Naked is a good investment, as long as it is not a “bare market”!

If you were tied up in all of the $GME – GameStop, $AMC – AMC Entertainment Holdings., $BB – Blackberry etc. drama you probably also heard of a stock that goes by $NAKD – Naked Brands. In this analysis I will be breaking down Naked Brands to help you understand the many aspects of their business and to see if it is a stock that is poised for growth . If you would like to see my other analyses and want to stay up to date on my new ones as soon as they drop, follow me here.

Company Overview:

Currently, Naked Brands business is operated through their main subsidiary “Frederick’s of Hollywood” (FOH), and through some of their other subsidiaries (which will be mentioned later on) through selling intimates’ products, sleepwear, loungewear, swimwear & swimwear accessories, and costume products.

Since 1946, FOH has set the standard for innovative apparel, and was the first to introduce the push-up bra, padded bra, and black lingerie products into the US markets. This history of innovation has led FOH to become one of the world’s most recognizable apparel brands in the world. Through an exclusive licensee deal, Naked has garnered the rights to sell the whole range of FOH products.

Naked’s strategy is to use the existing reputation of FOH to drive sales on a pure e-commerce business strategy. Naked plans to leverage their managements expertise in operations, development, capital markets, and e-commerce to build their brand. They are focused on growing/retaining their customer base, grow their sales, and increase their profitability by leveraging the FOH reputation. Lastly, Naked is planning to make investments into brands and technologies to strengthen their customer experience by innovating their products and platforms. Part of the “investments” that I mentioned are acquisitions that will provide synergistic benefits (which I will explain later).

Investment Information:

Seasonality:

Naked has stated that their business is seasonal in nature, and consists of two selling periods, the first half, and the second half of the year. Naked generates the majority of their sales during the second half of the year, which can be contributed to the holiday season. The second half of the year generated 57% of Naked’s annual revenues in 2021 and 2019.

Trademarks and Patents:

Naked owns the Frederick’s of Hollywood trademark through their license agreement. This trademark is very valuable as the name carries a lot of weight.

Brands:

Bendon Brand (Sold this branch of their business on April 30^th, 2021)
- Bendon Man
- Me
- By Bendon
- Davenport
- Lovable
- Hickory
- Fayreform
Naked Brands
- Heidi Klum Intmates
- Frederick’s of Hollywood
- Pleasure State

Bendon Brand Sale:

On April 30^th, 2021, JADR Holdings bought Bendon Brand from Naked for $1 (NZD), as the brand was burning cash quickly and incurring increasing net losses.

Real Estate Portfolio:

As of FYE 2020, Naked Brand reports that they own 59 separate retail locations, which are mainly located in malls, strip malls, and strips in Australia and New Zealand. In 2020, Naked only closed one of their retail locations, which is surprising due to the effects of COVID, especially on retail businesses in malls.

It is good to see that Naked owns their own real estate domestically, as it is considered an asset, and in many cases is better for the financial reports than leasing/renting.

Shift to e-Commerce:

Naked was an international brand and sold their products in Australia, New Zealand, United Kingdom, USA, and Internationally. Recently, they have been scaling back on their physical presence as they are going “all-in” on their e-commerce strategy, however they still sell their products internationally.

Naked has scaled their presence down from 5,241 physical locations in the countries previously mentioned (in 2019), to now just 181 physical locations in 2021.

Management Team:

Justin Rice (CEO and Chairman): Mr. Rice was previously the CEO of Bendon Limited, and prior to this was a co-founder of Pleasure state (bought by Bendon). This is good because it shows that Mr. Rice has experience in the business, however as we know Bendon was not successful, which may speak against Rice’s abilities.

Mark Ziirsen (CFO): Mr. Ziirsen previously has senior finance leadership roles with many large Australian companies such as Cochlear Aristocrat, Coca-Cola, and Goodman Fielder. Although he doesn’t have much experience in the apparel business, he is the CFO, which requires less knowledge about apparel and more knowledge about finance (which he has an abundance of).

Board of Directors: Naked’s board of directors exhibit extensive experience in apparel and related industries, and the 3 main directors have 55 years experience in apparel and related industries.

This management team looks solid, and by looking on the surface, these people (at least on paper) look fit to run this business. However, my only concern is with Justin Rice, and the potential that he has a repeat of Bendon, hopefully he has learned from that event and can translate this new knowledge and caution to Naked.

