COMPLETE REPORT ON TRLG
Wedbush Morgan does and seeks to do business with companies covered in its research reports. Thus,
investors should be aware that the firm may have a conflict of interest that could affect the objectivity of
this report. Investors should consider this report as only a single factor in making their investment
decision. Please refer to page 25 of this report to obtain analyst certification and important disclosure
information.
Footwear and Apparel Research Note
Equity
Research
L O S A N G E L E S | N E W Y O R K | P A R I S | S A N F R A N C I S C O | S E A T T L E
True Religion Apparel (TRLG)
The True Religion of Denim; Initiating Coverage with
a BUY rating
FYE DEC 2004E 2005E
EPS($) CURRENT PREVIOUS CURRENT PREVIOUS
Q1 Mar $0.01A - $0.11E -
Q2 Jun 0.02A - 0.12E -
Q3 Sep 0.05A - 0.12E -
Q4 Dec 0.12E - 0.12E -
Year** $0.20E - $0.47 -
P/E Ratio 44.7x 19.0x
Change NA 130.0%
FYE DEC 2004E 2005E
Revenue ($ mil.) CURRENT PREVIOUS CURRENT PREVIOUS
Q1 Mar $2.7A - $13.5E -
Q2 Jun 4.1A - 14.2E -
Q3 Sep 7.4A - 14.7E -
Q4 Dec 14.0E - 14.8E -
Year** $28.2E - $57.1E -
Change NA 102.5%
* Excludes non-cash charges for amortization of goodwill and intangibles, in-process research and development,
restructuring, and stock-based compensation.
** Numbers may not add up due to rounding.
INVESTMENT SUMMARY
We are initiating coverage of True Religion Apparel Inc. with a BUY rating and $12 price target.
Our BUY rating is based on four key factors:
o Increased product distribution along with greater product penetration could add up to powerful top and
bottom line growth of greater than 100% in 2005;
o Already impressive gross and operating margins have further upside potential;
o Very positive channel checks of 125 department stores nationwide conducted this week reveal high
demand for True Religion jeans which could lead to continued upward earnings revisions;
o A strong premium denim fashion cycle that, in our view, is really just beginning.
Current valuation does not fully reflect earnings potential, in our view. True Religion shares are
trading at 19.0x our 2005 EPS estimate of $0.47. We believe shares should trade at a premium multiple versus
its peer group forward multiple of 14.6x based on its powerful earnings growth rate potential, the opportunity for
margin expansion and the company benefiting from the very strong denim fashion cycle. We also believe True
Religion shares should trade more in-line with its high fashion peer group on a 12-month forward multiple based
upon previously mentioned factors which ranges from 20x to 31x. We believe True Religion can grow earnings in
the 100%-plus range in 2005 and at least 25% for the next two years. Accordingly, we believe a 25x multiple on
our 2005 EPS estimate of $0.47 is appropriate and leads to our $12 price target.
52-Week Range $0.65 – $9.33 Long-Term Debt $0.0M
Shares Outstanding 20.7 million Long Term Debt/Capital 0.0%
Insider/Institutional 50.9% / 1.9% ROE 97.5%
Public Float 11.7 million Cash & Inv/Share $0.24
Market Capitalization $190.4 million Book Value/Share $0.19
February 4, 2005
Price (as of close 2/3/05)
$8.94
Rating
BUY
12- Month Target Price
$12
Vera Van Ert
+1 213 688-4457
vera.van.ert@wedbush.com
Carrie Vilaplana
+1 213 688-4529
carrie.vilaplana@wedbush.com
Company Description
True Religion Apparel Inc., through
its wholly owned subsidiary Guru
denim, designs, manufactures,
markets and distributes high fashion
jeans and other apparel. The
company, based in Los Angeles,
currently distributes denim pants,
corduroy pants and denim jackets in
the US, Canada, the UK, Europe,
Japan and Australia under the “True
Religion Brand Jeans” Brand.
2 | True Religion Apparel Vera Van Ert +1 213 688 4457
Carrie Vilaplana +1 213 688 4529
Risks: The biggest risks to True Religion include its lack of product diversification, high fashion risk,
its limited operating history and the relative illiquidity of the stock, given its current OTC listing. We believe
other key risks in True Religion shares are changes in consumer tastes, the inability of the company to
anticipate, interpret, and react to the rapidly changing fashion tastes and trends of apparel consumers,
changes in the competitive landscape, economic risks associated with conducting business overseas and
macroeconomic factors.
Vera Van Ert +1 213 688 4457 True Religion Apparel | 3
Carrie Vilaplana +1 213 688 4529
TABLE OF CONTENTS
LIST OF EXHIBITS.......................................................................................................................................... 4
EXECUTIVE SUMMARY................................................................................................................................. 5
INVESTMENT POSITIVES.............................................................................................................................. 7
INVESTMENT CONCERNS ........................................................................................................................... 15
VALUATION .................................................................................................................................................. 18
MANAGEMENT TEAM.................................................................................................................................. 20
MODELING ASSUMPTIONS ......................................................................................................................... 21
FINANCIAL MODELS ................................................................................................................................... 22
4 | True Religion Apparel Vera Van Ert +1 213 688 4457
Carrie Vilaplana +1 213 688 4529
LIST OF EXHIBITS
Exhibit 1: True Religion Apparel Revenue Break-Out by Region in 2004
Exhibit 2: True Religion Apparel Revenue Break-Out by Distribution Channel in the U.S. in 2005
Exhibit 3: True Religion Apparel U.S. Revenue Break-Out by Gender
Exhibit 4: Recent Channel Checks Indicate Strong Demand for True Religion Denim.
Exhibit 5: Glossary of Premium Denim Terms
Exhibit 6: Premium Denim Brand Comparison
Exhibit 7: Valuation Comp Sheet
Exhibit 8: Management Team
Exhibit 9: True Religion Income Statement
Exhibit 10: True Religion Balance Sheet & Cash Flow Statement
Exhibit 11: True Religion Financial Statistics
Vera Van Ert +1 213 688 4457 True Religion Apparel | 5
Carrie Vilaplana +1 213 688 4529
EXECUTIVE SUMMARY
WHAT WE LIKE…
• We believe True Religion Apparel has the opportunity to significantly expand its
premium denim distribution in 2005, leading to impressive revenue and EPS growth in
2005. We are forecasting the company’s top line to grow 103% to $57 million while its bottom
line grows 127% to $0.47 for FY05. In addition, we believe there may be upside to our
estimates depending on the strength of Fall 2005 orders, which we will gain more visibility on
when the company reports its 4Q results on February 28.
• Already impressive gross and operating margins could have some upside potential.
We are modeling a conservative 20 to 30 basis points of gross margin improvement in the
next several years (ending 2005 at about 47.7%) as the company begins to gain greater
leverage on its manufacturers resulting from higher volume orders. We also believe there is
upside to current gross margin levels, though not as great as on the costing side, resulting
from the inclusion of more higher priced bottoms and denim jackets in the assortment.
• Channel checks conducted this week of over 125 department stores nationwide reveal
high demand for True Religion jeans. Over the past three days we called over 125 better
department stores across the country and found that True Religion was the third most popular
brand of denim behind Seven Jeans and Citizens of Humanity. True Religion received 12% of
the votes cast. Sales associates at each store were asked to name their top selling, hottest
denim brands and 58 of the 125 stores (46%) we surveyed named True Religion as one of
their top selling and hottest denim brands. Only Seven for All Mankind and Citizens of
Humanity surpassed True Religion. Both of these brands have a much broader distribution
(which includes Macy’s stores) than True Religion and have been established brands on the
premium denim scene for some time.
• Denim is The New “Black Pant.” True Religion will continue to benefit from a fundamental
shift in the buying habits of their target consumers’ as it relates to the purchase of high fashion
denim as a replacement for the traditional black pant in a woman’s wardrobe, in our view.
• Strong premium denim cycle that is really just beginning, in our view. We believe True
Religion and other premium denim makers and sellers will continue to benefit from the current
strong premium denim fashion cycle we are currently experiencing. In our view, this cycle
began in earnest in Fall 2004 and will have a three-year tail, like other fashion cycles.
