True Religion: Overreaction on Wall Street

I have been following True Religion Apparel (TRLG) for a long time and continue to see it as "the diamond in the rough". I wasn't the least bit surprised when they beat their Q4 estimates for 08 (see conference call transcript). I was, however, disappointed in the way the market traded the stock thereafter. It is clear upon glancing at their financial statements to date that TRLG has outstanding short-term liquidity, solvency and overall they display a true financial health for a going concern in its growth state.

Given the recent and current economic conditions, I don't think that the stock should have been beaten up as badly as it was as a result of their announcement that they are likely to come in below estimates for Q1 09. It's not like they are suddenly saying that they are going to be recording a loss for Q1 09 (as many companies have been), but rather that they are going to be slightly less profitable than previously forecasted (but still earning a substantial profit!).

Considering the cyclical nature of the company and the industry, it would be foolish to believe that the company could operate in the current economic conditions without feeling the negative effects of the overarching macro economic stress. Therefore, the forthcoming of the executives in acknowledging a potential reduction in future earnings, after crushing Q4 08 earnings (when so many other companies were struggling) during their conference call, should not have been shocking news that led to a fire sale of common equtiy shares, but rather a reality check that no company is immune to the crippling externalities caused by a recession.

As irritating it was to watch a quality and financially sound company get sold off like it was the next Circuit City, it offered an excellent opportunity to add to existing holdings at, basically, a sale price. Following the massive sell off and decline in share price, it has within one month, climbed its way back near the point at which wall street over sold it (in my opinion).

Brand exposure and brand recognition has propelled the company to be one of the most fashionable and popular premium denim brands on the market today. Although their target markets are for more affluent and financially uninhibited individuals, their product has been finding its way into market demographics that don't make any economic sense. The reason for this is because they are in, popular, and the jeans to own.

Regardless of one's ability to logically afford the brand, image and appeal has opened the door for the company to sell to those outside the intended financial demographics. As more retail stores open and create a larger pipeline for getting the highly desired and demanded product to consumers, the company will continue to grow and enjoy prosperity. In addition, should the market find its bottom soon (if we haven't already), this cyclical company, backed by its solid financial health, will be ready for new heights at several multiples of its current value.

Disclosure: Author holds a long position in TRLG

Comments

[Wez:]

Ever heard of a fad stock? This Depression is gonna hurt luxury apparel retailers hard.

Mar 27 08:55 AM

[captainccs:]

You expect this market to be rational? hehehe

There are two important points that you failed to make, one positive and one negative:

On the positive side, True Religion is continuing its expansion as planned and paying for it out of cash flow. The effect on revenues and earnings, as the economy recovers, is going to be explosive.

On the negative side: fashion markets are fickle making them dangerous for investors.

Long TRLG

Mar 27 08:55 AM

[Rohan C. Pease:]

If you have to own a high end retailer like TRLG, pelase be prudent and short something like Tiffany's, in order to hedge your exposure.

Mar 27 02:33 PM

[Marcap:]

True Religion makes a great product, has a great history, and is financially very stable. Having said that however, I agree with both Wez and Captainccs. I also fail to see much of a short- to medium-term future with a company producing jeans in the $200-300 range...certainly not in this economy. As a long-term investment however, that of course is a much different story. I also think that if one waits a little, they may get the stock for as low as $10, if not a little less. And as Rohan suggested, perhaps short an alternative such as Tiffany...just in case.

Mar 27 02:59 PM

[Larry House:]

One has to deal with what the market says about a company, not what would appear to be its merit by some individual reckoning. Right now the market doesn't like TRLG, it has a Beta of 2.19, the technicals are bearish, and the current economic conditions are quite negative for a high-end apparel company. Other than that, there is nothing wrong with the company.

Mar 27 04:24 PM

[CGP:]

As a long term investor in this stock (out 1 yr+) I'm looking at a PEG of 0.14 coupled with a strong balance sheet (no debt on a retail company?, even though debt is/will be cheap) and that they have strong cash flow - that's apparels' life blood.
I'm constantly looking for company specific bad news and can't find it (the economy is another matter). They're becoming more than just jeans, more of a brand; if this is a real Bull upturn, stocks like this will lead the expansion of multiples. When it was $8-9 I was looking to buy more but had no free cash as I had loaded up on BAC and UYG.

Mar 27 06:59 PM

[najdorf:]

Name one specialty retailer that has ever in the whole history of the stock market been a good long-term investment for anyone other than those who got in right at the beginning and got out at the top (mostly insiders).

It's great that they can finance their expansion out of free cash flow, but haven't you seen this story before? That's your money, going to opening stores rather than paying you dividends. Do you think this management is different from every other retail management in history and won't over-expand in pursuit of yearly growth, cash out their options at the top, and then leave you holding the bag?

Retail businesses can be a cash cow at the right size, but when I see a beaten-up retail stock of a company selling overpriced goods that is expanding massively into a recession, I stay away. Hate to think about what happens to this company when they have to start discounting to move inventory and keep up sales.

Retail stocks can be nice for smart traders because lost souls following Peter Lynch like to buy what they know all the way up - of course people who buy $200 jeans probably don't know a lot about how to value a stock. If you want to try to trade the momentum swings, go for it. But don't tell us it's some great value find. Unloved retail stocks don't have the same potential as unloved industrials to bounce back cyclically - they need the consumer love and the market love because their competitive advantage is nothing more than marketing/brand image.

Mar 28 03:28 PM

[datadave:]

Yeah, Marketgrader gave TrueReligion a huge rating and so I clicked on their wares and saw the prices of pants. Jessum, with pasta and guns going higher, I don't see high end skinny bell bottom jeans for 20 somethings (w/o real jobs mostly) going anywhere.

hey, SWHC was given a nearly F rating and look where it's gone. 160+per cent ytd. (sorry, not endorsing it, my kid and g/f made me sell my swhc stock even though it was "killing" at 20 percent a week...) We need to develop a little morality here. Buying ripped up pants at 300 bucks is even more stupid than buying guns 'cause Obama got elected. At least the guns will hold some value for awhile even though a lot of evil there. Paying that sort of price for "jeans' just seems lame.

Mar 28 08:02 PM

[hedge10:]

At the time this article was published (not written) the stock was trading at $12 and change, today it is trading at $25 and change. Clearly the above "na sayers" should stick to the ultra slow conservative approach of investing in mutual funds. The risk/return was a no brainer in this situation and still is to this day. Just because some of you individuals don't understand the market for high-end denim doesn't mean that it is a poor investment. Too bad for those of you that don't understand this market because maybe if you were a little more optimistic you could have made enough money to be able to afford these jeans like the rest of us that have doubled our money in less than one year. Shorting a company for the purpose of "hedging" your risk is backwards. Last time I checked tiffany's is not a competitor of trlg and if anything shorting a company such as them (in a different industry) only increases the amount of risk in a portfolio. Look into a collar move with options for trlg, not some other random company if you have doubts and need to reduce your risk. I hope the stock performance has shown some of you some light but if not have fun just beating inflation and remaining in the "obama friendly" tax bracket. Trlg still looks good at this level so those that are still on board look forward to making some more money.

Sep 28 01:59 AM