How Bendon May Build a Powerhouse Brand

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- By Joshua Rodriguez

Investors who are attracted to emerging companies are not exactly a rare breed, but, for all intents and purposes, they do share some inherent traits that make them somewhat of a renegade spirit in the investment world.

Let's face it. These investors aren't easily fazed by turbulent volatility, are willing to look past transgressions and for the most part are willing to undertake a significant risk in order to generate a meaningful reward.


Now, what if there was an emerging story that offered investors the best of all worlds - a superior management team, a well-capitalized balance sheet and an actual brand that has already established a remarkable footprint worldwide? Would you read that story? If you are not intrigued yet, read on because investors may soon be treated to witnessing the process behind the building of a brand and the real-time saga of how an iconic brand like Bendon is going to transform a relatively small company, Naked Brand Group Inc. (NAKD) intimate and innerware apparel, into a national brand capable of defining a new era of the way undergarments are marketed and sold.

Bendon can be Naked, too

Some investors are probably already familiar with Naked apparel, but they may have failed to realize that an investment opportunity was also at hand. Naked is not a new brand of underwear and intimate apparel. In fact, with the label being sold since 2010, they have established a strong and genuine reputation, formalizing engaging relationships with the likes of HSN (HSNI), Macy's (NYSE:M), Bloomingdale's and other major department store chains throughout the U.S. But even well liked and emerging brands, like Naked, eventually need deep-pocketed support on their drive toward profitability. This is where Bendon plays the critical role in propelling not only Naked, but its own company as well, perpetuating its iconic name in additional worldwide markets.

Let's not kid ourselves. While Naked can deliver additional value and market opportunity to Bendon, the real hero of this story is Bendon, and the proposed deal to merge with Naked Brand Group demonstrates how it can utilize its global company, size, strength and management expertise to bring near-term shareholder value to investors who have already bought into the company's brand story.

Bendon, in its 70-year history, brings enormous opportunity to Naked shareholders, but Naked Brand Group is contributing some well-earned assets as well. For instance, Naked has seen its brand sales grow and has also attracted enormous talent to endorse its men's line of athleisure wear, with Dwyane Wade serving the endorsement role in the men's category. With Bendon delivering an evergreen partnership agreement with Heidi Klum, the combined marketing power in just the intimate apparel and undergarment segment may continue to prove a lucrative market for Bendon and Naked Brand Group alike. If you are a Naked shareholder, having an interested partner like Bendon may be equivalent to hitting the jackpot on a one-armed bandit.

Let's be honest. While celebrity endorsements can be bought and paid for on some levels, it doesn't happen in the case of Klum and Wade. Their endorsements are sincere and powerful, and they deliver a message that both Bendon and Naked brand of underwear and intimate apparel are products worthy of consumer attention. Naked, for its part, is pioneering a new method of design, using innate features in their line which provides extreme comfort through the use of innovative manufacturing processes, such as "second skin" fabric that is seam free and silver infused.

Some investors question why Bendon would be so eager to merge with a company like Naked, whose revenue is less than 2% of Bendon's trailing 12 months revenue. It's because Bendon is quick to recognize and seize upon potential. Already enjoying consistent growth, Naked has engaged in an exclusive partnership for one of its brands with HSN, a premiere shopping network that offers a premium showcase for the brand. At the same time, Naked has positioned the brand to be a specialty garment, allowing for pricing power in an industry where margins have historically been razor thin.

Led by industry veteran Carole Hochman, CEO of Naked Brands, the company has fortified its presence by capitalizing on its management expertise. Banking on her skill set, Naked is already positioned to penetrate the barriers that exist in the apparel industry, barriers that can be prohibitive, especially for companies that are working to develop value through e-commerce and brick-and-mortar placements. While Naked, too, has seen its growth hamstrung by small and emerging brands, Bendon offers a competitive advantage by providing Naked the opportunity to take advantage of the many Bendon distribution channels, allowing the brand a real opportunity for success.

Bendon and the NAKD truth

The global intimate apparel market is significant, currently being pegged as an $82 billion market. Even more impressive for those keeping score, the already substantial market is expected to grow at a compounded annual growth rate of 17% through the year 2020, keeping the investment opportunity fresh and compelling. Unlike other consumer products, the intimate apparel market has remained relatively strong during economic downturns; in fact, the market even remained stable during the Great Recession. Pockets of growth have been demonstrated for only a small handful of intimate apparel brands, and Bendon has been a worthy inclusion into that select group.