Financial Information:

February 2021 Private Placement: On February 24, 2021, Naked entered into a securities purchase agreement with accredited investors. This agreement allowed these accredited investors to purchase 117.65M common shares for $0.85/share, and with this each share purchase they also received 1 warrant (totalling 117.65M warrants sold). These warrants expire in March 10 2026, and have an exercise price of $0.935/share. If all of these warrants were converted into common shares at expiry and then sold, and all of the original common shares were sold as well, there would be 235.3M shares dumped into the markets. Given todays current number of shares outstanding, this would have a dilutionary effect of 30.10%, however as we know the warrants expire in early 2026, so the average dilution would be 5.4%/year. This number is high, however high amounts of dilution are common with high growth stocks like Naked.
ATM Offering: In February of 2021, Naked entered into an agreement with Maxim Group, to sell them 69.27M shares for $69.12M ($0.9978/share). This caused a dilutionary effect of 8.86%, which once again is relatively high and something to watch out for.
Bendon Conversion Shares: As part of the deal agreement between Naked and JADR Holdings, Naked agreed to give Bendon $3.8M (at the time) of convertible shares. Recently, these convertible shares were converted into common shares, resulting in an aggregate of 45.93M shares. This diluted the existing shares by 6.24% and further adds to total amount of dilution this year.
Financial Performance (Bad): FOH’s net sales declined by 9.6% YoY, Naked’s net loss increased by 39.46%, net sales decreased by 11%. This poor financial performance can be attributed to the sale of Bendon, restructuring according to the new business model, and the closure of Naked’s physical locations due to COVID.
Financial Performance (Good): There is not much to celebrate financially this year due to the sale of Bendon, closing stores, and restructuring however this is understandable due to COVID. However, there was some good as their gross profits increased by 0.3%, their New Zealand revenues increased by 1.02%, their e-Commerce sales rose by 0.4%, and they reported a positive EBITDA for the first time in at least 4 years.

Competition:

Naked noted in their SEC 20-F filing that, “The sale of women’s intimate apparel, personal care, and beauty products is a very competitive business.” And that, “they have numerous competitors including individual stores, chains, department stores, and discount retailers.” Majority of their competition is private, however there are a couple of companies that are public that are also in the apparel space and will be used in my comparable analysis later on in this analysis.

These public companies include $SGC – Superior Group of Companies, $OXM – Oxford Industries, $LAKE – Lakeland Industries, and $DLA – Delta Apparel.

Investment Valuation:

The only valuation of Naked that I can currently undergo given their financial position is a set of comparable analyses. For this valuation I will be taking the average fair value reached via comparing Naked’s P/B, EV/Revenue, and EV/Assets to that of their competitors.

P/B:

By comparing Naked’s P/B to that of their competitors, I arrived at a fair value of $0.40/share, which represents a share price decrease of 45.2%.

EV/Revenue:

By comparing the EV/Revenue multiple of Naked to their competitors, I arrived at an implied downside of 21.92%, which implies a share price of $0.57.

EV/Assets:

I arrived at a similar result of that achieved in the EV/Revenue comparable by comparing the EV/Assets multiple of Naked to their competitors, I arrived at an implied downside of 23.29%, which implies a share price of $0.56.

Average Comparable:

In order to avoid any possible bias in my analysis I have decided to take the average of all 3 comprable analyses that I underwent. By doing this I arrived at one all-encompassing fair value of $0.51, which implies a downside of 30.14%.

Argument Against the Valuation:

It is very hard to compare a high growth, hype stock to public competitors because none of these companies exhibit the same share price growth or volatility that Naked does. This is evident by their big fluctuation in results in my comparable between the start of 2021, and where we are currently in 2021. As a result, this comparable may not be accurately portraying the value of Naked, so take the valuation with a grain of salt.

Furthermore, the companies that I am comparing Naked to do not operate in the same sub-sections of apparel as Naked, and they are in different stages of their business, as some of them are in their maturing stages.

For this reason, I think that the valuation could be off, however, it still implies that Naked is overvalued, and as investors we need to consider this.

With Naked’s high growth potential I think that the potential upside of this investment is worth the potential downside risk highlighted by the comparable.

Risks:

Dilution: So far in 2021 (and in some cases very late 2020) there has been a lot of share dilution. Naked has diluted shares via their February 2021 Private Placement, their ATM offering, and their Bendon convertible shares. This year alone, all of these sources of dilution will account for a total dilutionary effect of approximately 20.5% (using these years weighted average of the Feb 2021 Private Placement). These levels of dilution are very high even for a high-growth stock like $NAKD – Naked Brands, and need to be considered by current and potential investors.
Financial Performance: This year Naked exhibited a very poor financial performance, however this is understandable as it is attributed to COVID. This is understandable as one of the hardest hit industries is retail and malls, which is reflected in their financial performance. If this type of performance continues than the future for Naked will not be a favourable one and scare off investors.

Catalysts:

Financial Performance: If Naked can have a solid rebound through a great financial performance this year than this already pent-up stock has the potential to soar. One of the biggest things holding investors back for this stock is their lackluster financial performances recently, however a strong financial year can greatly benefit the share price.
Reddit: We have seen it once and are ready to see it again. Earlier this year, amidst the reddit and GameStop pump, we saw Naked’s share price take off over 100’s of percentage points. If reddit can get behind this stock again and build up positive sentiment, Naked can once again become a “social media growth stock”.
Re-Opening: Any sort of further re-opening of businesses and malls will help Naked to get back into their physical locations and start selling their products again. However, this may not help greatly due to their shift and focus of their e-Commerce segment.