There’s Still No Reason to Invest in Naked Brands

Naked Brands (NASDAQ:NAKD) has enjoyed a bit of a comeback so far in 2021. Shares spiked from 20 cents to more than 40 cents at one point over the past few days. That said, this is a rounding error in the bigger picture. On a split-adjusted basis, NAKD stock traded for $600 per share in 2018, so the stock is still down more than 99% from that level.

Why has Naked Brands been a catastrophic loser for its longer-term investors? Simply put, the business never achieved any significant commercial success.

For full-year 2018, for example, Naked Brands generated $95 million in revenues, while losing $19 million in the process. In 2019, long before the novel coronavirus hit, its revenues slumped to $76 million while its operating losses increased.

So, don’t merely blame Naked’s problems on the pandemic, or assume a recovery is coming as the economy reopens.

Severe Financial Distress

Naked’s financial situation got worse and worse as its operating losses mounted and its share price plunged. As a result, in January of last year – again, before the pandemic – Naked Brands ironically divested its Naked brand, selling it to an Italian apparel company. You know things are going poorly for a company when it sells off its namesake business.

From the company’s fiscal year 2020 results published in May, which are its latest financial figures on the company’s website, things went from bad to even worse. For full-year fiscal 2020, the company’s loss ballooned to $34 million even as revenues plunged to just $59 million. Needless to say, you won’t stay in business for long what that sort of negative profit margin.

As of Jan. 31, 2020, Naked had just $2.5 million of cash on hand. Subsequently to that, it raised capital both by issuing more stock to the public and taking on debt. When you’re losing $34 million a year on revenues of less than $60 million, it’s hard to bring in enough new cash to keep the lights on, however. As of this writing, Naked’s market capitalization is just $33 million, meaning it’d have to effectively double its share count with new issuance just to raise enough cash to fund one year’s operating losses.

Why The Stock Popped

So, if the company’s balance sheet is terrible and it is unloading core brands to survive, why did the stock rally recently? Given Naked’s persistently low share price, the Nasdaq had warned that it might delist the company. Normally, the Nasdaq requires that companies keep their share prices above the $1 mark. If a stock price falls below there, the Nasdaq sends a warning. And if the share price stays below $1, the exchange revokes the listing.

That said, the Nasdaq has been more lenient recently due to Covid-19. It has not immediately revoked many listings, instead giving companies a longer curative period to bring their shares back into compliance. Naked Brands was one such recipient of this policy.

Nasdaq will now be giving the company until May to get its stock price back to $1 or above. In theory, if the company’s fortunes greatly improve, shares could regain that mark naturally. More likely, however, the company will elect to enact a reverse stock split to get shares out of penny stock territory. That, in turn, would likely cause negative pressure on the share price.

While I see little merit in Naked’s business in general, if for some reason you do want to invest, it’d generally be advisable to wait until after a reverse split is executed.

NAKD Stock Verdict

Having another six months to regain listing compliance is something. If Nasdaq had not granted an extension, then NAKD stock would have been delisted promptly. That, in turn, would have killed any remaining speculative appeal around the stock and caused shares to tank.

That said, merely receiving a stay from being delisted has solved precisely nothing as far as the company’s problems go. Naked Brands was already in a downward spiral long before Covid-19 hit. It’s far for clear that it had a viable strategy that would allow it to remain solvent even at that point. And now, with the apparel industry in tatters thanks to the pandemic, it seems likely that Naked Brands will have to reorganize its capital structure, which in turn would probably wipe out existing shareholders.

Naked Brands has avoided its stock becoming worthless just yet. But there’s little to no evidence that shares have much value in the long-term. As such, even for avid traders, NAKD stock is not worth the risk.

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

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.