Why Investors Should Avoid Naked Brands Stock for Now

There is a somewhat compelling argument for Naked Brands (NASDAQ:NAKD) stock as an investment. That’s because it is one of the brands caught up in the conversations on r/wallstreetbets . 

For investors, the question seems to be whether a few recent moves by Naked Brands are likely to propel NAKD stock upward.

There doesn’t seem to be a lot of risk in the stock at current prices. And Naked Brands has plenty of opportunities to improve itself.

But despite those positive attributes, Naked Brands has never really done much to prove itself.

Former Highs Will Attract

I’m not really sure what criteria Redditors and the members of r/Wallstreetbets use to identify which stocks to back. I understand that the percentage of shares sold short is one factor.

That appears to be one reason for their bullishness on NAKD stock. But I believe that the meteoric descent of the stock and the fact that it once traded at high prices have made it more attractive to the members of r/Wallstreetbets.

The dollar amounts at which NAKD stock previously traded are frankly eye-opening. The shares traded in the $600s and $700s throughout 2018. Then, by the summer of 2019, the share price had declined to less than $10. NAKD stock changed hands for less than $1 a year later. 

In the first six months of 2018, Naked Brand’s posted revenue of 56.75 million NZD ($41.43 million). Remember, at that time the shares were trading for hundreds of dollars each. Fast forward to May 2020 and Naked Brands reported full-year revenue of 90.1 million NZD ($65.77 million). Prorated, that would be roughly 45 million NZD for a six-month period. However, in the wake of that report, NAKD stock fell below $1.

So the share price fell from several hundred dollars to well under $1, even though the company’s revenue did not change much. I believe traders might be keying in on that. Perhaps the Redditors think they can bump NAKD stock back into the $100s. After the other rallies they’ve sparked, they may be able to do that.

Meanwhile, Naked’s recent strategy changes at least give investors a justification for buying its shares.

From the Physical to the Digital

Brick-and-mortar operations aren’t what they used to be. In Naked Brand’s case, it believes fully in the transition to e-commerce. In fact, it is choosing to “shed its brick-and-mortar operations in order to focus exclusively on the planned rapid acceleration of its e-commerce business.”

The company is looking to expand its revenues and profitability by tapping into the $6.5 trillion of global e-commerce sales it anticipates in 2023. 

Therefore, any investors considering NAKD stock can at least cite the fact that the company is shedding its less-productive brick-and-mortar stores as a reason for their interest in the name. The pandemic likely factored into the company’s decision. 

Further, Naked Brands does already generate $20 million of annual revenue in the U.S. from its online operations. So there were good reasons for Naked Brands’ strategy change.

Capitalizing on Other Trends

Naked Brands also recently took advantage of another trend: the r/wallstreetbets’ crowd’s enthusiasm for NAKD stock.

After its stock was inflated by that crowd from 39 cents on Jan. 26 to roughly $1.65 three days later, Naked Brands struck. On Feb. 1 it offered 29.415 million ordinary shares for $1.70 each. After all was said and done, it obtained $46.9 million from selling the shares. 

Sure, that caused its investors to be diluted. Something tells me, though, that the company doesn’t care one bit about that, and it should not. In fact, I’d argue that shareholders should ignore the dilution as well.

Because now Naked Brands is flush with cash that it can use to enhance its e-commerce business. 

The Bottom Line on NAKD Stock

I don’t think that it makes sense to buy NAKD stock now. It’s reasonable to believe that the company’s exclusive focus on e-commerce strategy will improve its results. But given the company’s thin track record, I wouldn’t put any money into it now.

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