Buy True Religion Before the Epiphany Wears Off

This article covers a growing trend I have noticed over the years. Now I typically don’t write about or analyze retail stocks. However, I just wanted to make a few general and lighthearted observations (see my Back Pocket Indicator below) about a particular brand which doesn’t get too much attention on the Street. When I was in college, I noticed True Religion brand jeans starting to take off. Growing trends are easy to spot on any campus across the country, especially if you have any relationship to someone of a younger generation. True Religion Apparel Inc. (TRLG) manufactures and sells a wide variety of apparel, but I would say their bread and butter are their high end designer jean segment. The company is headquartered in Vernon, California and was founded in 2002 by the 53 year old Jeff Lubell (CEO) who has quite an extensive background in denim and apparel.

The unique thing about these jeans is that they sell for upwards of $200 - $300. They can be found in major retailers such as Nordstrom’s (JWN), Saks Fifth Avenue (SKS), Neiman Marcus, and Macy’s (M) as well as in smaller boutique shops. True Religion Apparel Inc. not only sells their clothing in major retailers, but they also own and operate 42 company branded retail stores around the world. Now you might think these prices are ridiculous compared to your average $25 Levis, but I know many people who wouldn’t be caught dead in a pair of Wranglers.

If you have heard of True Religion, you are probably also familiar with some of the other designer jeans like Victoria Beckham’s Rock&Republic, Justin Timberlake’s William Rast and others such as Seven for All Mankind (purchased by VF Corporation in 2007), and Citizens for Humanity. Strong branding is important for each of these companies, and their most visible marketing is the stitching on the back pockets of the jeans. True Religion jeans can easily be recognized by the large horseshoe design on the back pockets and the long thick stitching throughout the jeans. The back pockets on designer jeans are so important that I would compare them to the highly recognizable monograms on Louis Vuitton or Gucci handbags. Without a doubt, these symbols are a fashion statement and status symbol to the consumers of these products. The fact that many celebrities are often seen wearing True Religion jeans also helps position the overpriced line of apparel.

Since going public on September 4, 2003, the company’s stock has performed nothing short of phenomenal. The stock is up over 1500% since inception, and has reached a market capitalization of almost $600 million dollars. Year to date the stock is up over 100% and has outperformed competitors such as VF Corporation (VFC), especially over the long term. As the company has grown over the years, so has their product line. According to their website, the company most recently branched out into numerous licensed products such as Footwear, Headwear, Handbags, Swimwear, Eyewear, Hosiery, Socks, and Fragrance.

This brings me to my first point: oversaturation. As boutique companies grow and expand their product line, the high end appeal for their products begins to lose its flare. True Religion jeans which used to be expensive and hard to find, can now be found in discount stores such as TJ Maxx (TJX) and Loehmanns.

So what lies in the future for True Religion in this marketplace? Ultimately, I see this brand getting “played out” which reminds me of similar brands like Ed Hardy. I predict that this scenario probably won’t unfold for at least another year or two, so in the meantime pick up some shares as we head into the holiday season. My anecdotal indicators (The Back Pocket Indicator) suggest that this is a good stock to hold onto for the next few months, however; like all trendy products, True Religion jeans will start to lose appeal and other brands will fill the gap in the $300 jean market. Please take this article for what it is, and do your due diligence before taking my recommendation to buy TRLG. This being said, I would say pick up some shares and keep a close eye on the back pockets of your most fashionable friends to see if your TRLG position will keep up with the times.

Disclosure: No position in TRLG, but I do own a couple pairs of their jeans...

Comments

[CGP:]

I'm a little confused by this article. It's basically begins as a long term investment thesis (though a little thin on support) but it's conclusion is a short term to maybe mid-term trade. The problem is it doesn't imply any near term reason for the stock to go up, so if you're not in it why bother? If you're in it why do you need the long intro?