According to Women’s Wear Daily, denim is a $12.7 billion wholesale market in the U.S., of
which we believe premium denim makes up approximately 4%. In Fall 2004 we began to
notice a number of premium denim brands coming into their own, from a selling perspective,
and even some specialty retailers introducing higher price point denim lines into their
assortment. As this denim fashion cycle continues, we expect to see the percentage of
premium denim grow relative to the entire denim market.
• True Religion’s very solid EPS growth and limited capital requirements add up to
positive free cash flow for the company. We believe True Religion ended 2004 with free
cash flow of approximately $5 million on limited capital requirements of $350,000 and very
profitable bottom line results of $0.20 per share. The company ended 3Q04 with $1.6 million
in cash and no long-term debt.
6 | True Religion Apparel Vera Van Ert +1 213 688 4457
Carrie Vilaplana +1 213 688 4529
AND WHAT WE DON’T
• High Fashion Risk. True Religion is 100% a fashion brand. As such, the company’s top and
bottom line results are highly dependent on whether its designers (Jeffrey and Kymberly
Lubell) have correctly interpreted the current season’s trends, in terms of styling and color of
denim, and translated these trends into a representation of True Religion. In addition, True
Religion targets a very fickle demographic with constantly shifting fashion tastes which can
also contribute to volatility in the company’s sales and earnings results.
• Fashion miss can have serious affects. Given the company’s status as a fashion brand, a
wide-spread fashion miss could potentially negatively impact up to two quarters of business, in
our view. Although True Religion can move quickly into product given its 100% domestic
sourcing, it is difficult to fully turn around a season’s worth of business once soft selling has
begun.
• Lack of product diversification creates dependence on success of denim line to drive
top line results. True Religion currently derives the majority of its revenues from the sale of
its men’s and women’s denim jeans. Although the company expanded its line last year to
include corduroy bottoms and denim jackets, approximately 90% of the company’s revenues
are dependent on the sale of denim bottoms and any substantial deterioration in the level of
sales of this category could have a negative effect on the company’s profitability.
• True Religion’s lack of a long operations track record makes it difficult to evaluate the
long-term sustainability of the company. True Religion is a young company and, as a
result, the company does not have a meaningful historical record of sales and revenues nor
an established business track record.
• True Religion shares can be subject to dramatic price fluctuations given its relatively
illiquid nature and small capitalization. The company is considered a small-cap stock with
a market capitalization of approximately $190 million and 20.7 million shares outstanding. It is
important to note that the company is considering listing its shares on the NASDAQ market
and, if the company is successful in accomplishing this, we believe it could have a very
positive impact on liquidity and access to trading the company’s stock.
Vera Van Ert +1 213 688 4457 True Religion Apparel | 7
Carrie Vilaplana +1 213 688 4529
•
INVESTMENT POSITIVES
1. We believe True Religion Apparel has the opportunity to significantly expand its premium
denim distribution in 2005, leading to impressive revenue and EPS growth in 2005. We are
forecasting the company’s top line to grow 103% to $57 million while its bottom line grows
127% to $0.47 for FY05. In addition, we believe there may be upside to our estimates
depending on the strength of Fall 2005 orders, which we will gain more visibility on when
the company reports its 4Q results on February 28.
We believe True Religion can achieve greater than 100% revenue and EPS growth in 2005
primarily by expanding its distribution in its wholesale and international channels through
expanding the number of doors that carry the product and broadening the assortment
each store carries. We believe the company is poised to grow its percentage of revenues in the
wholesale channel from 20% in 2004 to 35% in 2005. The wholesale channel includes
Nordstrom (JWN, Not Rated), Bloomingdales (a unit of Federated Department Stores, FD, Not
Rated), Neiman Marcus (NMGA, Not Rated), Saks (SKS, Not Rated), Bergdorf Goodman (a unit
of Neiman Marcus) and Henri Bendel (a unit of Limited Brands, LTD, Not Rated). This equates to
approximately $11 million in the wholesale channel in 2005, up from approximately $3 million in
2004, with Nordstrom becoming the largest wholesale customer of True Religion, in our view. We
believe Nordstrom will account for approximately 35% to 36% of the company’s wholesale
revenues in 2005 up from about 25% to 26% in 2004. The company plans to increase the
number of Nordstrom doors the product is in from 20 doors at the end of 2004 to 80 - 100 stores
in 2005.
Although True Religion derives about 90% of its revenues from its denim bottoms line, the
company has expanded the product offering to include corduroy bottoms and denim jackets (the
remaining 10% of revenues is evenly split between corduroy bottoms and denim jackets) and
plans to offer the cords and jackets in an increasing number of department stores throughout
2005. The company’s jeans are currently available in three vintage washes (light, medium and
dark) with the medium and dark being the largest sellers to date. In addition, the jeans are
available in three hand washes including light, medium and dark. True Religion denim is most
easily distinguished from other players in the premium denim space by the inclusion of stylistic
embroidery on the back pocket of each style of jean. The company’s most popular jean style for
both men and women (the Joey) is also available in a myriad of colors of corduroy (darker colors
for winter and lighter, bright and pastel colors for spring). Corduroy bottoms for both men and
women retail for $172. The company is also manufacturing mini-skirts for the spring selling
season and has achieved success with its denim jacket. True Religion plans to update its
product offerings (style, fit, washes) every six months to help ensure the company remains at the
cutting edge of fashion.
We also believe the company can grow its international revenues to approximately $29 million in
2005 from $14 million in 2004, primarily through expanding the assortment in existing wholesale
accounts and adding additional doors in 2005.
In addition, we believe additional upside to earnings, especially beginning in 2006, could be
driven by a new, more moderate line of denim the company is considering producing. The
company is exploring the opportunity of introducing a more moderately priced (approximately $80
retail) denim line aimed at the middle market consumer, which would be produced in Mexico and
likely distributed in Macy’s (unit of Federated Department Stores, FD, NR) and Robinsons- May
(unit of May Department Stores, MAY, NR). Although the timing is still uncertain, the line (not
under the True Religion brand name) could hit stores in 1Q06.
8 | True Religion Apparel Vera Van Ert +1 213 688 4457
Carrie Vilaplana +1 213 688 4529
Exhibit 1: True Religion Apparel Revenue Break-Out by Region in 2004
Source: Wedbush Morgan Securities.
Exhibit 2: True Religion Apparel Revenue Break-Out by Distribution
Channel in the U.S. in 2005
Source: Wedbush Morgan Securities.
53% of True
Religion’s
revenues are
derived from its
U.S. operations.
United States
53%
Europe &
Canada
20%
Japan
27%
Business is
shifting and
becoming more
department stores
based versus
fashion boutique
based.
Wholesale
33%
Boutiques
67%
Vera Van Ert +1 213 688 4457 True Religion Apparel | 9
Carrie Vilaplana +1 213 688 4529
Premium Denim Designer, Manufacturer, and Distributor. True Religion Apparel, through its
wholly-owned subsidiary Guru Denim, designs, develops, manufactures, distributes and sells
men’s and women’s high fashion jeans ($172 - $220 retail price), corduroys ($172 retail price)
and denim jackets ($250 retail price). The company sells its product into higher end department
stores including Nordstrom, Bloomingdales, Neiman Marcus, Saks, Bergdorf Goodman and Henri
Bendel, and to approximately 300 fashion boutiques concentrated in New York and Los Angeles
via a commissioned salesperson who makes approximately 10% commission on net sales less
returns.
Exhibit 3: True Religion Apparel U.S. Revenue Break-Out by Gender
Source: Wedbush Morgan Securities.
The company also has agreements in place with commissioned sales agents in Canada, the UK,
Ireland and Scotland (earning sales commissions between 10% and 12%). True Religion’s
products are sold in Canada through its commissioned sales agent Margulius, in Vancouver
Canada, and the company has appointed A.N.V. Clothing Inc. as its exclusive distributor. The
products are sold in the UK, Ireland and Scotland through its commissioned sales agent, Melwani
and customers include Harrods, Harvey Nichols, Liberty, Selfridges and a number of men’s and
women’s fashion boutiques. In addition, the company has distribution agreements with
distributors in Italy (Massimo Cavallari), Germany, Switzerland, Holland (all three with the United
Fashion Agency), Australia (Krites) and Japan (Jameric). True Religion’s distributors purchase
products from the company at a discount for resale to their customers in their respective
territories.
