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Naked Brands (NAKD) Enters LOI To Acquire Major Online Brand

|Includes: Naked Brand Group Limited (NAKD)
Summary

aggressive grwoth strategy continues with latest planned purchase.

since Bendon merger completion, the strategy is to build quickly and efficiently.

share price is reflecting dilution and not the significant value driver added.

Shares of naked Brands (NasdaqCM: NAKD) were higher in early trading following another huge announcement from the company, telling investors on Thursday that the brand has entered into a non-binding letter of intent to acquire a leading U.S. online retailer of women’s apparel. The purchase price of the deal is expected to be US$42.5 million, which would include cash, stock and assumption of approximately $6.1 million of the retailer’s debt.

When added alongside Naked’s existing Frederick's of Hollywood e-Commerce license revenue, which has grown 36% in the last 12 months, a successful closing of this acquisition could easily send Naked’s projected e-Commerce revenues in excess of US$70 million for FY2019. After implementing its integration strategies, management expects the combined e-Commerce business to generate a projected EBITDA contribution of US$11.3 million and projected net income of US$5.3 million for FY2019. Estimates for these revenues are based on an assumption of approximately 26% year-over-year revenue growth for Frederick’s of Hollywood, and minimal expansion assumed for the retailer’s business.

The prospective acquisition represents a crucial component of Naked’s major focus on expanding the company’s direct-to-consumer product approach. If the transaction is agreed upon, e-Commerce would represent approximately 43% of projected group revenues, with overall direct to consumer channels (including owned retail and outlet stores) reaching 70% of projected revenue contribution for FY2019.

Speaking on the potential acquisition, CEO of NAKD Justin Davis-Rice detailed, “The acquisition would augment our proprietary digital operating platform to create ongoing synergies that we believe will produce over $70 million in e-Commerce revenues in the United States for FY2019 and will be accretive to Naked shareholders over the long term.”

However, investors new to the company should know that NAKD has already been extremely busy and opportunistic prior to this morning’s news.

A Huge Wave Of Growth At Naked Brands
The wave of momentum started to swell in July when NAKD revealed that Bendon reached an agreement with CVS Health to launch Heidi Klum Intimates in over 4000 CVS locations throughout the US. That deal combines the enormous marketing power from both Bendon and Heidi Klum that will likely set into motion a significant spike in exposure for Naked Brands as they leverage the Heidi Klum label to maximize brand and product exposure.


Then, in August, coming off the heels of the CVS deal, NAKD and Bendon announced a second potentially lucrative deal by signing an agreement with Costco Australia to carry several of Bendon's iconic brands in that region. These two deals, which may further set the stage for future expansion within these two major global retailers, provides insight to the strategic vision and opportunities that the merged Bendon and NAKD may be willing and able to exploit. But, NAKD was not done.


Following those two potentally transformative announcements, NAKD also announced in late August that the company is entering into a non-binding term sheet to receive a $25 million strategic investment from Sapinda Holding B.V., an industry-leading European investment firm and owner of globally recognized Italian luxury-lingerie firm La Perla. That proposed agreement, when finalized, considers an equity investment by Sapinda (or its affiliates or designees) in Naked through a private placement of up to 5,000,000 newly issued ordinary shares of the company for a price per share of US$5.00. A cap on the terms states that NAKD will not issue to Sapinda new shares representing more than 19.99% of the total issued ordinary shares of Naked.


In a statement from Justin Davis Rice, Chief Executive Officer of Naked Brand Group Limited, he was quoted as saying, "We are pleased to announce the term sheet for a proposed $25 million strategic investment from Sapinda, owner of the globally recognized Italian luxury-lingerie firm La Perla, which we view as a validation of our operating model and strategy. If completed, this investment will provide us with additional capital to support our plans to complete accretive strategic acquisitions to better utilize our under-leveraged operating infrastructure. We have identified several attractive opportunities within the eCommerce and direct-to-consumer space that we believe have the potential to create notable shareholder value over the long term. I look forward to announcing new developments surrounding these strategic initiatives as appropriate."


Needless to say, the months of July, August and with todays September announcement, the stage has been set for continued and significant company growth. And, the surge in momentum is supported by the strength of Bendon Ltd., a partner that can maximize the current opportunities and help to develop new ones as well. Although the share price has been weak following the Sapinda announcement, many investors are taking the opinion that the sell-off is a short-sighted move by investors that are trying to time potential dilution, while neglecting the enormous and potentially lucrative impact to future growth that the deal may provide.


Naked Brands And Bendon Together At Last


For reasons discussed, the recently announced coupling between NAKD and Bendon is likely to produce a significant and positive near-term impact on share-price valuation for early investors. Just having a partner in Bendon, who throughout its more than 70 years in business now sits positioned as an iconic and highly respected competitor in the industry, may be enough to jump start the stock price of NAKD. After all, with Bendon staying true to the principals of company founder Ray Hurley, who is recognized as a revolutionary force in the lingerie industry, the liklihood for NAKD to mature into a globally positioned multi-line specialty garment company is certainly a distinct possibility.


Hence, if NAKD can be molded in similar fashion as Bendon, then perhaps NAKD will emerge into similar prestige and one day equal Bendon's impressive portfolio of industry-leading brands that include Heidi Klum Intimates, eight other company-owned brands, and three licensed brands, all of which focus primarily on intimate apparel and swimwear. And, as it stands right now, Bendon's experienced management team, now with NAKD as an asset, has set into motion a strategy to expand its robust and comprehensive infrastructure to take advantage of both organic growth and retail opportunities.


From a financial perspective, Bendon brings power to the combined entity. The company boasted a trailing twelve months revenue number (TTM) of $119 million in 2016, along with an impressive ttm gross margin of 50.3% of sales. The respectable gross margins are a reflection of Bendon's carefully sourced logistics network, providing market agility and economies of scale. Notably, the production and platform efficiencies have allowed Bendon to increase their global footprint and currently maintains a working presence in 34 different countries and distribution to over 4000 unique customer doors.


Thus, for those investors looking at NAKD as a standalone opportunity, they are missing out on a significant portion of the real valuation potential. Even at face value, the flagship brands including Naked, Heidi Klum Intimates, Frederick's of Hollywood, and Pleasure State contribute a substantial benefit that may not be justly recognized at current share price levels.


For instance, the Heidi Klum Intimates line, designed by the supermodel and Executive Producer/Host of Project Runway, sits as just one example of the significant opportunities available to NAKD that can get effectively monetized and expanded to a global audience. Furthermore, in support of her NAKD line, Klum routinely models her line of merchandise to her 5.4 million Twitter followers, 4.2 million Facebook followers, and 4.7 million followers on Instagram. This should ultimately bode exceptionally well for Naked Brands and in turn its market cap and share price.


A Combined Global Opportunity


The news that hit the wires today serves to add fuel to the pace of growth taking place at the newly combined Bendon and NAKD brands. Combining this mornings news with the agreements in place with CVS Health, Costco Australia, and a potential $25 million capital infusion from Sapinda, the emerging growth opportunity for NAKD should not go unnoticed for much longer. The brands are fantastic, the endorsement deals are significant, and the management team is first class. For investors, that may be the trifecta ticket to a winning investment opportunity in the very near future

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.