During the past few years, there has been an influx of new and smaller players in the space, facilitated by the relative ease of building a small scale e-commerce site. However, the reality of actually building and maintaining a profitable business strategy beyond the initial launch proves well beyond the reach of most emerging brands as the customer acquisition costs, lack of an integrated infrastructure and the barriers in place that can stifle sustainable growth are mostly underestimated by new brands on the block.

Despite the brand and name recognition sometimes enjoyed by small and aspiring brands, in many instances these names only tend to provide a handsome salary to the brand owners with product sales often unable to provide much of the additional capital required to take a brand beyond the $20 million revenue level.

Without a solid infrastructure and a richly experienced management team in place, the opportunities for growth are minimal, regardless of how well a brand may be received by consumers. In an industry where a single stitching error can cost a company millions of dollars in lost sales and wasted expense, a company that does not launch with a well organized and integrated business plan is often destined to fill the racks at national discount chains. Under Bendon's tutelage, don't expect to find Naked there.

Perhaps Bendon recognized this quality early on in Naked. Knowing the potential limitations of product and market development for smaller brands, Bendon appears to be taking aim at emerging opportunities to expand its consumer base. For Naked, by being able to take advantage of Bendon's significant market position and worldwide distribution platform, the journey forward for investors may prove to be a smooth ride. No doubt, Naked investors may have hit the jackpot, as a finalized reverse merger will take their investment into a small, $2 million revenue company and facilitate ownership into a much bigger and established worldwide player in Bendon.

Bendon gets Naked

For Naked shareholders, the Bendon alliance may be a windfall. Bendon holds a 70-year history deeply rooted in innovation and lifestyle excellence. Its founder is considered a pioneer of modern women's lingerie, breaking away from styles that included heavy and restrictive corsetry, designing garments that allowed free flow and nonrestrictive fits. These innovative features quickly put Bendon on the lingerie map, allowing Australian lingerie to emerge into the competitive arena on the world stage.

Inclusive of Heidi Klum Intimates, Bendon nurtures its own established portfolio of brands, with eight company-owned brands and three licensed brands in its stable of intimate apparel and swimwear.

Managing growth, Bendon has a distinguished and experienced executive team, which has built a formidable infrastructure and business operating platform that is conducive to facilitating continuous organic growth as well as the all-important integration of acquisitions.

Bendon's global distribution and operations platform may turn out to be the perfect fit for Naked. In January, Naked entered into a Letter of Intent with Bendon Limited for a proposed merger of the two companies. Assuming the Merger Agreement is ratified by both boards, the parties expect to seek approval from Naked shareholders during the first quarter of 2017, subject to SEC review. A merger with Bendon opens the door to tremendous growth and market opportunity for Naked shareholders and the likelihood of shareholders not endorsing this proposed merger is low. Clearly, the advantages in consummating the deal are a boon for Naked shareholders, noting that once Naked is rolled up, they become part of a much larger and far more powerful company, effectively becoming Bendon.

Naked undressed

Naked is bringing a modest but consistent record of growth to the table. The company has recorded sales growth in both retail and e-commerce sales, posting a 74% increase in quarter over quarter sales in the third quarter of 2016. Additionally, for the nine months ended Oct. 31, 2016, Naked's net sales increased by 38% to $1,292,132, driven primarily by sales expansion into new department stores that include Saks Fifth Avenue, Bloomingdale's, Chico's (CHS) and Dillard's (DDS).

Key partnerships are expected to drive continued growth, utilizing exclusive A-list talent like Wade, who will endorse and spearhead its Naked Truth marketing campaign. Taking advantage of Wade's tremendous social media following, estimated to be in excess of 9 million followers, Naked capitalized on his social media strengths to launch "Wade x Naked" in October 2016 at Nordstrom's (JWN), Nordstrom.com, and wearnaked.com. The "Wade x Naked" began generating revenue in the third quarter of 2016.

Investors are anticipating growth in the next financial release, which is expected to show continued traction in all segments of Naked's categories.

Bendon dressed

Bendon, an iconic worldwide brand, is no stranger to delivering impressive financial results. Its global brands include some of the most recognized lingerie brands in Australia, the U.S. and the U.K. The company has an evergreen partnership in place with Heidi Klum, securing perpetual and mutual benefits and has maintained focus on its core competencies in the design and development of bras, briefs, swimwear and sleepwear.

Bendon has demonstrated consistent growth in revenue and earnings with trailing 12 months revenue (ttm) of $119 million in 2016 and an impressive ttm gross margin of 50.3% of sales. The strong gross margin can be attributed to a host of synergies, but the company's highly efficient sourcing and logistics network, which provides market agility and economies of scale, acts as the primary bread winner for Bendon.

Bendon's global footprint has consistently increased over time. The company's presence is now in 34 countries with distribution to over 4,000 unique customer doors. Additionally, the company benefits from the Omni-channel platform with online, wholesale and company-owned retail and outlet stores peppered throughout its worldwide operations. Sales are generated through a loyal and diverse customer base with customers ranging in age and social demographic.

Bendon's brand portfolio is segmented into three categories. The first segment contains its global flagship products,which include Heidi Klum Intimates, Heidi Klum Man and Heidi Klum Swimwear. These lines secure tremendous online presence through the company's e-commerce site and position the garments as a premium fashion brand for marketing and commercialization purposes. These products offer an accessible price point of between $25 and $99 per item or set.

The company's "Luxury" segment also enjoys global distribution, with specifically constructed marketing bringing the opulence of the brand to life. Utilizing premium positioning, the Luxury segment sets price points of between $50 and $170 per item or set.

Bendon's third business segment is its Moderate And Mass category with the majority of its presence in Australia and New Zealand. For the U.S. market, Bendon offers its iconic "Fredericks of Hollywood" line of intimate apparel through its online distribution channel. This category provides a dominant heritage market position and sets retail price points between $20 and $69 per item or set.

A combined Naked Bendon

Bendon will immediately deliver value to Naked, and Naked may enjoy expanded revenue and meaningful distribution channels via Bendon. Additionally, Bendon delivers a significant global operations platform with over 30 production partner facilities across Asia. Company-owned distribution centers in New Zealand, the U.S., China and Hong Kong provide outlets to efficiently get products to their respective markets; with supporting offices in New Zealand, Australia, Hong Kong, the U.S. and the U.K., logistical issues can be met directly with an executive team that is fluent with each respective market or region.

Dressed for growth

Already powerful, Bendon can further set the stage to take advantage of significant opportunities generated from the Naked merger. The merged company expects to initiate an incremental rollout of additional retail stores across new and existing markets around the globe. Bendon's distribution channels are anticipated to quickly facilitate an accelerated growth path for Naked by allowing the efficient global platform to work its magic, expediting brand placement and offering immense logistical support to fuel and manage the projected growth of the Naked brand.

However, it is not only the business platform that generates the efficiencies. As previously stated, the combined company will take keen advantage of Carole Hochman's talent, leveraging her expertise to build a compelling sleepwear business, focusing on building organic growth in the company. Additional category launches including resortwear, athleisure and tween will also be in a position to benefit greatly from Hochman's talents.

What may offer the biggest opportunity for the combined business is the fragmented nature of the intimate apparel and swimwear industry globally. The company has been vocal that an acquisitive growth strategy, leveraging the capital market's platform to consolidate synergistic businesses, is critical to its immediate and midterm game plan. In a market that has become highly fragmented due to the relative ease of initial entry, Bendon can utilize its expertise to take advantage of potential rollup opportunities and continue to maintain itself in a position to consolidate segments of the industry. In that respect, the company believes it has identified a potential deal pipeline that can generate in excess of $190 million in incremental revenue opportunity.

While the merged entity will be loaded with extremely valuable and proficient executive talent, an associate described to me the resulting entity to its core, which should cause investors to take an interested and genuine look at the value proposition this deal has to offer.

To paraphrase, he said that if Hochman is placed in a role that allows her to do what she does best, which is building, developing and acquiring new brands, then there is no limit as to how far Bendon's acquisitive ambitions can go. Investors should value her involvement; with the Bendon muscle behind her, the investment opportunities are greatly magnified.

Taking into account all of the positives and accretive synergies to this proposed deal, investors may be well suited in considering an investment into this combined entity. So much so, in fact, that they may even feel eager and excited to join Klum and Wade and walk around Naked.

Disclosure : I have no position in any stock mentioned but may initiate a long position in Naked within the next 72 hours.

This article was originally featured on CNA Finance.

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