Not Much to Worship at True Religion

Part of being a value investor means buying stocks when their stock price is depressed. That is the reason True Religion (TRLG) came across my screen. I actually saw it on Joel Greenblatt’s Magic Formula website and decided to dig deeper.

True Religion is a Los Angles based high-end denim company which designs, develops, manufactures, markets, distributes and sells denim jeans and other apparel, including corduroy jeans and jackets, velvet jeans and jackets, skirts, shorts, t-shirts, sweaters and sportswear. In other words, it’s a parent’s worst nightmare if your kid is into this fashion because jeans for example are priced in the $150 plus range.

The stock is hovering near its 52-week low as the company recently missed earnings by $.07 per share mainly due to weakness its Japanese and European units. Worse was the reason management gave for the shortfall; unseasonably warmer weather in Europe and a miss in the sales figures for Japan. Translation: management failed to execute. Analyst Eric Tracy of BB&T Capital Markets put it best in saying the more likely reason for the earnings miss was “lack of brand awareness” and “inconsistent distribution”.

On the most recent conference call, CEO Jeff Lubell was asked if the rumors surrounding his divorce with wife Kymberly were true. Jeff refused to comment saying he was there to discuss anything to do with the business only. I understand his reasoning for not wanting to discuss this personal matter but considering Kymberly is a VP within the company, it is a matter of business. Sorry Mr. Lubell but if you want to run a public company you’re going to have to answer the tough questions.

On the positive side, I give Lubell and management credit for seeking out help. An $800,000 in fees were paid mainly to Goldman Sachs last quarter for Goldman to seek “strategic alternatives”. Strategic alternatives could mean a number of things but hopefully it is a recognized omission by management that they are off course and need to get back on track. Who better to contact than Goldman? On the other hand, why not just tell shareholders what “strategic alternatives” are being sought?

The ultimate question is if True Religion is a buy a current levels? The company has no debt, a ROE & ROC above 50%, a PEG of .85 and a P/E [TTM] of about 13.5. The company is diversifying its product line in order to not be so susceptible to its main staple denim. The company is trading at a discount to its peers and on the surface looks like a bargain. However, a lot of questions still need to be answered before I would consider investing.

Quite frankly listening to the recent conference call did not give me the assurance that management will turn the company’s problem around quickly. Furthermore, who knows what is up TRLG sleeves with the Goldman Sachs deal? At this point it is total speculation. Shareholders can only pray that True Religion will not fall further. I’ll wait this one out until further developments.

TRLG 1-yr chart: