Joe's Jeans Earnings Not So Relevant to True Religion Investors

Includes: JOEZ, TRLG
by: Adam Muller

In a June 28 article I discussed True Religion (NASDAQ:TRLG). In the article I pointed out that while the company's retail stores were performing well, there was still weakness in the women’s wholesale business.

As of the market close on July 11, 2011 TRLG was trading at $29.34 per share, implying a market capitalization of $756mm and an enterprise value of $602mm. TRLG has $156mm of cash on its balance and no debt. In terms of valuation TRLG is trading at 1.6x trailing sales, 7.3x trailing EBITDA, 15.8x estimated 2011 earnings, and 13.4x estimated 2012 earnings.

While no perfect comparable company exists for TRLG, there is an argument that could be made to look at higher end retailers like Abercrombie & Fitch (NYSE:ANF) or Polo Ralph Lauren (RL,) although both ANF and RL are at different stages of their life cycle and have more scale than TRLG. Both ANF and RL trade at a premium to TRLG, with ANF trading at 11.1x trailing EBITDA and RL at 10.7x. Currently, TRLG’s growth is coming from online sales, new stores, and international expansion.

On July 11, after the bell, Joe’s Jeans (NASDAQ:JOEZ) reported second quarter 2011 earnings. It is worthwhile to read the earnings call transcript. On the top-line JOEZ saw overall revenue fall 5% versus Q2 2010, with wholesale revenue falling 12% while retail revenue increased 52% as JOEZ increased its store count to 20, versus only 13 in the prior year. Similar to Q1, Joe’s saw increases in men’s sales with the men’s denim category now representing 16% of sales, up from 11%. JOEZ saw lower traffic in its company-owned stores and reported a same-store sales decline of 15%, solely associated with lower traffic.

It is important to note that there are only 6 stores in Joe’s calculation and, as a result, the same-store sales number should be taken as only one of many data points. On the positive side Joe’s conversion rates were high at 40% in its outlet stores and over 50% in full priced stores. Further, JOEZ plans to open 4 more stores in 2011. To address the decline in same-store sales, Joe’s is going to increase marketing spending in the second half of the year. Given that the company have re-vamped its fall and holiday lines, this increased spend makes a lot of sense to get the word out there.

I don’t think there is much from JOEZ earnings that applies to TRLG. TRLG sells more fashion-detailed products, has a much larger store base, and the trends that JOEZ reported (growth in men’s denim and continued difficulties in the women’s wholesale business) should not be a surprise to TRLG investors. TRLG is able to mitigate this weakness because of its store base, and the higher margin that comes from the direct channel. TRLG also has a more advanced online business versus JOEZ. This is one of the reasons JOEZ is focused on increasing its own store base and improving its website.

From a pure risk / reward basis, I would suggest taking a long look at JOEZ. While it will be more volatile, there is the potential for outsized returns if the company executes its strategy and everything from the earnings release suggests that the company is on target. TRLG at 7x trailing EBITDA does not feel expensive, but does not scream value the way it did in the low $20s.

Disclosure: I am long JOEZ.