Jun 11, 2021
[8 min Read]
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.
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).
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.
Bendon Brand Sale:
On April 30th, 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.
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.
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.
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.
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%.
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.
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.
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.