Women
70%
Men
30%
10 | True Religion Apparel Vera Van Ert +1 213 688 4457
Carrie Vilaplana +1 213 688 4529
2. Already impressive gross and operating margins could have some upside potential.
We are modeling a conservative 20 to 30 basis points of gross margin improvement in the next
several years (ending 2005 at about 47.7%) as the company begins to gain greater leverage on
its manufacturers resulting from higher volume orders. We also believe there is upside to current
gross margin levels, though not as great as on the costing side, resulting from the inclusion of
more higher priced bottoms and denim jackets in the assortment.
We also believe the potential exists (although we are not modeling it specifically) for True
Religion to source some of its manufacturing overseas over the next few years. The company is
currently 100% domestic manufacturing based and although it currently stands firm in its resolve
to keep those operations here in the U.S., it is hard to overlook the great strides Chinese
manufacturing processes continue to make in achieving high quality finishes and washes on
garments. The company currently utilizes three Los Angeles-based manufacturing facilities to
produce its products. Atomic is responsible for approximately 45% to 50% of the company’s
production (Atomic also produces denim for Seven for all Mankind, Armani Exchange and
Abercrombie & Fitch). LA-based Pinc handles about 45% of True Religion’s production and also
produces jeans for Lucky Brand. Indigo Group produces a very small quantity of products for the
company, and also makes jeans for Ralph Lauren (RL, Not Rated).
We also believe, given the limited operational requirements on the business and the resulting
huge leverage on expenses the company is able to achieve due to its phenomenal sales growth
trajectory, the company’s operating margin could reach the 30% level in the next several years
(up from a mid 20% forecast for 2004).
3. Channel checks conducted this week of over 125 department stores nationwide reveal
high demand for True Religion jeans.
Over the past three days we called 125 department stores across the country (including 55
Nordstrom stores, 30 Saks stores, 25 Neiman Marcus stores and 15 Bloomingdales stores) and
found that True Religion was the third most popular brand of denim behind Seven for All Mankind
and Citizens of Humanity (see Exhibit 4). True Religion received 12% of the total votes cast,
versus 21% for Seven for All Mankind and 19% for Citizens of Humanity. Sales associates at
each store were asked to name their top selling, hottest denim brands and 58 of the 125 stores
(46% of stores) we surveyed named True Religion as one of their top selling and hottest denim
brands. The breakdown of votes for True Religion by department store is as follows:
Nordstrom – True Religion ranked as third top selling, hottest denim brand in 58% of stores
the we surveyed (32 stores)
Neiman Marcus – True Religion ranked as third top selling, hottest denim brand in 56% of the
stores we surveyed (14 stores)
Bloomingdales – True Religion ranked as fourth top selling, hottest denim brand in 27% of
the stores we surveyed (four stores)
Saks – True Religion ranked as fifth top selling, hottest denim brand in 27% of the stores we
surveyed (8 stores).
At Nordstrom stores, only Joes Jeans (Innovo Group Inc, INNO, NR) and Seven for All Mankind
surpassed True Religion as the hottest selling brands. At all the other department stores we
called, only Seven for All Mankind and Citizens of Humanity beat True Religion by a meaningful
margin. Both of these brands have a much broader distribution (which includes Macy’s stores)
than True Religion and have been established brands on the premium denim scene for some
time. Anecdotally, the sales associates we spoke with mentioned the incredible strength the
denim category is experiencing and unanimously agreed that this strength is expected to
continue. In addition, many sales associates mentioned that True Religion jeans are so popular
in their area, shipments have sold out within a day or two of hitting the selling floor. The stores
are not able to keep them in stock and are awaiting new shipments to replenish their supply.
46% of
Department
Stores surveyed
named True
Religion as one
of their hottest
and best selling
denim brands.
Vera Van Ert +1 213 688 4457 True Religion Apparel | 11
Carrie Vilaplana +1 213 688 4529
Exhibit 4: Recent Channel Checks Indicate Strong Demand for True Religion Denim
Percentages reflect the number of votes each brand received out of the total number of votes cast across all stores we surveyed.
Source: Wedbush Morgan Securities.
4. Denim is The New “Black Pant.” True Religion will continue to benefit from a fundamental
shift in the buying habits of their target consumers’ as it relates to the purchase of high
fashion denim as a replacement for the traditional black pant in a woman’s wardrobe, in
our view.
Although we have no scientific evidence, we believe a greater percentage of women aged 21 to
35 are choosing to wear premium denim bottoms when selecting something for an evening out,
as opposed to the traditional black pant, especially on each of the Coasts. In our view, this trend
will continue and represents a fundamental shift in some women’s buying patterns as it relates to
selecting their preferred bottom for an evening out. Although specific brands may come in and go
out of favor as it relates to this trend, and the trend may not always be as “hot” as it is today, we
believe this shift towards denim as a comfortable and stylish alternative to black pants is here to
stay and will continue to benefit True Religion and other makers of premium denim.
5. Strong premium denim cycle that is really just beginning, in our view. We believe True
Religion and other premium denim makers and sellers will continue to benefit from the current
strong premium denim fashion cycle we are currently experiencing. In our view, this cycle began
in earnest in Fall 2004 and will have a three-year tail, like other fashion cycles. According to
Women’s Wear Daily, denim is a $12.7 billion wholesale market in the U.S., of which we believe
premium denim makes up approximately 4%.
In Fall 2004 we began to notice a number of premium denim brands coming into their own, from a
selling perspective, and even some specialty retailers, including Abercrombie & Fitch, introducing
higher price point denim lines into their assortment. Also, as a point of reference, Guess is
increasing its denim inventory +25% in 2005 versus last year and Bebe is introducing some
higher price points in its premium denim collection. As this denim fashion cycle continues, we
expect to see the percentage of premium denim grow relative to the entire denim market.
Seven for All Mankind
21%
Citizens of Humanity
19%
True Religion
12%
Joe's Jeans
10%
AG Jeans
9%
Juicy Couture Jeans
8%
Rock & Republic
6%
James Jeans
4%
Blue Cult
3%
Other
8%
12 | True Religion Apparel Vera Van Ert +1 213 688 4457
Carrie Vilaplana +1 213 688 4529
Exhibit 5: Glossary of Premium Denim Terms
Source: Shop Etc. Website and Wedbush Morgan Securities.
abraded (adj.): Describes the battering jeans go through to achieve a vintage look.
baking (v.): Treating jeans with a resin, then putting them in an oven so chemicals can merge with fibers to add
color, stiffness, and make creases permanent.
broken twill (n.): combines the left- and right-hand twill fabric weaving processes (see definitions for both, below)
to create more texture and help the fabric retain its shape (read: wear them 20 times and they won't bag in the
knees).
fit block (n.): The pattern each designer uses to create his or her signature silhouette.
global sanding (v.): Using hand or power sanding tools to abrade (see above) an individual pair of jeans.
hand (n.): The feel of the denim, from soft to coarse.
hand tacking (v.): Hand sewing tucks and flaps so certain areas fade less during laundering (stitches are removed
before sale).
left-hand twill (n.): Fabric woven to the left, a more intricate process that produces a suppler product than righthand
twill (see below).
right-hand twill (n.): Fabric woven to the right. More common and easier to manufacture, but often not as soft as
left-hand twill (see above).
ring spinning (v.): An older method of machine spinning cotton into yarn with an emphasis on twisting, not just
stretching the fibers; slower and more expensive, but produces stronger cotton.
rinse denim (n.): Raw fabric that has no washing procedure and is simply rinsed before arriving at the store;
produces the toughest jeans.
rise (n.): The length of fabric from the crotch seam to the top (or, depending on the maker, sometimes the bottom)
of the waistband; one label's seven-inch rise may be slightly higher or lower than the other's, so always try them
on.
selvedge (n.): The reinforced edge of a bolt of denim fabric, which is woven so that it won't unravel; this superdurable
edging is now highly desirable when making couture jeans.
slubby (adj.): A term applied to cotton yarn that is less smooth, more textured with nubs and character.
stitch count (n.): The number of stitches per inch on the jean's seams; 12 stitches per inch takes longer to sew
and uses more thread than, say, 8 stitches per inch, but makes the seam stronger.
stone wash (v.): Stones (usually pumice stones) put in the wash to soften the fabric.
sundries (n., pl.): Extras like metal rivets, Swarovski crystals and decorative stitching on the back pocket.
tear-and-repair (v.): An aging technique that involves taking a screwdriver or other tool and tearing small holes in
the jeans then sewing them closed.
wash (n.): The color and texture produced by the finishing process of washing the jean; creates varying results,
such as an aged appearance or enhanced softness and can include applying colored dye and resin.
weight (n.): The lightness or heaviness of the denim. Approximately 8 ounces is a breezy, cotton-y fabric; 14
ounces is on the hefty side.
whiskers (n.): The flattering wrinkles around the crotch of the jeans. Sometimes behind the knees, too; called a
"moustache" in Europe.
