True Religion: More Than Junk in a Trunk?

Let me be the first to say that I know about True Religion (TRLG) (21.85, $512mm, R2000 member) for only a few reasons, only one of which is really relevant. First, I remember it being hot when denim was hot a couple of years ago. The former penny stock (literally) had exploded in 2004 and was the poster-child of the fashion transition that took place in 2005. Second, the company’s name was mentioned in an infamous song that debuted in early 2006 and still remains quite popular (Go Fergie!). Finally, and truly the only important reason, is that the name keeps showing up on a bunch of my screens, particularly my newest ones that are based upon Greenblatt’s “Magic Formula”.

Its low PE and high Return on Capital, combined with EPS that have bottomed out after falling subsequent to a late 2006 take-down, strong balance sheet and good recent price momentum tell me to set aside my lack of interest in potential fads like Crocs (CROX), which is up 109% YTD, Deckers Outdoor (DECK), which is up 75% this year, Volcom (VCLM), which is up 58% YTD and Under Armour (UA), which is up over 400% since its late-2005 IPO). The real question, then, is “Do these jeans have legs”?

For those who think that is really the question, it isn’t. In fact, the company has entered into several licensing agreements over the past eight months for swimwear (debut is in November), high-end handbags and small leather accessories (at retailers next Spring), outerwear and its first agreement, which was for footwear, headware, scarves and gloves (in stores this Fall). On top of these interesting brand expansions, the company continues to open up stores (2 in L.A., Miami, NYC, 2 in Metro NY, Chicago and Houston, which I guess I can check out though I wouldn’t know what to look for, along with an outlet store at Desert Hills in Palm Springs). So, for those not in the know, like me before I just spent a little time investigating, the company isn’t exactly just a supplier of once-trendy jeans despite the address of their website, which they need to change! Given the success over the years of certain retailers and brands like those mentioned above, as well as Chico’s (CHS) and Urban Outfitters (URBN), I am definitely interested despite the fact that the company isn’t even 5 yet.

Investment Considerations

For the most part, things look quite good. First, a couple of negatives. The CEO/Founder, Jeff Lubell, who has been in the industry for 29 years (and in jeans for a decade), recently punted a big chunk of stock (about ¼ of his prior holdings), though he remains a 22% holder. Second, the stock is a bit over-covered, with 9 analysts – not exactly an unknown, though not too surprising I suppose. None of these guys work for top-tier firms. They loved the stock last summer near the all-time high, went flat-out neutral when it plunged late in the year and have recently been warming up. I guess I would be more concerned if they all loved it again (as opposed to a 5 holds and 4 buys).

The valuation seems reasonable, especially if the 20% estimated growth for 2008 is close to right:

They aren’t exactly giving the stock away, but it seems awfully reasonable at 15.6X forward estimates. Since they last reported, those estimates have actually increased a bit for 2008. Yes, the company stumbled and grew sales only 2% in the recent quarter, but they are expected to show 33% year-over-year growth in the big 4th quarter. The balance sheet is stellar - $49mm in cash, just $9mm in inventories (down sharply from a year ago) and AR of just $6mm (also down). There are no intangibles on the balance sheet, and the company has no debt (total liabilities are just $14mm). Before I would buy the stock, I would want to investigate off-balance sheet obligations, but the company appears to be very strong financially.

While the data for Q2 is only starting to come out, I do see that large holder Lotsoff Capital shed some of its shares. Other large holders as of Q1 included Columbia Wanger, SAB, UBS and Royce (very smart investors), all of which were stable or increased holders. Fidelity exited in Q1.

Technicals

While the stock probably needs to make a new 52-week high (the October high was 23.88) to command a lot of attention, it is at the top of its 19 month range of 15 to 23ish. I think that there is good support at 19.50-20 or so based upon chart patterns and the rising 50dma. The company reports in early August.

Conclusion

TRLG is one to watch. I intend to add it to my focus list of 100 stocks for now and see how the stock reacts in a couple of weeks. The stock is up strong year-to-date, but only a market performer over the past year. If it holds the support I mentioned, I think that area affords a nice entry, as there is considerable long-term support at 16. On the other hand, perhaps the stock blasts through the resistance. I still might buy it if I believe the move is justified. If the stock works, the multiple could expand plenty. Looking out a bit and assuming the company can earn about 1.80 on 2009, the stock could double over the next year and a half.

Disclosure: I don’t own this stock or any of the ones mentioned in this article, though CROX was sure showing up on a lot of my screens last quarter before they reported. I admit to not knowing much about clothing and fashion. I don’t really like to shop and am quite happy purchasing last year’s clothes at deep discounts. So, if anyone would like to share their thoughts, please feel free to contact me!

Comments

[Alan Brochs...:]

To follow up, I ended up buying a 3% position today in this ugly market at 18.85.

2007 Jul 26 02:43 PM

[Alan Brochs...:]

This may sound a little schizo, but I sold today after it failed at 19.50 area. I REALLY hate this market. It didn't help that when I walked into the new Houston store yesterday, it was empty. The salesperson said that it had been that way since it opened a couple of weeks ago. There's now way I was going to buy anything, as their jeans are $200 and t-shirts $60. I know these people exist, though. Will they continue to blow their money? I'll revisit as we get closer to the earnings release.

2007 Jul 30 02:53 PM

[Dan Jacome:]

the people exist and there is upside for the next 2 quarters we think.

This continues to puzzle all the shorts and I don't want to get in front of a "lifestlyle brand" with so much steam behind it.

Eventually, this could be the next CROX or HLYS, the type of stcok chanos would love to short, but the timeline right now is a bit off.

right now, it is doing what FRPT did last week, the 50 day is under the 200 and ready to test a major resistance level. If TRLG fails to bump past it, we would be short and see the stock dipping from 18 back to 14.

On the plus side, we still like the 50% ROE coupled with a PE discounted to the market (.9 x S&P)...tough call, no wander the stock is where it is: purgatory.

2007 Dec 02 04:18 PM

[Alan Brochs...:]

I agree - I think it is in purgatory primarily because of the macro outlook - the company has a lot of initiatives and is very early in its life with a strong brand value. One of the reasons CROX and some of the other retailers have done so well (you mentioned HLYS, but I would cite UA), even "food retailers" like CMG, is their functionality and relative low price point. Yes, CROX has been hot, but they don't cost a lot in their category. This guy has very high price points. Is it the next COH is more the question (though a different demographic).

2007 Dec 02 04:57 PM

[borisb:]

march quarter was so good a breakout attempt has occurred. short interest in huge.

2008 May 12 06:26 PM