After retaining their services for nearly a year, True Religion (TRLG) announced that they have concluded their review of strategic alternatives with Goldman Sachs, with this statement from the company’s CEO, Jeffrey Lubell…
“True Religion has been a fast growing young company, with a desire to build a global brand. We engaged Goldman Sachs to help us evaluate various strategic options for maximizing shareholder value. We have been presented with and have thoroughly explored a number of strategic opportunities over the past year and have come to the conclusion that focusing on our own current growth initiatives ultimately serves to best enhance the long-term value for all shareholders. With our visibility into the future of this year, which we have shared publicly, we believe our stock is undervalued. Our consumer direct segment is expected to grow significantly in the next three years, with our eight retail stores today growing to 14 stores by year-end. We anticipate that this segment will grow rapidly in 2008 and 2009, reaching at least 50 stores by the end of 2009, which we believe should expand our operating margin. We also expect to continue to grow our wholesale and licensing businesses in the U.S. and internationally.”
Mr. Lubell clearly stated that he feels True Religion stock is undervalued right now, and the decision to focus on continued growth rather than pursuing a sale of the company serves to further reinforce this sense of insider confidence at True Religion. This announcement was somewhat anticipated after hearing so little concerning the Goldman review for so long. It should be viewed as a net neutral event.
Disclosure: Joseph Urgo has a long position in True Religion Apparel.
After gaining nearly 15% on a heavy volume day yesterday, following an upgrade by Sterne Agee, True Religion (TRLG) closed up 6% on another high volume day. With 46% of the float short as last reported, it appears that a short squeeze may have been triggered, with shares breaking out of the range they have been bound in, closing well above their 200 day moving average, a metric they’ve closed a trading-day over only 12 times since mid-November of last year. With such a high percentage of the float currently short, shares could appreciate rapidly if traders whom are short True Religion start to feel the need to cover their positions quickly.
In addition to the aforementioned upgrade from Sterne Agee, True Religion has also been the beneficiary of some extra press, from both CNBC and the tabloid’s most recent victim, Alex Rodriguez, as he was wearing a pair of True Religion jeans in the recently highlighted photos. They also presented at Friedman, Billings, Ramsey & Co. 2007 Growth Conference yesterday, and will be making a similar presentation at the Piper Jaffray 27th Annual Consumer Conference, in taking steps to improve their visibility an sustainability as a company in the eye’s of Wall Street.
True Religion has made strides in their business in recent months as well, further building out their retail initiative with True Religion branded store openings in Northern Texas, Southern California, New Jersey, Chicago and New York in the past two months, which should add revenue and expand margins quickly after coming online. The company also recently announced signing a licensing deal with a leading high-end handbag designer and distributor, to create and sell True Religion branded handbags, with a line of bags debuting at a fashion show in August of this year. This deal adds to a number of licensing deals that True Religion has signed, which have yet to roll out. As products from these deals begin to come on line in the approaching half of 07 and early 08, both the top and the bottom lines will benefit. The company continues to execute their business plan nicely and looks to be positioning themselves for long term, sustainable growth and brand durability.
Disclosure: Joseph Urgo has a long position in True Religion Apparel.
True Religion (TRLG) shares closed the day at $16.24, up $1.28 on the day, representing a gain of nearly 9% on about 5 times average volume. Shares remain active after hours, up almost another 4%. While no official news has been released, the rumor behind this move calls for a management led buyout of the company, as reported by CNBC’s Mark Haines early this morning.
Though completely unconfirmed at this point, this is a rumor that looks to be a realistic possibility. Goldman Sachs was hired about 9 months ago by True Religion and has remained on board despite no news or updates regarding what exactly they are being compensated for. Normally, when an investment banker such as Goldman Sachs is brought on board to explore strategic alternatives, the company winds up being acquired or taking on an initiative such as a large buyback or dividend to boost shareholder value. Also helping to make this rumor appear viable, is the fact that management already owns about 46% of the shares outstanding, a very significant amount. Couple these facts with a very strong balance sheet and strong financial metrics that make this stock look very undervalued at current levels, and the possibility of a management led buyout of True Religion doesn’t appear to be too far fetched.
Disclosure: Joseph Urgo has a long position in True Religion Apparel.
Strong Buy
12 Month Target $25.00
Following yesterday’s closing bell, True Religion Apparel (TRLG) reported 4th Quarter and full year 2006 financial results. In the most recent quarter, the high-end fashion company achieved revenue of $29.8 million and diluted earnings per share of $0.21. These numbers were in line with expectations, displaying strong year over year growth in both sales and profitability. 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 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: Joseph Urgo has a long position in True Religion Apparel.
