Give credit where credit is due. Naked Brand (NASDAQ:NAKD) is in a much better position than it was twelve months ago. The problem is that even that better position doesn’t seem like it justifies the massive move in NAKD stock.
NAKD has gained a stunning 441% so far this year. It appears to have been a major beneficiary of the “Reddit rally” that began in late January, a rally that sent stocks like GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC) soaring as well.
Unlike GameStop, Naked has capitalized on the rally. A company that a year ago seemed destined for bankruptcy now is on far stronger footing.
The core question is whether that’s enough to justify an exponential increase in the value of Naked’s business. The answer appears to be no.
Headed for Bankruptcy
To look at Naked Brand at Jan. 31, 2020, the end of its fiscal 2020, and now is to look at two very different companies.
At the end of FY2020, Naked Brand was in trouble. In its Form 20-F annual report filed with the U.S. Securities and Exchange Commission, Naked included a so-called “going concern” warning. That warning essentially tells investors that the company may not survive the ensuing 12 months without filing for bankruptcy.
The warning was easily justified. On Jan. 31, Naked Brand had just $3.7 million in cash. It had $2.83 million in total borrowings.
Given that EBITDA (earnings before interest, taxes, depreciation and amortization) for the year was a loss of more than $1.6 million NZD, the situation was dire. It had recently issued convertible bonds at a whopping 20% interest rate — compounded daily.
This was a company that was seemingly on a certain path to bankruptcy. The NAKD stock price certainly suggested as much. NAKD opened today at about $1. Even assuming full dilution from the convertible notes and warrants, Naked Brand’s market capitalization was a little more than $12 million.
Firmer Ground
The situation now certainly is far more positive, for a number of reasons.
First, the losses in the business should moderate going forward. Naked Brand already had exited its U.S. wholesale business and pulled back in Europe. It then agreed to sell its Bendon subsidiary to management in exchange for the new owners assuming Bendon’s liabilities.
This is now an e-commerce-only business. It likely won’t be profitable immediately, but it should lose less money and burn less cash than the previous incarnation of the business.
More importantly, Naked Brand has taken advantage of the Reddit pop. It sold $50 million worth of stock in late January at an average price of $1.70 per share. Last week, it announced an agreement to raise another $100 million, through a private placement of shares at 93 cents each, which includes warrants exercisable at $1.13.
Including Bendon, which the company says is still unprofitable, EBITDA loss in FY2020 was about $12 million. Including the agreement announced last week, Naked should have $200 million in cash.
Near-term risk in that scenario is pretty much gone. The $100 million private placement can still fall through, but even if it does, Naked is in fine shape. That unequivocally was not the case 12 months ago.
What Goes Wrong for NAKD Stock
But, as is often the case, there’s a catch.
Again, Naked Brand has fixed its balance sheet through equity offerings. As a result, shareholders have been dramatically diluted.
According to a recent prospectus, as of Feb. 19 Naked had 476 million shares outstanding. The private placement adds another 107 million shares, plus 107 million warrants at $1.13. Naked still has a shelf offering outstanding for more sales at the market price.
At a minimum, the current share count is 583 million. That in turn puts Naked Brand’s market capitalization over $600 million.
That’s a massive valuation on this business. Bear in mind that revenue for the e-commerce segment — the only business left once Bendon is divested — was 34.2 million NZD for the 12 months ending July 31.
That’s about $25 million. Even backing out cash of $200 million, NAKD still trades at about 17x revenue. That revenue comes from online sales of the Frederick’s of Hollywood brand, but only in the U.S., Australia and New Zealand.
That’s a massive multiple. E-commerce companies in the same ballpark are Etsy (NASDAQ:ETSY), Poshmark (NASDAQ:POSH), and Farfetch (NYSE:FTCH).
Naked is not any of those companies, each of which generates higher-margin platform revenue. It’s instead a niche direct-to-consumer business with a dated brand (Frederick’s of Hollywood) that has posted relatively modest growth in recent years.
It’s certainly doesn’t seem like a $400 million-plus business, which is what the NAKD stock price suggests at the moment. And so while zero doesn’t look like a likely mid-term outcome for NAKD stock, $1-plus doesn’t either.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.