Personally I've been long a little more than a year. I just recently sold 1/2 of my position as I expect some near term market turbulence and think I can re-buy lower. In March I was going to average down big time but was too stubborn about price and missed out on the big run-up. Ultimately I agree that TRLG will see a sunset but not right now - they are still a growing company; a retailer w/no debt funding expansion from cash flow. The big negative for them (and the stock) was the timing of the great recession.

Not much of a revelation here; I think all retailers (if not stocks in general) follow the same arc, the trick is catching the upswing (e.g. TRLG) and not getting caught where it levels out or starts the downturn. Here's my prediction - WMT, in extreme milk maid mode now, won't be half its' current size in 25 years.

Oct 06 09:17 PM

[TRBJ2009:]

I believe the writer really should do his own Due Diligence before writing an article on the leading premium denim company in the world... Specifically with regard to the number of branded stores the company has to date which is 50% more than this semi-informed analyst mentions or is aware of!!! These stores are refered to as "cash cows" and the driving force behind the company's superior earnings reports where TRBJ has beat market expectations for the last 7 or 8 consecutive quarters (I lost count,lol). Also the fact that they continue to roll out these company branded stores at an amazing pace even throughout the recent economic crisis when so many others had failed and closed their doors...

I don't believe TRBJ is anywhere near the market saturation that the writer bases his entire theory on, hence my opinion is that the company has tremendous upside for the long haul especially with respect to the international market of which TRBJ is just embarking on!!!! Tune in during the 1st week of November to see how it performs once again...

Oct 08 05:11 PM

[TheCaptain:]

Your article would have been relevant (arguably) 4 years ago. Good info commenting on something everyone has already been on top of for a long time. In retail, you want to be before the trends, not after.

Oct 09 12:29 PM

[Alex Khande...:]

The stock is still rallying, so I am not late in this article. The trend will continue for at least another 1-2 years. At that point, I think the brand and compnay will undoubtedly lose its appeal. I will also reitterate what I said at the end of my article " Please take this article for what it is, and do your due diligence before taking my recommendation to buy TRLG."

Oct 09 02:48 PM

[Alex Khande...:]

I am looking at this purely from a fundamental standpoint. The clothing is trendy, and trends wear out. The facts are straight from their last quarterly statement.

"Our net sales to boutique customers decreased sharply; these customers were more impacted by the challenging retail environment as they generally depend to a larger extent on external financing. Our sales to "majors" accounts, which consist of customers such as Nordstrom, Bloomingdale's, Saks Fifth Avenue and Neiman Marcus, decreased 1.7%, which is an improvement from the first quarter decrease of 12.6% as these accounts showed more confidence that their customers will purchase our merchandise this quarter compared to last quarter. Partially offsetting these decreases was an increase in our sales to off-price retailers of $0.6 million to $8.8 million."

Sales are shifting to off brand retailers and away from high end stores. Although stores are continuing to open across the country, I haven't seen the data to suggest that they are "cash cows" or data to suggest they are the best long term strategy for the company.

That being said, I will limit commentary to accredited subscribers and avoid the ensuing flame posts.

Oct 11 01:35 PM

[TRBJ2009:]

Nice to hear back from you... What exactly is an "accredited subscriber" ??? I again suggest you increase your DD and read transcripts from a year plus ago when the stores were initally showing their results on the "bottom line".... And they were very much refered to as "cash cows" by many on the yahoo mesage board, because it is so clear of what their impact is on the company... Also are you aware that these stores are all opened with comapny funding and repay themselves in an average of 9 months and have the highest square footage returns of basically any other apparel retial type business operating today???? Hence the terms "cash cows" and "printing money" are widely used by "those of us in the know" regarding the branded stores!!!

Also the so called off brand stores are all "mega store retailers, who have lot's of funds whereas the small boutiques have been suffering through the recent tough times caused by the economy, which BTW is being reported as something we have worked ourselves out of... Also I would imagine that you are aware that the off brand retailers are not sold Tue Religions newest styles, but older styles that the company is more than wiling to let go at smaller margins and not effecting the "now crowd" who truely support this companies products and the higher end department stores, yet alone their own branded retail stores which are just touching the tip of the iceberg on an international level where the "true" future growth lies ahead??? When one does fuller DD they become more aware of all the pieces of the puzzle and can speak out and advice better for their own good and future clients of you new endeavor, good luck going forward, I will continue to check in with you to see "what the score is and where we both stand on our observations and knowledge."

