True Religion: How to Play a Turnaround in the Wholesale Denim Business

| About: True Religion (TRLG)
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TRLG Company Overview

True Religion Apparel (NASDAQ:TRLG) designs, markets, distributes and sells fashion jeans and related sportswear apparel including hoodies, t-shirts and sweats under the brand name "True Religion Brand Jeans”. The company operates in four segments: U.S. Wholesale, International, U.S. Consumer Direct and Core Services, which includes licensing activity.

The U.S. Consumer Direct segment consists of branded retail stores located in the United States and e-commerce sales. Wholesale customers include specialty stores, major department stores, off-price retailers and wholesale distributors. The Core Services segment provides product design, production, distribution, marketing and other overhead resources to the other segments.

TRLG's products are sold in the United States in leading national premium stores, including Bloomingdale's, Neiman Marcus, Nordstrom (NYSE:JWN), Saks Fifth Avenue (NYSE:SKS) and in approximately 750 boutique and specialty stores. Products are also sold through 94 branded retail stores and via the internet. Internationally products are sold through seven branded retail stores and distributed internationally to boutiques and specialty stores.


TRLG has a current market capitalization of approximately $730mm and an enterprise value of approximately $580mm. The company has no debt and approximately $160mm of cash on their balance sheet. On a multiple basis TRLG trades at 7x trailing EBITDA and 15.3x forward earnings.

TRLG announced first quarter earnings on April 28 with Q1 EPS exceeding analyst estimates by 37%. The stock increased 8.8% from $27.79 to $30.22. The stock has not closed above $30 since falling to a low of $24.90 on June 10th in sympathy with the overall market sell-off and fear of an economic slowdown.

(Link to TRLG Q1 2011 earnings)

Same-store sales in the U.S. consumer direct segment increased 7.4% but the U.S. wholesale business declined. In particular there is weakness in the women's wholesale business. This was not a surprise and other denim manufacturers have signaled similar dynamics. The women's wholesales business in the U.S. has been weak

So how do you invest in the turnaround of the women's wholesale business? While the valuation of TRLG does not feel extreme and the company has other growth opportunities in addition to a wholesale turnaround, there may be a better way to play this dynamic.

Joe's Jeans

Joe's Jeans (NASDAQ:JOEZ) is another way to play the wholesale turnaround. A much smaller company than TRLG, Joe's has a market cap of approximately $50mm. Like TRLG, Joe's has its own branded retail stores, but it only has a few the majority of which are outlet stores. Joe's is therefore much more levered to the wholesale channel. Joe's is a strong well-known brand but is trading at only 0.8x book value, which is absurd. For comparison TRLG is trading at 2.8x book value. Further, Joe's fall 2011 line is strong and heading to the major stores now. Joe's also just signed a deal to open at least 7 stores in the Middle East. This gives credence to Joe's brand value and offers an additional growth opportunity. Joe's also plans to open more stores in the U.S. and over time the company will diversify away from the wholesale channel. Nonetheless, as the women's wholesale channel stabilizes Joe's stands to do very well and investing now, below book value and before the turnaround is evident in the financials, could result in significant investment gains.

Disclosure: I am long JOEZ.