NAKD Stock Will Split Eventually, and Then You’ll Really Be Stuck

 You heard it here first. Naked Brand Group (NASDAQ:NAKD) stock will likely execute a reverse split to get out of Nasdaq’s bad books.

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Although it’s got until Oct. 25 to regain compliance and get its minimum bid price above $1 for 10 consecutive days, I’ve lost track of how many notices it’s gotten in recent years.

While a reverse split would be the second in less than two years for Naked Brand, it makes sense to take this action given its so-called “transformation” to a pure-play e-commerce company. 

If the company wants investors to take it seriously, the least it can do is get a share price that’s not stuck in penny-stock hell.

The question is whether a reverse split even matters. It’s possible the company’s ready for the scrap heap, not for a primetime spot on CNBC’s Mad Money. 

I grew up with a friend whose family manufactured lingerie. It’s not an easy business to make money consistently. It’s even harder to grow consistently. An investment in Naked Brand is such a waste of energy. 

Here’s why. 

NAKD Stock Has Only One Shot

Investors can be remarkably forgiving. Should the powers that be at Naked Brand decide to go the reverse split route, I’m sure it will be able to turn the corner from its minimum bid issues and move forward. 

The question I have is: to what?

Pivoting to e-commerce isn’t the worst idea in the world. After all, you’ve got biotech companies pivoting from ophthalmology treatments to Covid-19 vaccines. Moving from brick-and-mortar retail to online retail is barely a transition in today’s omnichannel world.

My bigger concern is that the transformation to a pure-play e-commerce company won’t be nearly as easy as everyone thinks. In my last article about the company in April, I suggested that it had a long climb ahead of it to get back to $1 or higher. 

Spitballing, I came up with an estimate of $29 million in 2021 for Naked Brand’s e-commerce revenues. Trading at 57 cents, about where it is as I write this, it had a price-to-sales ratio (P/S) of 12.6, double Nike’s (NYSE:NKE).

What sane person would buy Naked Brand over Nike? With fractional shares all the rage these days, you’d be an idiot not to buy the latter. 

The company is so confident it can find attractive e-commerce buys with its $270 million in cash that it brought in a mergers and acquisition specialist to help spend the booty. 

Who Might It Buy?

Not Amazon (NASDAQ:AMZN). I happened to find an article from 2017 that discussed Amazon’s sales in different categories. 

“Men’s and women’s underwear and intimate apparel accounted for two out of five of Amazon’s top-selling apparel categories last year, for a total of $415 million in sales, according to the report,” Insider reported in July 2017.

“The No. 1-selling category was men’s bottoms ($375 million in sales) — which include pants and shorts — followed by women’s intimate apparel ($250 million), men’s workwear ($225 million), women’s denim ($170 million), men’s underwear ($165 million).”

Ok, so Amazon sold $415 million in men’s and women’s underwear and intimates in 2016. What are the odds those numbers have grown much larger over the past four years? Pretty high. 

Amazon alone could crush Naked Brand’s ambitions. 

Looking at a list of publicly traded internet retail companies, there aren’t many that would fit the bill. Moving over to apparel manufacturers, I suppose it could take a run at Oxford Industries (NYSE:OXM) — it owns Tommy Bahama, Lily Pulitzer and Southern Tide and a few others — but it would have to pay a minimum of $1.8 billion [enterprise value] including the assumption of debt.

Unfortunately, even if it blew the entire $270 million, it would have more than $1.5 billion in debt. With inflation threatening higher interest rates, that would be almost certain bankruptcy. 

But, we can use Oxford’s valuation metrics as a guide. 

It’s trading at 2x sales. This means that if Naked Brand were to pay cash for its acquisition, it could buy $135 million in revenue, almost five times its current sales. In a normal year, say 2019, Oxford had an operating margin of 8%. If the tentative acquisition had the same margins, that would generate almost $11 million in operating income.

So, as its M&A specialist suggested, it’s possible, given the weakened condition of many companies in the apparel industry due to Covid-19, that targets will be more plentiful than usual. 

I guess we’re about to find out. 

The Bottom Line

Barring a miracle, I don’t see any way that Naked Brand avoids a second reverse split. As I stated in April, a 1-for-100 split is what the company did in 2019. To do it again, NAKD stock would be trading at $60. 

My guess it will go for a 1-for-20 split this time around or a $12 share price, well out of penny-stock territory. 

Consider this.

If you owned 10% of NAKD stock in November 2019 [223.13 million shares outstanding] before it did a 1-for-100 split that December, you would have owned 223,130 shares post-split [223.13 million divided by 100 multiplied by 10%].

Based on 641.48 million shares outstanding as of March 10, your 10% ownership would now be 3.5%. Should another round of reverse split/share dilution take place, your ownership likely would be reduced to less than 1% without some top-up to maintain your level of ownership.

Do you really want to be a part of a company that cares so little about who gets diluted? I sure wouldn’t.    

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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