Oct 18 06:59 PM

[TRBJ2009:]

When I read your post I had a feeling you were referring to that article, I replied back on his blog, twice, he replied to me once, it's all there to read if you're interested...

Oct 21 09:51 AM

[TRBJ2009:]

One thing that is going against the shorts is TRs powerful cash position and strong balance sheet coupled with incredible free cash flow. We are able to generate this type of free cash flow while quickly expanding our store base. The shorts might have been right that TR might have been a fad when it was in its early days. That was because TR was heavily dependent on Jeans and if that started to slow then it would have been game over for TR. However, we are becoming a lifestyle brand and jeans are starting to make a lower % of total sales. Couple that with the fact that we now have licenses that should generate sales are are almost a 100% gross margins.

We were one of the few companies that were growing in a deep recession. Growing at this fast of a rate is one thing, growing at this rate while being in one of the worst recessions ever is just plain amazing. We were also growing while selling clothes that were $200+ per peice. If that does not show strong brand loyalty and brand power than I do not know what will.

I still think you want to stick with companies that are spitting out cash, have a strong balance sheet and have a track record for success. TRLGs valuations are very cheap considering how much cash they spit out each quarter.

I will be interested to see how this earnings report plays out.


On Oct 11 01:35 PM Alex Khandelwal wrote:

> I am looking at this purely from a fundamental standpoint. The clothing
> is trendy, and trends wear out. The facts are straight from their
> last quarterly statement.
>
> "Our net sales to boutique customers decreased sharply; these customers
> were more impacted by the challenging retail environment as they
> generally depend to a larger extent on external financing. Our sales
> to "majors" accounts, which consist of customers such as Nordstrom,
> Bloomingdale's, Saks Fifth Avenue and Neiman Marcus, decreased 1.7%,
> which is an improvement from the first quarter decrease of 12.6%
> as these accounts showed more confidence that their customers will
> purchase our merchandise this quarter compared to last quarter. Partially
> offsetting these decreases was an increase in our sales to off-price
> retailers of $0.6 million to $8.8 million."
>
> Sales are shifting to off brand retailers and away from high end
> stores. Although stores are continuing to open across the country,
> I haven't seen the data to suggest that they are "cash cows" or data
> to suggest they are the best long term strategy for the company.
>
>
> That being said, I will limit commentary to accredited subscribers
> and avoid the ensuing flame posts.

Oct 21 06:40 PM

[Alex Khande...:]

Quick Update for TRLG (11/4/09):

True Religion announced Q3 earnings this morning. On the call they reported earnings of $14.1 million ($0.58 per share) down 9% from $15.4 million ($0.64 per share) year-over-year. Analysts expected the company to earn $14 million ($0.59 per share).

Revenues rose 4% to $82.4 million but still missed Wall Street's consensus of $85 million.

In addition to the negative earnings report, Lazard Capital Markets analyst Todd Slater also downgraded the stock to hold from buy, stating that the company has been more focused on lowering expenses than on higher sales. Slater further commented in his report, "We recommend investors move to the sidelines, awaiting a more attractive entry point driven by either decreased valuations or increased 2010 visibility."

Taking the opposite stance on the recent downgrade, Brean Murray Carret analyst Eric Beder disagrees. "Frankly, we think this reaction is highly short-sighted and we should use any weakness to become more aggressive in the name," he wrote in a research note. "We believe the company's estimates remain conservative and that True Religion is now even better positioned to ignite material top- and bottom-line growth."

* Despite a slightly more positive forecast for 2010, shares of TRLG are currently down over 18%, giving up the 14% gains they have achieved since September.

Nov 04 02:17 PM