Vera Van Ert +1 213 688 4457 True Religion Apparel | 13
Carrie Vilaplana +1 213 688 4529
Women’s Denim
Dark Destroyed Joey Jeans $216.00 Joey Cords $172.00
Men’s Denim
Dark Destroyed Joey Jeans $215.00 Western Destroyed Jean Jacket $215.00
14 | True Religion Apparel Vera Van Ert +1 213 688 4457
Carrie Vilaplana +1 213 688 4529
6. True Religion’s very solid EPS growth and limited capital requirements add up to positive
free cash flow for the company.
We believe True Religion ended 2004 with free cash flow of approximately $5 million on
limited capital requirements of $350,000 and very profitable bottom line results of $0.20
per share. The company ended 3Q04 with $1.6 million in cash and no long-term debt.
The company currently has a factor in place for credit administration and cash flow
purposes. Under the factoring agreement with First Capital Western Region, the factor
purchases a portion (about 85%) of the domestic trade accounts receivable and assumes
most of the credit risks with respect to such accounts for the factoring charge of 0.75% of
the gross invoice amount of each accounts receivable.
Vera Van Ert +1 213 688 4457 True Religion Apparel | 15
Carrie Vilaplana +1 213 688 4529
INVESTMENT CONCERNS
1. High Fashion Risk. True Religion is 100% a fashion brand. As such, the
company’s top and bottom line results are highly dependent on whether its
designers (Jeffrey and Kymberly Lubell) have correctly interpreted the current
season’s trends, in terms of style and color of denim, and translated these trends
into a representation of True Religion. In addition, True Religion targets a very
fickle demographic with constantly shifting fashion tastes which can also
contribute to volatility in the company’s sales and earnings results.
Fashion miss can have serious affects. Given the company’s status as a fashion
brand, a wide-spread fashion miss could potentially negatively impact up to two quarters
of business, in our view. Although True Religion can move quickly into product given its
100% domestic sourcing, it is difficult to fully turn around a season’s worth of business
once soft selling has begun.
Fickleness of target demographic can cause volatility in sales and earnings. The
True Religion brand targets highly style conscious men and women between the ages of
20 and 35. Given the volatile nature of high fashion trends and styles and consumers’
equally fleeting allegiance to these trends and styles, a particular brand could be the “IT”
look one season and out of favor the next, thus, creating the risk of volatility in a
company’s results.
2. Tough competition in premium denim. True Religion competes in a very crowded
marketplace and faces stiff competition in the premium denim marketplace from
well-known and established brands as well as new cutting-edge brands which
seem to spring up almost on a daily basis. In premium denim bottoms (which
comprises approximately 90% of the company’s sales), True Religion competes
with specialty apparel based chains including Guess (GES, BUY Rated, $16 Price
Target), Abercrombie & Fitch (ANF, BUY Rated, $57 Price Target), Bebe (BEBE,
HOLD Rated, $27 Price Target), as well as premium denim brands including Salt
Works, Earnest Sewn, Chip & Pepper, James Jeans, Yanuk, True Religion, Citizens
of Humanity, Joe’s Jeans, Joie and Seven for all Mankind (see Exhibit 6) many of
which were started in the past six years.
Fashion cycle heightens competition. Although being in a denim fashion cycle
ultimately benefits True Religion, other fashion-oriented companies also see this period
as a window of opportunity that needs to be exploited to the fullest degree. In addition,
the high margins on denim prove very attractive and have drawn a number of entrants
into the space. As such, True Religion competitors will also attempt to be at the top of
their game during this period, creating a very competitive environment.
True Religion’s’ high
fashion risk can
create volatility in the
company’s sales and
earnings.
True Religion faces
competition from
specialty apparel
retailers and an
onslaught of newly
introduced premium
denim brands.
16 | True Religion Apparel Vera Van Ert +1 213 688 4457
Carrie Vilaplana +1 213 688 4529
Exhibit 6: Premium Denim Brand Comparison
Source: Company Websites and Wedbush Morgan Securities.
Premium Denim Brand
Date
Founded Style Names
Average
Price Points
Salt Works 2004 Orchard Street $125
Avenue A $121
Earnest Sewn 2004 Rigid Boot-cut $190
Stretch Boot-cut $180
Bebe 2004 Sophie Rhinestone $249
Low-rise Distressed $118
Chip & Pepper 2003 Sorority Girl 1 $178
Pearl Boot-Cut $132
James Jeans 2003 Dark Emily Patch-Pocket $142
Boot-Cut $138
Yanuk 2003 6 Pocket Classic $242
Worker $159
Sacred Blue 2003 Slight Flare Jeans in Spot Wash $198
Slight Flare in Rinse $174
True Religion 2002 Destroyed $216
Bobby Sandblasted $150
Citizens of Humanity 2002 Willys Denim Pants $194
Ingrid $123
Habitual 2002 Glory Stretch $172
Placebo Stretch $160
Joe's Jeans 2001 Socialite Special Edition $242
Socialite $158
Joie 2001 Blue Money Future Vintage $195
Carry On $170
AG Adriano Goldschmied 2001 Legend Virtual $145
Angel Flare $128
Seven for all Mankind 2000 Caribbean $264
Basic Flare $121
Blue Cult 1999 Weekender Flare $159
Kelley Butt Lifter $121
Paper Denim & Cloth 1999 Super Low Flare $190
Super 5 Flare Stretch $150
Earl 1996 75 $150
Surplus Flare $150
Miss Sixty 1989 Big Ty Rigid $169
Extra Low Ty Trouser $119
Diesel 1978 Riden $195
Rame $139
Gap 1969 Long and Lean $58
Bootcut Flare $58
Notify N/A Aramus $315
Anemone Bootcut $212
Rock & Republic N/A Skynard $174
Adam $136
Vera Van Ert +1 213 688 4457 True Religion Apparel | 17
Carrie Vilaplana +1 213 688 4529
3. Lack of product diversification creates dependence on success of denim line to drive top line
results. True Religion currently derives the majority of its revenues from the sale of its men’s and
women’s denim jeans. Although the company expanded its line last year to include corduroy pants
and denim jackets, approximately 90% of the company’s revenues are dependent on the sale of
denim bottoms and any substantial deterioration in the level of sales could have a negative effect on
the company’s profitability.
4. True Religion’s lack of a long operations track record makes it difficult to evaluate the longterm
sustainability of the company. True Religion is an early stage company and, as a result, the
company does not have a meaningful historical record of sales and revenues nor an established
business track record.
• Background on the company: Gusana Exploration (now known as True Religion Apparel Inc.)
was incorporated in April 2001 and in June 2003 Gusana Explorations acquired all the issued and
outstanding shares of Guru Denim Inc. in a reverse merger and changed its name to True
Religion Apparel Inc. In June 2003, Gusana entered into a formal share purchase agreement
with Jeffrey Lubell and Guru Denim (a California-based company formed in November 2002 for
the design, manufacture, marketing, distribution and sale of high-fashion denim jeans), pursuant
to which Gusana decided to acquire all 1,000 of the issued and outstanding shares of Guru
Denim (800 owned by Lubell and the remainder owned by Indigo Group USA). In consideration
for all the shares of Guru Denim, Gusana decided to issue 14.6 million shares of its common
stock to Lubell and to pay $300,000 in cash to Indigo Group in a transaction accounted for as a
reverse merger.
• Prior to the company’s reverse merger with Guru Denim, Gusana Exploration (now known as
True Religion Apparel Inc.) was engaged in the exploration and acquisition of mineral properties.
Gusana realized it has insufficient capital to fully explore and develop its mineral properties and
the company was unable to obtain additional financing necessary to survive and exploit its
resources. As a result, the company’s board of directors decided that it was in the company’s
best interests to concurrently pursue initiatives in the clothing industry as an extension to its
existing business. The company subsequently began researching business opportunities in the
clothing industry, including potential acquisitions and arrangements with suitable partners that
might help the company realize its goal of engaging in a profitable business. The company’s
board of directors felt that it was unlikely that its mineral properties could be successfully explored
and developed without a source of revenue to sustain these activities and as a result the board
decided to let the mining claims lapse. Effective January 12, 2004 the company sold Gusana
Explorations back to an ex-director for $1.00.
• Lubell conditioned his obligation to close the sale on the successful private placement of equity
by Gusana with gross proceeds of at least $1.2 million. The proceeds from the first private
placement of $900,000 were distributed as follows: $300,000 to Indigo Group USA, $250,000 To
Lubell as a signing bonus, $308,125 as a loan to Guru Denim Inc. for operating capital and
$41,848 for legal costs for Guru Denim Inc. and Gusana. The proceeds of the second private
placement of $300,000 were advanced to Guru Denim Inc. for operating capital.
5. True Religion shares can be subject to dramatic price fluctuations given its relatively illiquid
nature and small capitalization. The company is considered a small-cap stock with a market
capitalization of approximately $190 million and 20.7 million shares outstanding. It is important to
note that the company is considering listing its shares on the NASDAQ market and, if the company is
successful in accomplishing this, we believe it could have a very positive impact on liquidity and
access to trading the company’s stock.
18 | True Religion Apparel Vera Van Ert +1 213 688 4457
Carrie Vilaplana +1 213 688 4529
Valuation
Current Valuation Does Not Fully Reflect Earnings Potential, In Our View. True Religion shares
are trading at 19.0x our 2005 EPS estimate of $0.47. We believe shares should trade at a premium
multiple versus its peer group forward multiple of 14.6x based on its powerful earnings growth rate
potential, the opportunity for margin expansion and the company benefiting from the very strong
denim fashion cycle. We also believe True Religion shares should trade more in-line with its high
fashion peer group on a 12-month forward multiple based upon previously mentioned factors which
ranges from 20x to 31x. We believe True Religion can grow earnings in the 100%-plus range in 2005
and at least 25% for the next two years. Accordingly, we believe a 25x multiple on our 2005 EPS
estimate of $0.47 is appropriate and leads to our $12 price target.
Guidance. The company is guiding to 4Q04 sales of $13.7 million and EPS of between $0.10 and
$0.12. For 2005, the company expects its sales to range between $50 million to $55 million and EPS
of between $0.42 and $0.46.
Vera Van Ert +1 213 688 4457 True Religion Apparel | 19
Carrie Vilaplana +1 213 688 4529
Exhibit 7: Valuation Comp Sheet
Source: Wedbush Morgan Securities. Price Trailing Fwd Est.
% Market Div. 12 mo. 12 mo. L-T
2/3/05 Current Target change Cap Yield Sales Sales 12 mo. Current Next 12 mo. EPS 12 mo. Current Next 12 mo. Relative
Company Name Ticker Rating FYE Price Price 12 mo. High Low (mil) % (mil.) (mil.) Trailing Year Year Fwd. CAGR Trailing Year Year Fwd. P/E1 PEG
Footwear/Apparel Brands
Footwear
adidas-SALOMAN AG ADDDY NR DEC $70.71 22% $82.23 $55.02 $6,428 1 $8,501 - $4.62 $7.70 $5.34 $7.70 12% 15.3 9.2 13.2 9.2 54% 77%
Brown Shoe Company BWS NR JAN $29.67 -20% $42.02 $24.18 $540 1 $1,899 - $2.39 $2.79 - $3.44 9% 12.4 10.6 NM 8.6 50% 96%
Candies CAND NR JAN $5.00 108% $6.34 $2.00 $140 Nil $76 - ($0.17) - - NM NM (29.4) NM NM NM NM NM
Columbia COLM Hold DEC $55.64 $56 4% $62.18 $49.22 $2,222 Nil $1,095 $1,226 $3.40 $3.36 $3.70 $3.70 15% 16.4 16.6 15.0 15.0 88% 100%
Deckers DECK BUY** DEC $39.05 $50 83% $49.12 $20.62 $465 Nil $176 $224 $1.57 $1.92 $2.30 $2.16 20% 24.9
18.1 106% 90%
Genesco GCO NR JAN $30.19 69% $31.39 $17.18 $666 Nil $1,013 $1,211 $1.78 $2.14 $2.50 $1.99 12% 17.0 14.1 12.1 15.2 89% 126%
K Swiss KSWS NR DEC $31.05 25% $31.85 $17.06 $1,064 0 $476 $472 $1.72 $1.74 $1.80 $1.65 14% 18.1 17.8 17.3 18.8 110% 134%
Kenneth Cole Prod. KCP NR DEC $27.12 -20% $37.39 $24.66 NA 2 $500 $544 $1.84 $1.99 $2.29 $1.88 13% 14.7 13.6 11.8 14.4 NA NA
Nike NKE NR MAY $86.60 24% $92.43 $65.81 $22,731 1 $13,101 $14,245 $4.05 $4.70 - $4.70 14% 21.4 18.4 NM 18.4 108% 132%
Oakley OO Hold DEC $12.98 $10 -6% $16.23 $9.68 $883 1 $549 $619 $0.51 $0.60 $0.67 $0.68 14% 25.5 21.6 19.4 19.1 111% 136%
Phoenix Footwear Grp. PXG Hold DEC $5.91 $7 -27% $14.30 $5.91 $46 Nil $67 $89 $0.64 $0.51 $0.64 $0.62 18% 9.2 11.6 9.2 9.5 56% 53%
Reebok RBK NR
Saucony SCNYA NR DEC $27.41 45% $29.00 $17.25 $181 0.7 $164 - $1.65 - - NM NM 16.6 NM NM NM NM NM
Skechers SKX Hold DEC $15.46 $12 81% $15.44 $7.85 $605 Nil $889 $964 $0.21 $0.46 $0.80 $0.78 16% 73.6 33.6 19.3 19.8 116% 124%
Steve Madden SHOO NR DEC $18.85 1% $21.61 $15.59 $246 Nil $325 $324 $1.01 $1.08 - $0.97 NM 18.7 17.5 NM 19.4 113% NM
Stride Rite SRR NR NOV $12.63 18% $13.18 $9.60 $464 1.6 $558 $564 $0.65 $0.71 $0.76 $0.71 NM 19.4 17.8 16.6 17.8 104% NM
Timberland TBL NR DEC $66.19 24% $67.98 $49.54 $2,278 Nil $1,461 $1,564 $4.11 $4.75 $5.25 $4.61 14% 16.1 13.9 12.6 14.4 84% 103%
Wolverine World Wide WWW NR DEC $22.91 62% $22.85 $13.77 $1,314 0.9 $992 $1,058 $1.09 $1.23 $1.38 $1.23 14% 21.0 18.6 16.6
18.6 109% 133%
Footwear Composite $41,574 17.3 14.9 16.0 90.3% 105.5%
Apparel
Ashworth ASHW NR OCT $11.27 30% $11.35 $7.65 $152 Nil $173 $212 $0.66 $0.83 - $0.81 18% 17.1 13.6 NM 13.9 81% 77%
Bebe BEBE HOLD JUN $27.22 $40 119% $28.11 $11.45 $1,604 0.2 $432 $506 $0.82 $1.00 $0.40 $1.00 20% 33.2 27.2 68.1 27.2 159% 136%
Carter's CRI NR DEC $36.22 32% $36.56 $24.67 $1,029 Nil $776 $859 $1.55 $1.92 $2.26 $1.85 15% 23.4 18.9 16.0 19.6 114% 131%
Cherokee CHKE NR JAN $35.80 77% $36.76 $19.50 $310 5.1 $38 - $1.84 $1.81 - $1.81 NM 19.5 19.8 NM 19.8 116% NM
