New Zealand based undergarment apparel and swimwear manufacturer Naked Brand Group Limited (NAKD) has gained 415.6% year-to-date, driven by a speculative Reddit rally. Prior to this, the stock boasted more modest gains of 23.8% over the past nine months. The Reddit community wallstreetbets-induced short squeeze has driven the stock 389.9% higher over the past three months.

However, following a slowdown in Reddit community fueled investments, NAKD has slumped over the past month. The stock has declined 18.9% over the past month, marking an end to its speculative gallop. With faltering financials and sky-high valuations, we believe the stock’s decline paints an accurate picture of the company’s growth prospects.

Here’s what we think could drive NAKD’s performance in 2021:

Threat of Delisting and Bankruptcy

NAKD was faced  the threat of delisting by  NASDAQ in 2019 because the stock  was trading at less than  $0.10 for some time. To protect its “publicly traded” status, the company administered  a reverse stock split (1 for 100) on December 20, 2019.

However, shortly  after the stock split, the stock fell  below the listing requirement of $0.10 for a few days at a stretch, reactivating the threat of delisting. While the situation was highlighted by the meme stock rally, the company’s financial status is still dire, raising concerns regarding bankruptcy.

This has led  many investors to worry about the company’s sustainability, with some  expecting it  to declare bankruptcy soon. However, this risk has been reduced  by NAKD’s issuance of a “going concern” in its SEC Form 20F filing for the fiscal year 2020 ended January 31, 2021. The company  expects to meet its short- and long-term obligations with assets on hand.

Weak Financials and Profitability

NAKD’s revenues have declined at a CAGR of 19.3% over the past three months, while its total assets fell slightly over this period. Its revenues and EPS declined 15.1% and 95.5%, respectively, year-over-year in 2020.

The company has generated $22.53 million as gross profits over the past year, indicating a gross profit margin of 41.18%. However, its trailing 12-month EBITDA, net income and EPS are negative. NAKD has  yet to generate adequate cash flows from its operations; its trailing 12-month net operating cash flow is negative $6.51 million, while its trailing 12-month levered free cash flow balance is negative $3.22 million.

NAKD’s trailing 12-month net income margin and EBITDA margin are -53.35% and -27.85%, respectively. This compares to the industry averages of 2.29% and 8.74%. Its trailing 12-month ROE of -3812.12% is significantly lower than the industry average 4.87%.

POWR Ratings Reflect Bleak Prospects

NAKD has an overall rating of D, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

It has an F grade for Quality, D for Stability and Value, and C for Growth, Sentiment and Momentum. The stock is currently trading above its 200-day moving average of $0.38, but below its 50-day moving average of $1.03, consistent  with its Momentum grade. NAKD’s Value grade is justified because  its trailing 12-month ev/sales of 9.51x is 441.5% higher than the industry average  1.76x. The company’s poor grades for Quality and Growth reflect its declining financials.

NAKD is ranked #63 of 66 stocks in the B-rated Consumer Goods industry.

There are 19-stocks in this industry with an overall rating of A for B. Click here to view them.

Bottom Line

NAKD was targeted by the Reddit community and  retail investors owing to its poor financial prospects, which led hedge funds to heavily short the stock. With the  meme stock rally slowing down, NAKD’s momentum has been declining gradually toward its true valuation. Given the stock’s price history and financial status, we think it is best avoided now.

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NAKD shares were trading at $0.88 per share on Thursday afternoon, down $0.11 (-11.53%). Year-to-date, NAKD has gained 358.33%, versus a 0.19% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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