Naked Brand Group Isn’t Worth the Gamble on the Off Chance of an M&A Deal

For a while, it seemed as if r/WallStreetBets had breathed new life into Naked Brand Group (NASDAQ:NAKD) stock.

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

The intimate apparel manufacturer was heading for Chapter 11 bankruptcy. Everyone knows how the rest of the story goes. The company has eliminated its debt, has $270 million in cash, and is looking forward to a major acquisition.

However, before you purchase NAKD stock, there are a few things to consider.

One of the most surprising statistics regarding retail is that even though eCommerce has become a major part of how consumers buy, many companies still struggle.

The company in question here – NAKD – suffered from competition and a poor social media following that led to their lackluster performance over the last few years. With the new cash in tow, the company is shifting its focus to a completely online business model.

With the divestiture of everything but its online sales channel and essentially no growth from this source, the outlook is strained.

E-commerce is undoubtedly the future. The world’s love affair with shopping online has not only impacted businesses but people across America.

As retail e-commerce sales worldwide totaled $4.28 trillion in 2020, it is projected that by 2022 the figure will grow to $5.4 trillion. But Naked is late to the party. And selling off a running business is impacting its bottom line.

It needs to provide investors with a reason to believe its story.

Stay Away From NAKD Stock

Global retail sales are expected to only grow by 16% in 2021, but that doesn’t mean the online market is slowing down; it accounted for 19.6% of total retail sales in 2020. However, NAKD only grew sales at 0.4% year-over-year against global eCommerce growth of 25.7%.

NAKD had to compete with Victoria’s Secret (NYSE:VSCO), H&M, Lascana, and others in the brick-and-mortar world. As they focus purely online, there will be new competition from upstarts like CUUP and established giants like Amazon (NASDAQ:AMZN).

This is a great example of how competition in the industry has changed over time. Naked Brand’s Frederick’s of Hollywood brand was once able to thrive because there was no other brand like them. Now, with so many competitors vying for attention and money from consumers, it’s tough to outrun the others.

Maintaining your relevance will take more than just price cuts or advertising campaigns; you also need innovative strategies that take advantage of changing consumer trends.

NAKD has been transformed into an eCommerce company as a result of its unprofitable brick-and-mortar operations. The Covid-19 pandemic accelerated this transformation.

When NAKD finally decided to make the jump to digital they were already light years behind.

High customer acquisition costs and difficult retention mean that even if their conversion rates improve significantly over time, it will be hard for them to compete with other companies who kicked off this trend earlier than expected and now have an advantage of growing using existing infrastructure.

Clean Energy Pivot

Whatever the future holds for Naked Brand, one thing is for certain. It’s popularity with the Reddit crowd has allowed the company to raise enough funds to pursue an aggressive mergers and acquisitions (M&A) strategy.

The core business is suffering. Hence, the company should look to diversify into other areas. We got a hint of this last August.

Naked Brand shares rose greatly after announcing that it has reached a preliminary agreement with an unknown merger or acquisition partner.

The company declined to specify the name of the company. However, it said the sector in which it operates is a high-growth one. In September, CEO Justin Davis-Rice said that the merger or acquisition partner operates in clean energy. He offered the following regarding its operations and the prospects of a deal:

This company is a market leader with cutting-edge patented proprietary technology that we believe satisfies those EGS mandates. We have made significant progress over the past few weeks and believe the path to a definitive agreement is in sight. However, there can be no assurance that we will sign a definitive agreement, or if we do sign an agreement, that we will be able to close the business combination.

Although investors are happy, this is also puzzling news. Intimate apparel and clean energy do not necessarily go hand in hand.

Although the latter is a high-growth space, it is unclear how the company will fit into the overall operations of Naked Brand. It is already struggling after divesting its brick-and-mortar Bendon operations. It needs a shot in the arm and fast. But the latest piece of news leaves us both excited and confused.

Not the Right Investment

The meme-stock phenomenon is not slowing down. Several of the more iconic names out there, like AMC Entertainment (NYSE:AMC) and GameStop (NYSE:GME), continue to be Reddit darlings.

However, the same level of commitment does not exist with NAKD stock. Shares have been down 15% in the last month.

The efforts to transform into a pure-play e-commerce business are commendable. However, its transition has come at the worst possible time for NAKD, coming far too late to catch up with everyone who has already made their shift.

The decision to pivot into clean energy is also vague. Moving forward, it can become a game-changer, but there is nothing set in stone at the moment. If there is more clarity regarding the acquisition, you can make a case to buy more NAKD stock.

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On the publication date, Faizan 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 Publishing Guidelines.

Faizan Farooque is a contributing author for and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence.

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