD) stock has been in the radar of the Reddit army. It’s therefore not surprising that NAKD stock has been extremely volatile.

Lingerie on a pink background.
Source: NazarBazar/Shutterstock.com

The stock touched a low of 7 cents in November. However, towards the end of January 2021, the stock had surged to $3.40. The correction was equally sharp and the stock currently trades at 62 cents.

If we talk about the reasons for the correction, profit booking is the obvious factor. Further, Naked Brands utilized the rally to mop up some funds from the secondary markets. Equity dilution contributed to the steep decline.

It seems that the stock has finally settled into a zone of consolidation. Further, it’s very likely that a fresh breakout is due.

As an overview, Naked Brands sells women’s and men’s intimates apparel and swimwear products. The company is focused on the United States.

Estimates suggest that the North American lingerie market was valued at $9.5 billion in 2018. Further, the market is expected to grow at a compound annual growth rate of 9.9% through 2027.

The market is therefore attractive, but it remains to be seen if Naked Brands can accelerate growth. In the next few quarters, there are likely to be ample factors that serve as catalyst for a big move in the stock.

The Business Transformation Plan

The e-commerce business has witnessed rapid acceleration through the pandemic. In January, Naked Brands announced a business transformation plan. The company decided to focus entirely on the e-commerce model and divest the unprofitable brick-and-mortar operations.

In April 2021, Naked Brands announced the completion of Bendon’s brick-and-mortar operations. It’s this transformation plan that triggered a big rally for NAKD stock.

In terms of business expansion, Naked Brands was on a fund-raising spree in the first quarter. As of March, the company had $270 million in cash with zero debt in its balance sheet. It’s this cash buffer utilization that’s likely to determine the stock movement in the next few quarters.

Growth Strategy Likely to Deliver Results

In April, Naked Brands announced the appointment of Mark Ziirsen as the company’s chief financial officer. A reason to talk about his appointment is the fact that Ziirsen has been involved in mergers and acquisitions.

According to the company, his expertise “will add significant value as we continue to pursue accretive acquisitions of high growth and cash flow positive businesses.”

As of the first quarter, the company already had a portfolio of eight company-owned and licensed brands. It’s very likely that the company is seeking brand portfolio expansion that accelerates online growth.

An important point to note is that the brick-and-mortar model is more capital intensive. It’s a challenge for a small company to pursue aggressive regional expansion.

However, with Naked Brands entirely focused on the e-commerce model, I expect geographical expansion. This will significantly increase the company’s addressable market.

It’s also worth noting that the company has zero debt in addition to the cash buffer. Assuming debt that’s equal to the cash position, Naked Brands has a total liquidity buffer in excess of $500 million. A big acquisition can spark a sharp rally.

Concluding Views on NAKD Stock

The Reddit army triggered rally has allowed dozens of small companies to raise funds during the stock surge. It’s the utilization of the funds that will determine the next leg of the rally for these stocks.

NAKD stock belongs to this group with the company having ample resources to execute its new growth strategy. If the results are positive in terms of top-line growth or quality acquisitions, returns can be multi-fold.

I am positive on NAKD stock, but like all penny stocks, it makes sense to have control on position sizing. Some exposure to the stock can be considered as markets wait for positive news. Primarily related to one or few acquisitions.

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

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.


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