True Religion: A Good Faith Buy
By Jordan Kahn
Street Insight Contributor
3/15/2006 10:37 AM EST
True Religion Apparel should give investors more reason to believe after it reports earnings after the close Wednesday. The hip apparel firm should have a good quarter, based on what I am hearing regarding channel checks, market share and inventory levels.
It's also notable that the company has exceeded estimates and/or raised guidance in each of the past few quarters. Current estimates for the quarter are for EPS of 22 cents on revenue of $25.5 million; those figures represent year-over-year growth rates of more than 80% and 90%, respectively.
The company may have been somewhat restrained in the fourth quarter because of limited shipments of its new fleece line, but those issues have since been resolved. Its spring lines are being well received, and the company should report a solid backlog.
Here are the key things to listen for on the call:
First-quarter backlog levels,
Margin trends,
Update on door counts (number of stores it sells in),
Comments on international revenues, and
First-quarter guidance.
True Religion continues to take market share and shelf space at major department stores. Although the death of premium denim has been predicted for well over a year now, I see little sign of that coming to pass. I'm not just saying that because I live in Los Angeles and work in Beverly Hills: The company's products are hot in Las Vegas, Miami, and even in the Midwest. Its new fleece line is gaining customer loyalty, helping the company successfully transform itself from a trendy jean company to more of a lifestyle brand.
As for the stock, I believe it represents a good buy at current levels. It is trading at a P/E of roughly 18 times forward estimates, despite above-average growth rates and some of the higher margins in the apparel business.
If you don't believe there is any value there, consider the recent transaction of competitor Citizens of Humanity. That company sold a 62% stake to Berkshire Partners for what is believed to be a multiple of 8 times revenue. If you apply that to TRLG, you come up with a valuation that is more than 50% higher than today's level.
Also, this stock has huge short interest. Not only has that interest risen over the last few months as the stock has climbed, it now stands at 40% of the float. That's a lot of fuel that could be thrown on the fire if the shares continue to hit new highs. Retail issues remain volatile, so the reaction to the earnings call could go either way, But I believe the stock offers a nice risk/reward with limited downside. |