Columbia COLM Hold DEC $55.64 $56 4% $62.18 $49.22 $2,222 Nil $1,095 $1,226 $3.40 $3.70 $4.08 $3.70 15% 16.4 15.0 13.6 15.0 88% 100%
Guess GES BUY DEC $14.36 $16 3% $19.58 $11.59 $634 Nil $705 $789 $0.63 $0.63 $0.82 $0.73 20% 22.8 22.8 17.5
19.7 115% 98%
Haggar Corp HGGR NR SEP $19.00 -5% $24.00 $15.53 NA 1.1 $481 - $1.44 $1.54 - $1.52 15% 13.2 12.3 NM 12.5 73% 83%
Hartmarx HMX NR NOV $8.71 71% $8.90 $5.00 $313 Nil $587 $624 $0.44 $0.59 $0.72 $0.59 9% 19.8 14.8 12.1 14.8 86% 164%
Jones Apparel Grp. JNY NR DEC $33.60 -2% $40.00 $32.34 $4,107 1.1 $4,547 $5,210 $2.44 $2.78 $3.13 $2.61 10% 13.8 12.1 10.7 12.9 75% 129%
Kellwood KWD NR JAN $28.25 -30% $45.10 $28.00 $781 2.3 $2,485 $2,517 $2.73 $2.58 $2.90 $2.30 12% 10.3 10.9 9.7 12.3 72% 102%
Liz Claiborne LIZ NR DEC $42.11 15% $42.47 $32.09 $4,571 0.5 $4,467 $4,840 $2.77 $3.13 $3.56 $3.06 11% 15.2 13.5 11.8 13.8 80% 125%
Mossimo MOSS NR DEC $4.03 -17% $5.00 $2.67 $63 Nil $20 $24 $0.27 $0.37 - $0.32 25% 14.9 10.9 NM 12.6 74% 50%
Oakley OO Hold DEC $12.98 $10 -6% $16.23 $9.68 $883 1 $549
19.1 111% 136%
Perry Ellis PERY NR JAN $20.75 -6% $29.95 $18.20 $196 Nil $630 $758 $2.25 $2.29 $2.78 $2.19 10% 9.2 9.1 7.5 9.5 55% 95%
Phillips-Van Heusen PVH NR JAN $27.08 53% $29.95 $16.45 $839 0.6 $1,537 $1,520 $1.19 $1.52 - $1.43 15% 22.8 17.8 NM 18.9 111% 126%
Polo Ralph Lauren RL NR MAR $38.70 30% $42.83 $29.19 NA 0.5 $3,183 $3,344 $2.41 $2.75 - $2.75 12% 16.1 14.1 NM 14.1 82% 117%
Quiksilver ZQK Buy OCT $30.88 $33 80% $31.15 $16.49 $1,756 Nil $1,267 $1,467 $1.36 $1.36 $1.63 $1.62 19% 22.7 22.7 18.9 19.1 111% 100%
Tommy Hilfiger TOM NR MAR $10.02 -22% $18.25 $8.47 $920 Nil $1,803 $1,711 $1.23 $1.05 - $0.97 10% 8.1 9.5 NM 10.3 60% 103%
True Religion Apparel TRLG BUY DEC $8.94 $12 NM - - $184 Nil - - - $0.20 $0.46 $0.46 NM NA 44.7 19.4 19.4 113% NM
1Relative to S&P Composite
Sources: Company reports, Baseline and Wedbush Morgan Securities estimates
52 Week
P/E Earnings Estimates
20.3 17.0 DEC $45.00 14% $45.99 $31.25 $2,616 1 $3,785 $3,999 $3.04 $3.41 $3.78 $3.41 14% 14.8 13.2 11.9 13.2 77% 94%
$619 $0.51 $0.60 $0.67 $0.68 14% 25.5 21.6 19.4 Urban Outfitters URBN BUY JAN $41.90 $50 102% $48.47 $19.85 $3,392 Nil $752 $983 $0.99 $1.44 $1.83 $1.34 25% 42.3 29.1 22.9 31.3 183% 125%
VF Corporation VFC NR DEC $54.20 26% $55.61 $42.06 $6,020 1.9 $5,882 - $4.04 $4.37 $4.90 $4.30 8% 13.4 12.4 11.1 12.6 74% 158%
Oshkosh B'Gosh GOSHA NR DEC $22.40 2% $25.45 $17.04 $264 2.0 $399 - $1.11 $1.15 - $1.15 NM 20.2 19.5 NM 19.5 114% NM
Apparel Composite $27,146 17.4 14.6 16.0 93.2% 113.3%
Footwear/Apparel Composite $68,720 14.7 16.0 91.2% 110.0%
Average 26.4% $3,420 $1,515 15% 19.0 17.8 18.2 16.7 97% 113%
Avg Ex. High and Low 24.5% $1,588 $1,363 15% 18.4 16.9 15.2 16.3 95% 114%
S&P 500 Composite SPX 1193.19 5.0% 1218 1062 1.6 $64.11 $70.21 $75.00 $69.68 6% 18.6 17.0 15.9 17.1 285%
** Focus List Stock
20 | True Religion Apparel Vera Van Ert +1 213 688 4457
Carrie Vilaplana +1 213 688 4529
Management Team
The True Religion management team is seasoned, with its executive management team having
extensive experience in denim and apparel related industries.
Exhibit 8: Management Team
* Jeffrey Lubell receives 3% of sales less returns and financing costs in addition to the above mentioned compensation.
Source: Proxy filing dated July 16, 2004 and Wedbush Morgan Securities.
Jeffrey Lubell – CEO, President & Lead Designer, Men’s. Mr. Lubell is also President of the
company’s wholly owned subsidiary Guru Denim Inc., a company Lubell founded in November 2002.
From 2001 to May 2002, Lubell was the President and Creative Director (Men’s) of Hippie Jeans
based in Commerce, California where he was responsible for creative design concepts and
establishing and managing the company’s presence at national and regional trade shows. From
1998 to 2001, Lubell was the Vice President and Creative Director of Jefri Jeans & Bella Dahl based
in Los Angeles. From 1978 to 1998 Lubell was the President and CEO of Jeffrey Lubell Textiles,
based in Los Angeles, a textile design and distribution firm he founded.
Kymberly Lubell – Vice President of True Religion Apparel & Lead Designer, Women’s. From
2002 to 2003 Lubell was employed by LEI/Jones Apparel Group of Commerce, California where she
was responsible for creative design. In 2002, Lubell was a creative designer for Laundry by Liz
Claiborne of Commerce, California and from 2001 to 2002 Lubell was the Vice President and
Creative Director (Women’s) of Hippie Jeans/Azteca Productions, based on Commerce, California.
From 1998 to 2001, Lubell was the President and Creative Director of Bella Dahl and Jefri jeans of
Los Angeles.
Mark Saltzman – Chief Operating Officer. Mr. Saltzman became a Director of the company in July
2003 and was named COO in September 2004. Since June 2003, Saltzman has been the
Operations Director of Joie Jeans and prior to that was an independent consultant to the apparel
industry.
Charles Lesser – Chief Financial Officer. Mr. Lesser joined the company as CFO in September
2003. From March 2003 to September 2003, Mr. Lesser was acting President and a Director at
Alpha Virtual Inc., a software company. From 1997 to 2002, Lesser was CFO of BCCom Inc., an
internet service provider.
Lubell has over
27 years
experience in
textile design and
manufacturing.
Compensation (000) as %
Name Age Position 2003 Shares of O/S
Jeffrey Lubell* 48 CEO, President & Lead Men's Designer $151 9,894,333 50.1%
Kymberly Lubell 38 Secretary & Lead Women's Designer NA 618,142 0.9%
Mark Saltzman 55 COO NA 15,000 0.1%
Charles Lesser 57 CFO $125 137,500 0.7%
Vera Van Ert +1 213 688 4457 True Religion Apparel | 21
Carrie Vilaplana +1 213 688 4529
Modeling Assumptions
Top Line
2005
We’re modeling total revenue growth of 103% in 2005 to $57 million.
Operating Expenses
2005
We’re looking for a 30 basis point increase in gross margins in 2005 to 47.7%. We are expecting
SG&A expenses to increase to 35.7% of sales from 22.0% of sales in 2004, getting us to an 29.1%
operating profit margin, 370 bps higher than 2004.
Below the Line
Interest Expense. We are modeling zero interest expense for True Religion in 2005.
Tax Rate
We expect the company’s tax rate to be 42% in 2005.
22 | True Religion Apparel Vera Van Ert +1 213 688 4457
Carrie Vilaplana +1 213 688 4529
Exhibit 9: True Religion Apparel Inc. Income Statement
Source: Wedbush Morgan Securities.
