Following a disappointing 3rd Quarter which made many question the company’s direction and staying power, investors should breath a sigh of relief as True Religion’s business appears to be back on track following a few key senior management hirings and some strategic steps that should give the brand staying power. Among these strategic steps are a ramped up retail build-out, a more diversified product mix, and the signing of licensing deals for footwear and outerwear. All three of these initiatives will lead to greater brand recognition and move the company further away from the one trick pony they have been (with premium denim sales accounting for nearly all of True Religion’s revenues up until this point in their existence).
Despite the fact that True Religion had only 4 retail stores in operation during the quarter, two of which opened just weeks before the end of the period, the opportunity for improved margins that they provide is already quite obvious. Gross margins expanded 300 basis points in the most recent quarter to 54.1%, with the retail platform being cited as the key driver.
With gross margins of over 75% being achieved at their retail locations, further margin expansions will be realized as more company branded stores open their doors in 2007. A new Miami Beach location has already opened for business and four new leases for stores have been signed thus far this year.
Management is projecting full year 2007 earnings per share of $1.24-$1.27, on revenue growth of approximately 20%. The market is currently valuing the textile apparel industry at about 20 times earnings. Based on yesterday’s closing price, True Religion is trading at a forward P/E of 13.2. With significantly higher growth rates than the industry average, as well as rapidly expanding gross margins, it is reasonable to assume that True Religion should command a multiple at least equal to that of their peers, if not higher.
Further supporting this thesis is the strength of their balance sheet, with over $2 per share in cash and zero debt. Seeing no reason for True Religion to be valued at a price to earnings ratio lower than the average for the industry, I foresee shares appreciating over the course of the next year and achieving fair valuation near $25.00.
Disclosure: The author has a long position in True Religion Apparel.
TRLG 1-yr. chart: