True Religion Apparel Looks Fashionable, But Will It Always Be?

True Religion Apparel (TRLG) is an upscale apparel clothing company. It's best known for its denim apparel. Its target customers are fashion-conscious consumers.

Just recently it started expanding its operations by opening retail stores to sell its apparel, but it is still just a small part of the company, with just over 3.5% of net sales coming from its retail segment. It also sells its clothing through such upscale retailers such as Nordstrom (JWN), Neiman Marcus, and Saks Fifth Avenue.

Bullish Case

1) This is a classic growth slow down stock. It's still growing fast but it's not growing as fast as it was in 2004. Sales are projected to grow just over 20% for fiscal year 2007.

2) Its retail stores are showing good signs, this is one of its main strategies of growth. The gross margin for its retail operations was 46.5%.

3) There are no signs that its apparel is going out of fashion. Sales are at an all time high. Its denim apparel has been a hit all over the world.

4) Its valuation is excellent. Its trailing twelve months price/earnings ratio is just 14.64 and its forward price to earnings ratio for fiscal year 2008 is just under 10. PEG ratio is just .54.

5) Its growth has been phenomenal. Its revenue has grown from $27.7 million in 2004 to $139.0 in 2006 and expected to grow to $167.1 million in 2007 by analysts.

6) Its balance sheet is strong with almost $45 million of cash on its books and no debt.

7) Company wide gross margin increased 166 basis points in 2006 compared to 2005.

8) Great inventory management. Sales increased by over 35% and inventory shrunk by over 6%. Inventory turnover increased to 14.79 in 2006 compared to 10.2 in 2005.

Bearish Case

1) Upscale clothing is one of the first casualties in the downturn of the economy, people will slow their buying of luxury goods.

2) There have been a lot of clothing fads over the years where styles have come and gone and their companies with them, will TRLG still be around in a decade?

3) TRLG has been in business for not even 5 years. What will happen to it when the current fashion changes, will it adjust on the fly or will it struggle? Are its management and designers talented enough to adapt to the fast changing fashion trends?

4) Its auditor has found some issues with its accounting recently. There could be issues with internal control over financial reporting.

Technicals

TRLG has been trading in a range for the past 18 months between $15 and $24 a share. Currently it is trading around $15 a share. It is pretty much sitting on 18 month support, a good spot to buy in. $12 looks like the next solid support. The down trend is firmly in place, the 200DMA is above the 50DMA which is above the 20DMA. The 20DMA has been acting as recent resistance. MACD and RSI are pretty neutral right now but they have been showing a bullish divergence.

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Volume has been positive. The up days have been on heavy volume and volume on down days has generally been pretty light.

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Conclusion

I can't seem to make up my mind on this stock. Both the bear and the bull cases seem to make sense. My primary concern is TRLG has not been in business long enough to see how it adjusts to different trends in fashion. Yes, growth so far is excellent but how will it adapt to a new trend? Its valuations are excellent and it seems to be making the right decisions about expanding the company with the new retail segment and licensing deals it has signed. It has also expanded its distribution. There is no doubt that the denim product that it has been putting out is excellent, but for me there is not enough operating history to start a long position.

Disclosure: I don't have a position in TRLG.