True Religion 2004 YEAR 2005 YEAR YEAR YEAR YEAR
Fiscal Year Ends in Dec. 1QA 2QA 3QA 4QE 2004E 1QA 2QE 3QE 4QE 2005E 2006E 2007E 2008E
2/3/2005
Operating Revenue
Total Revenue $3 $4 $7 $14 $28 $13 $14 $15 $15 $57 $74 $93 $111
Consolidated Expenses
Cost of Goods Sold $1 $2 $4 $7 $15 $7 $8 $8 $8 $30 $39 $48 $58
YoY % Change 400.0% 244.8% 97.0% 5.0% 101.7% 29.5% 24.5% 19.5%
As a % of Revenue 51.9% 53.7% 52.9% 52.3% 52.6% 51.9% 52.9% 52.1% 52.3% 52.3% 52.1% 51.9% 51.7%
YoY Point Change 51.9 53.7 52.9 6.0 52.6 0.0 (0.8) (0.8) 0.0 (0.3) (0.2) (0.2) (0.2)
Gross Profit $1 $2 $3 $7 $13 $6 $7 $7 $7 $27 $36 $45 $54
YoY % Change 0.0% 0.0% 0.0% 0.0% 0.0% 400.0% 256.1% 103.4% 5.0% 104.4% 30.5% 25.5% 20.5%
Gross Profit Margin 48.1% 46.3% 47.1% 47.7% 47.4% 48.1% 47.1% 47.9% 47.7% 47.7% 47.9% 48.1% 48.3%
YoY Point Change 48.1 46.3 47.1 (6.0) 47.4 0.0 0.8 0.8 0.0 0.3 0.2 0.2 0.2
Selling, General & Administrative
Selling & Shipping $0.4 $0.5 $1.0 $1.7 $3.7 $1.9 $1.9 $1.9 $1.9 $7.4 $9.7 $12.1 $14.5
YoY % Change 0.0% 0.0% 0.0% 0.0% 0.0% 330.4% 244.9% 91.9% 7.8% 103.0% 30.0% 25.0% 20.0%
As a % of Revenue 16.0% 13.3% 13.2% 12.3% 13.0% 13.8% 13.1% 12.6% 12.6% 13.0% 13.0% 13.0% 13.0%
YoY Point Change 16.0 13.3 13.2 12.3 13.0 (2.2) (0.2) (0.5) 0.3 0.0 0.0 0.0 0.0
Other General and Admin. $0 $1 $1 $1 $3 $1 $1 $1 $1 $3 $4 $4 $5
YoY % Change 0.0% 0.0% 0.0% 0.0% 0.0% 40.0% 25.0% 25.0% 25.0% 27.7% 20.0% 15.0% 10.0%
Total SG & A $1 $1 $2 $3 $6 $3 $3 $3 $3 $11 $14 $17 $20
YoY % Change 0.0% 0.0% 0.0% 0.0% 0.0% 180.3% 134.7% 63.3% 13.3% 72.2% 32.0% 21.3% 16.8%
As a % of Revenue 33.1% 26.6% 23.0% 18.0% 22.0% 35.8% 33.7% 36.1% 37.0% 35.7% 36.3% 35.4% 34.6%
YoY Point Change 33.1 26.6 23.0 18.0 22.0 2.7 7.1 13.1 19.1 13.7 0.7 (0.9) (0.8)
Operating Income $0 $1 $2 $4 $7 $4 $4 $4 $4 $17 $22 $28 $34
YoY % Change 0.0% 0.0% 0.0% 0.0% 0.0% 885.0% 419.9% 141.7% 0.0% 132.1% 32.8% 27.6% 22.4%
Operating Margin 15.0% 19.7% 24.1% 29.7% 25.4% 29.6% 29.2% 29.2% 28.3% 29.1% 29.7% 30.3% 30.9%
YoY Point Change 15.0 19.7 24.1 (24.0) 25.4 14.6 9.6 5.0 (1.4) 3.7 0.6 0.6 0.6
GAAP Calculation
Interest Expense $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Other Nonop Income (Expense) $0 $0 ($0) $0 ($0) $0 $0 $0 $0 $0 $0 $0 $0
Total Nonoperating Expense $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Pre-Tax Income $0 $1 $2 $4 $7 $4 $4 $4 $4 $17 $22 $28 $34
YoY % Change 0.0% 0.0% 0.0% 0.0% 0.0% 885.0% 419.9% 160.0% 0.0% 136.3% 32.8% 27.6% 22.4%
Provision for Taxes $0 $0 $1 $2 $3 $2 $2 $2 $2 $7 $9 $12 $14
Tax Rate 36.8% 41.2% 42.1% 42.0% 41.6% 42.0% 42.0% 42.0% 42.0% 42.0% 42.0% 42.0% 42.0%
Net Income Before Extra Item $0 $0 $1 $2 $4 $2 $2 $2 $2 $10 $13 $16 $20
YoY % Change 0.0% 0.0% 0.0% 0.0% 0.0% 804.1% 413.1% 160.6% 0.0% 134.8% 32.8% 27.6% 22.4%
Extraordinary Item, Net of Tax $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Net Income $0 $0 $1 $2 $4 $2 $2 $2 $2 $10 $13 $16 $20
YoY % Change 0.0% 0.0% 0.0% 0.0% 0.0% 804.1% 413.1% 160.6% 0.0% 134.8% 32.8% 27.6% 22.4%
EPS Before Extra Item $0.01 $0.02 $0.05 $0.12 $0.20 $0.11 $0.12 $0.12 $0.12 $0.47 $0.62 $0.79 $0.96
YoY % Change 0.0% 0.0% 0.0% 0.0% 0.0% 741.9% 383.3% 160.6% 0.0% 127.4% 32.8% 27.6% 22.4%
Basic EPS $0.01 $0.02 $0.05 $0.12 $0.21 $0.12 $0.12 $0.13 $0.12 $0.49 $0.65 $0.83 $1.01
Reported Fully Diluted EPS $0.01 $0.02 $0.05 $0.12 $0.20 $0.11 $0.12 $0.12 $0.12 $0.47 $0.62 $0.79 $0.96
YoY % Change 0.0% 0.0% 0.0% 0.0% 0.0% 741.9% 383.3% 160.6% 0.0% 127.4% 32.8% 27.6% 22.4%
Basic Shares OS (mm) 19.3 19.7 19.7 19.7 19.6 19.7 19.7 19.7 19.7 19.7 19.7 19.7 19.7
Share Equivalents 0.0 (0.2) 1.0 1.0 0.4 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
Fully Diluted Shares OS (mm) 19.3 19.5 20.7 20.7 20.0 20.7 20.7 20.7 20.7 20.7 20.7 20.7 20.7
Vera Van Ert +1 213 688 4457 True Religion Apparel | 23
Carrie Vilaplana +1 213 688 4529
Exhibit 10: True Religion Apparel Inc. Balance Sheet & Cash Flow Statement
Source: Wedbush Morgan Securities.
