True Religion Apparel: Keeping the faith

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Worship at the alter of denim: True Religion Apparel, Inc. (Nasdaq:TRLG) is the true religion for jean wearers and investors alike, churning out stellar top and bottom-lines around a brand that has garnered considerable clout in only five years.

True Religion’s fit, look and feel of lived-in jeans is what has created a competitive advantage for the jean manufacturer in a saturated market and pushed it to the designer-brand level. The jeans, which are sold through stand-alone stores and high-end department stores such as Saks 5th Avenue and Neiman Marcus, range from $170 to $350 per pair.

Given the success True Religion has had, it’s branching out into other clothing offerings, such as jackets, shorts, cargo pants, tops and shirts in other non-denim fabrics such as corduroy and twill. The retailer is also expanding into colored denim this year, and last year the patented its “super big-T stitch,” a distinctive thread stitch that characterized its best-selling products in 2007.

While almost every other retailer continues to languish in the murky macro environment characterized by crippled consumer spending, True Religion is devoutly hitting quarter after quarter out of the ball park.

For the second quarter ended June 30, 2008, net sales for the consumer direct segment, the company’s bread and butter, surged 170.5% to $17.7 million from $6.5 million in the prior year period. A segment mix shift toward the company’s higher margin consumer direct business has certainly helped buoy results.

While most other retailers have had to close stores to make ends meet, True Religion opened 12 new stores in the quarter.

Both revenues and earnings bested the consensus on Wall Street. Revenues soared 79% to $64.2 million from $35.9 million in the same quarter last year. Net income surged 86% to $9.3 million, or $0.39 per share, compared with profit of nearly $5 million, or $0.21 per share, for the second quarter in 2007. Analysts were expecting earnings of $0.32 per share on sales of nearly $50.2 million.

International revenues picked up steam, soaring 66.3% in the quarter.

What remains impressive about True Religion is that its jeans will likely remain the “it” pairs for the remainder of the fiscal year on account of management’s guidance. The company recently raised their full-year guidance on account of a better-than-anticipated first half, the addition of new stores and increased visibility into third-quarter bookings.

True Religion also raised the number of stores it expects to open by year end to 39 from 35. 

“We believe strong sales momentum despite weaker macro trends validates the brand’s resonance with consumers and suggests that sales momentum is poised to continue as, in a tough environment, retailers put a greater focus on brands with strong sell-throughs,” BB&T analyst Eric Tracy wrote in a research note. “The company is better equipped today to capitalize on the momentum as it has increased the number of SKUs on automatic reorder.”

Morgan Keegan analyst Brad Stephens adds that guidance is conservative as it only incorporates second- and third-quarter bookings; but he also notes that the company is up against tough year-ago comparisons.

Investors should also be cautious of potential upside to the stock’s current price. The company trades at a trailing price-to-earnings ratio of 20.04, compared with the industry of 14.88. “Should TRLG continue to execute on its strategy of developing higher-margin, company-owned retail and deliver on wholesale bookings, we believe the shares may warrant a higher multiple,” Tracey wrote in a research note. “We will look for a pullback in the shares and/or better visibility before we consider getting more constructive with our rating. As such, we maintain our ‘hold’ rating.”

Yet even through hard times, consumers are lining up to buy True Religion jeans, giving investors a reason to keep the faith.

About the Author
Reporter Jennifer Schonberger is based in SmallCapInvestor.com's Washington, D.C. bureau. Read More

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