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Naked Brand: Consolidation Never Sounded So Good

By CNA FinanceStock MarketsJul 31, 2018 12:16PM ET
Naked Brand: Consolidation Never Sounded So Good
By CNA Finance   |  Jul 31, 2018 12:16PM ET
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Once dominated by a handful of players, the lingerie and swimwear industry, which has been distributed by upstart brands, has become highly fragmented. However, if Naked Brand Group (NASDAQ:NAKD) has anything to do with it, that’s going to change. After the Bendon Acquisition that happened earlier this year, NAKD likely to take the market by storm as it plans to use its unique global presence, industry leading design and sourcing platform to provide scale for emerging brands and consolidates the lingerie industry segments into a highly valuable conglomerate.

The Naked/Bendon Merger Changed The Game

On June 20, 2017, Naked Brand Group announced that it had completed a merger that could become the one of the most value accretive transactions in the lingerie industry. With the merger, Naked Brand Group went from a relatively small company with a few brand names to a massive loungewear conglomerate with a strong eCommerce presence and its products in more than 6,000 brick and mortar locations around the world.

Perhaps more importantly, NAKD is now well positioned from a financial standpoint to make what could become a series of accretive acquisitions. In fact, recently had the pleasure of speaking with CEO, Justin Davis-Rice. One of the key takeaways from the conversation had to do with just how fragmented the loungewear industry is and how with a few, accretive acquisitions, Naked Brand Group could defragment the industry, becoming the cornerstone of the market as a whole.

The Naked Brand Group Of Today

Looking at what NAKD is today, it’s hard to argue that the company is doing well. Currently, its products are being sold in 44 different countries through more than 6,000 retail locations. At the same time, the company established a core focus on eCommerc and is showing impressive growth in online sales. In fact, from the year 2015 to 2018, eCommerce sales have grown to account for 24.3% of the revenue generated by the company.

As a result of the success of the company in both the brick and mortar retail and the eCommerce, it has built a revenue foundation. The most recently reported data shows that NAKD has $7.9 million in cash and approximately $22 million in inventory on hand. Not to mention that Naked Brand Group generates nearly $100 million in revenue per year.

The Naked Brand Group Of Tomorrow

NAKD is a strong company as is. However, through the creation of a unique retail operating platform, the company has plenty of room to grow. In fact, as it stands, the company’s retail platform is capable of supporting approximately $200 million in revenue with relatively minimal growth in general and administrative (G&A) expenses.

An important factor that allows for this room to grow is that NAKD has a laser-like focus on keeping inventory risk to a minimum. At the moment, about 40% of product sales come from basic items on replenishment. The company’s brands also have an impressive lifecycle. In fact, successful basic items can be on store shelves for 5 years with high performance styles sell for more than 10 years with some still running from more than 20 years ago. This coupled with the fact that approximately 60% of product sales are fashion-related, with the majority of them being produced to order and the company’s string of outlet stores that serve as a high-margin clearance mechanism for slow moving merchandise gives the company a unique ability to avoid inventory-related losses.

The Industry Is Ready To Be Taken Over

The lingerie and swimwear market has little fragments of unique, disruptive eCommerce brands here and there making up the entire industry, an opportunity has emerged for a company like Naked Brand Group to bring the market together. Interestingly, NAKD is well positioned to do so.
Industry experts are predicting that online revenue growth will outpace the broader industry, with a compound industry growth rate (CAGR) of 18% in the next 4 years. At the same time, Naked Brand Group is an early leader in multi-continent, multi-currency online business with access and flexibility provided through the capital market. With a highly under-leveraged operating platform that has plenty of room to grow, and the support of capital markets, the company is well positioned to consolidate the industry through accretive acquisitions that solves key issues within the fragmented lingerie and swimwear market.

NAKD's Growing List Of Iconic Brands, Celebrity Support

Naked Brand Group has an impressive portfolio of iconic brands. This portfolio is broken into two distinct types of brands:

  • Global Flagship Brands – The company’s list of global flagship brands, including naked, HEIDI KLUM INTIMATES, Frederick’s of Hollywood and pleasure state represents approximately 60% of the company’s volume. With premium pricing ranging between $25 and $250, global distribution and premium fashion brand marketing, the company’s global flagship brands have become a staple in the loungewear industry.
  • Heritage & Mass Market Brands – Naked Brand Group’s heritage and mass market brands include lines like bendon, Fayreform, Hickory, Lovable and Davenport. These brands represent 40% of the company’s sales volume and are strategically priced to reach the masses ($20 – $69).

Along with a strong and growing list of iconic brands, the company has caught the attention of a celebrity. That celebrity, Heidi Klum is a key partner to the company, bringing the company’s brand to 5.4 million twitter followers, 4.2 million facebook followers and millions of followers on other social outlets. The relationship with Heidi Klum was minted in January of 2015, when Bendon entered into an evergreen licensing agreement with the supermodel and A-list celebrity. As a key player in the fashion and entertainment world, Heidi Klum has the ability to catapult the company’s brands to new heights.

The Market Potential Is Incredible

The intimate apparel market is already massive. However, it’s growing quickly. In fact, it is expected that the industry will grow to $250 billion by 2020. Not to mention that global underwear, hosiery and sports and swimwear market is expected to grow from $348 billion in 2017 to more than $416 billion in 2021. There are two key drivers to this growth:

  • Consumers Are Buying More – In 2010, the average consumer purchased 6 pairs of underwear per year. In 2017, that figure grew to 8 pieces per capita on an annual basis.
  • Consumers Are Willing To Spend More – Interestingly, this growth doesn’t just have to do with consumers purchasing more of these products. Not only are more products being purchased, consumers are willing to spend more money in doing so. In fact the average price per underwear unit has grown 11% since 2010.
  • Growth In Average Revenue Per Capita – The strong consumer demand and willingness to spend more is leading to incredible growth in the average revenue per capita in the apparel market. In 2010, this figure was just $3.43. However, in 2017, average revenue per capita in the market grew to $68.22, and by 2021, it is expected to grow to $79.57.

Final Thoughts

NAKD represents what I believe to be a compelling opportunity in the market. At the end of the day, the company is in the right place, at the right time, and has the ability to take advantage of their unique positioning. With a highly fragmented loungewear market, the industry is ripe for the picking for the company. This, coupled with the unique Naked Brands Group operating platform, room to scale, iconic brands, market access and celebrity support, makes the stock hard to ignore. In an industry that is expected to see exponential near-term growth, Naked Brands Group is well positioned to solidify its place as a market leader!

This article was originally published on CNA Finance.

Naked Brand: Consolidation Never Sounded So Good

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Naked Brand: Consolidation Never Sounded So Good

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