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Is Naked Brand Group a Buy Under $1?

Naked Brand (NAKD) has lost money for six consecutive years and this cash burn has caused a dilution in shareholder wealth due to constant equity capital raises. Will this trend change anytime soon and is the stock worth buying?

Naked Brand Group (NAKD) designs, retails and sells women’s and men’s intimate apparel and swimwear products.  It’s a small-cap company that trades under $1 and has just a $725 million market cap.

Surprisingly, NAKD has recently been one of the most heavily traded stocks on US exchanges.  That’s directly because of its popularity on Reddit among retail traders.

But is Naked Brand a solid long-term bet? Will it stage a comeback or lose steam after it has gained a staggering 497% in the last year?

Naked Brand Group is down 80% from 52-week high

In the last year, shares of Naked Brand have traded between $0.066 and $3.40. It is currently priced at $0.7236 which is 80% below the 52-week high. Despite the massive pullback in shares prices since January, the stock has gained over 500% since October 2020, valuing the company at a market cap of $644 million.

The company’s sales have fallen from $131.38 million in fiscal 2018 to $80 million in fiscal 2021 ended in January. So, what has driven the rally in shares of this small-cap retail company higher?

Naked Brand Group has been extremely popular on social media platform Reddit. The massive uptick in NAKD stock can be attributed to a short squeeze orchestrated by retail traders on Reddit.

The company took advantage of its high stock prices and raised cash by diluting shareholder wealth. The equity raise as well as asset sales enabled Naked Brand to reduce debt on its balance sheet and provide the company with enough liquidity to acquire other online businesses.

Naked sold-off its traditional retail (read brick-and-mortar) business in April 2021, allowing it to solely focus on online sales channels. In August 2021, the company disclosed it has found a partner to collaborate the merger or sales of Naked Brand. Last Friday, it announced that the company’s management has identified a disruptive opportunity in the clean energy space that could also serve as a potential for the above-mentioned merger.

In a press release, company CEO Justin Davis-Rice stated, “During my career as an owner and operator of many diverse businesses, I have always been attracted to commercial opportunities that benefit our environment and help contribute to the growing ESG mandates that major corporations are implementing today across the globe. This company is a market leader with cutting edge patented proprietary technology that we believe satisfies those ESG mandates."

What next for investors?

The acquisition/merger agreement is still in the early stages of development of due diligence and investors should understand that Naked Brand Group has lost money every year since fiscal 2015. 

Further, as it exits the offline retail space, investors should expect another year of falling revenues. Naked Brand Group has also diluted shareholder wealth at an alarming rate as its share count has risen to 906 million right now, from 86 million last October.

Even if the acquisition or merger talks are successful, the potential buyer will be unwilling to pay 8x trailing sales for a company grappling with negative margins and steep revenue decline, making Naked Brand Group an extremely risky investment right now.

NAKD shares were unchanged in after-hours trading Wednesday. Year-to-date, NAKD has gained 275.00%, versus a 17.34% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.


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