True Religion Jeans: Death or Transition?

Last night one of my favorites stocks disappointed. True Religion Apparel (TRLG), a luxury jeans manufacturer, reported lower sales and lower earnings than expected. The company reported 7 cents below estimates, and lower sales in Europe and Japan. The company blamed the weather and excessive heat for its low sales. Worse, they did not give investors any warning of this horrible quarter.

Looking at the stock (see chart), the momentum crowd got killed.

Fifteen looks to be a good level of support, but there are plenty of repairs to be made. For the next year, an optimistic view for earnings is $1.11 to $1.20. Almost no growth compared to this year. A good entry price will be in the low 10s. Meanwhile, investors will have to wait for the company to improve results. Or look at the sky and see if the weather will be right to go out and buy jeans.

Is this the death of True Religion?

I do not think so. The company has entered a transition period. They already have good brand recognition and they are number one on the luxury jeans space. They may have reached a plateau. Now, they must find newer ways to grow. They have plenty of choices:

One, is to build their own stores, which it is not likely to increase sales of jeans as they will cannibalize sales from boutiques and department stores. Instead, their stores will promote non-denim sales. In fact, True Religion wants to mimic Diesel success with shoes and other accessories, away from jeans. Right now, non-denim sales comprise 20% of revenue.

Another way to propel growth would be to establish a brand that focuses more on hip suburbia kids a la Guess (GES), instead of the city look they have now. That way they will fight against the Abercrombies (ANF) and Zaras in the malls. They would need plenty of capital and lots of time. Somehow I feel this management do not want to go that way.

Maybe the executives do not like the heat of a public company and rather want to sell or take it private. That could be the reason for Goldman Sachs' (GS) involvement in the company.

For now, executives will try the Diesel way to keep shareholders happy. Hey, they were once Diesel employees. But, if somebody wants to buy them -- the price is 20% lower now!