True Religion YEAR YEAR YEAR YEAR YEAR
Fiscal Year Ends in December 2004E 2005E 2006E 2007E 2008E
STATEMENT OF CASHFLOWS
Cash Flow from Operations
Net Earnings $4 $4 $4 $4 $4
Depreciation $0 ($0) ($0) $0 $1
% of Beg Net PP&E 37.0% 37.0% 37.0% 37.0%
Replacement Rate (Years) 0.0 2.7 2.7 2.7 2.7
Amortization $0.0 $0.0 $0.0 $0.0 $0.0
Total D&A $0 ($0) ($0) $0 $1
Allowance for Doubtful Debts $0 $0 $0 $0 $0
Changes in Working Capital $0 $0 $0 $0 $0
Other Adjustments to CFO $0 $0 $0 $0 $0
Total Adjustments $0 ($0) ($0) $1 $1
Cash from Operations $4 $4 $4 $5 $5
Cash Flow from Investing
Purchase of Property/Plant/Equipment $0 $0 ($1) ($2) ($2)
% of Revenue -1.2% -0.3% 2.0% 2.0% 2.0%
Other $0 $0 $0 $0 $0
Net Investments $0 $0 ($1) ($2) ($2)
Free Cash Flow $5 $4 $3 $3 $3
Cash Flow from Financing
Dividend $0 $0 $0 $0 $0
Other $0 $0 $0 $0 $0
Cash from Financing $0 $0 $0 $0 $0
Effect of Exchange Rate on Cash $0 $0 $0 $0 $0
Change in Cash $5 $4 $3 $3 $3
Beginning Cash $0 $5 $9 $11 $14
Ending Cash $5 $9 $11 $14 $17
BALANCE SHEET
Assets
Cash and Cash Equivalents $5 $9 $11 $14 $17
Accounts Receivable $0 $0 $0 $0 $0
Sales Per Day $0.1 $0.2 $0.2 $0.3 $0.3
Days Sales Outstanding $0 $0 $0 $0 $0
Inventories $0 $0 $0 $0 $0
Days of Inventory $0 $0 $0 $0 $0
Prepaid Exp. & Other Current Assets $0 $0 $0 $0 $0
Other $0 $0 $0 $0 $0
Total Current Assets $5 $9 $11 $14 $17
Net Property, Plant and Equipment ($0) ($0) $1 $3 $4
% of Revenue -1.4% -0.7% 1.6% 2.8% 3.5%
Other Assets, Net $0 $0 $0 $0 $0
Total Assets $4 $8 $13 $17 $21
Liabilities
Short Term Debt $0 $0 $0 $0 $0
Accounts Payable $0 $0 $0 $0 $0
COGS Per Day $0 $0 $0 $0 $0
Days Payable Outstanding $0 $0 $0 $0 $0
Accrued Expenses $0 $0 $0 $0 $0
Income Taxes Payable $0 $0 $0 $0 $0
Other Current Liabilities $0 $0 $0 $0 $0
Total Current Liabilities $0 $0 $0 $0 $0
Long-Term Debt, less Current Maturities $0 $0 $0 $0 $0
Other Deferred Liabilities $0 $0 $0 $0 $0
Total Liabilities $0 $0 $0 $0 $0
Shareholder's Equity
Preferred Stock $0 $0 $0 $0 $0
Common Stock $0 $0 $0 $0 $0
Additional Paid-In Capital $0 $0 $0 $0 $0
Retained Earnings/(Accum. Deficit) $4 $8 $12 $16 $21
Other Adjustments $0 $0 $0 $0 $1
Treasury Stock $0 $0 $0 $0 $0
Total Shareholders' Equity $4 $8 $13 $17 $21
Total Liabilities and Equity $4 $8 $13 $17 $21
24 | True Religion Apparel Vera Van Ert +1 213 688 4457
Carrie Vilaplana +1 213 688 4529
Exhibit 11: True Religion Apparel Inc. Financial Statistics
Source: Wedbush Morgan Securities.
True Religion YEAR YEAR YEAR YEAR YEAR
2004E 2005E 2006E 2007E 2008E
FINANCIAL STATISTICS
Return on Equity - Dupont Method
Profit Margin (NI/Rev) 14.6% 16.9% 17.2% 17.6% 17.9%
Asset Utilization (Rev/Assets) 6.7 6.8 5.9 5.5 5.3
Leverage (Assets/Equity) 1.0 1.0 1.0 1.0 1.0
ROE 97.5% 114.5% 101.4% 97.1% 95.0%
Return on Average Assets 97.5% 114.5% 101.4% 97.1% 95.0%
EVA: ROIC-WACC
Return on Invested Capital NM NM 1047.3% 621.5% 0.0%
Weighted Average Cost of Capital 8.4% 8.4% 8.4% 8.4% 0.0%
ROIC-WACC Spread NM NM 1038.9% 613.1% 0.0%
EVA $4 $10 $13 $16 $0
RNOA
Tax-Adjusted EBIT Margins 14.8% 16.9% 17.2% 17.6% 0.0%
Net Op Asset Turnover (71.3) (140.3) 185.4 48.3 -
RNOA -1070.6% -2293.1% 1047.3% 621.5% 514.5%
Operating Profit/Cash Flow
Gross Profit $13 $27 $36 $45 $54
Year-to-year Change 0.0% 104.4% 30.5% 25.5% 20.5%
Gross Margins 47.4% 47.7% 47.9% 48.1% 48.3%
EBIT $7 $17 $22 $28 $34
Year-to-year Change NA 132.1% 32.8% 27.6% 22.4%
EBIT Margins 25.4% 29.1% 29.7% 30.3% 30.9%
EBITDA $7 $16 $22 $29 $35
Year-to-year Change NA 128.7% 33.1% 30.6% 23.8%
EBITDA Margins 25.6% 28.8% 29.5% 30.8% 31.8%
Debt and Solvency Ratios
Debt to Total Capital 0.0% 0.0% 0.0% 0.0% 0.0%
Net Debt to Total Capital -109.4% -105.0% -90.3% -84.4% -81.5%
Net Debt ($4.6) ($8.8) ($11.4) ($14.2) ($17.1)
Net Interest Coverage NA NA NA NA NA
Other Ratios
Dividend Payout Ratio 0.0% 0.0% 0.0% 0.0% 0.0%
Total Payout Ratio 0.0% 0.0% 0.0% 0.0% 0.0%
Capex as % of EBITDA 4.9% 1.0% -6.8% -6.5% -6.3%
Per Share Data
Book Value per Share $0.21 $0.41 $0.61 $0.81 $1.02
Tangible Book Value Per Share $0.21 $0.41 $0.61 $0.81 $1.02
EBITDA Per Share $0.36 $0.79 $1.06 $1.38 $1.71
Adjusted EPS $0.20 $0.47 $0.62 $0.79 $0.96
Reported EPS $0.20 $0.47 $0.62 $0.79 $0.96
Vera Van Ert +1 213 688 4457 True Religion Apparel | 25
Carrie Vilaplana +1 213 688 4529
ANALYSTS CERTIFICATION
The analysts certify that the views expressed in this report accurately reflects his or her personal opinion and that the
analysts have not and will not, directly or indirectly, receive compensation or other payments in connection with his or
her specific recommendations or views contained in this report.
IMPORTANT DISCLOSURES
INVESTMENT RATINGS
BUY – FOCUS LIST – The stock is expected to outperform the market and return at least 20% over the next 6-12
months.
BUY – The stock is expected to outperform the market and return at least 15% over the next 12 months.
HOLD – The stock is expected to perform in line with the market and return between 0% and 15% over the next 12
months.
SELL – The stock is expected to underperform the market and provide negative returns over the next 12 months.
RESTRICTED – The analyst is restricted from commenting on the stock as a result of an advisory relationship with
the company.
NOT RATED – The stock currently does not have an investment recommendation.
DISTRIBUTION OF RATINGS (as of December 31, 2004)
BUY – 54% (8% of this rating category were investment banking clients within the last 12 months).
HOLD – 41% (0% of this rating category were investment banking clients within the last 12 months).
SELL – 5% (0% of this rating category were investment banking clients within the last 12 months).
The analysts do not receive compensation based on specific investment banking activity. The analysts responsible for
preparing this research report received compensation that is based upon various factors including WMS’s total
revenues, a portion of which are generated by WMS’s investment banking activities.
WMS makes a market in the securities mentioned herein.
Another WMS analyst, Adrienne E. Tennant, provides research coverage of Bebe Stores (BEBE) and Urban Outfitters
(URBN).
WMS managed an underwriting for Phoenix Footwear Group (PXG) and co-managed an underwriting for Deckers
Outdoor (DECK) within the last 12 months.
WMS has received compensation for investment banking services from Deckers Outdoor (DECK) and Phoenix
Footwear Group (PXG) within the last 12 months.
WMS changed its rating system on 10/1/01 from five tiers (Strong Buy, Buy, Long-Term Attractive, Hold, Sell) to three
tiers (Buy, Hold, Sell).
Additional information is available upon request.
OTHER DISCLOSURES
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CORPORATE HEADQUARTERS (213) 688-8000
The information herein is based on sources that we consider reliable, but its accuracy is not guaranteed. The information contained herein is not a
representation by this corporation, nor is any recommendation made herein based on any privileged information. This information is not intended to
be nor should it be relied upon as a complete record or analysis; neither is it an offer nor a solicitation of an offer to sell or buy any security
mentioned herein. This firm, Wedbush Morgan Securities, its officers, employees, and members of their families, or any one or more of them, and
its discretionary and advisory accounts, may have a position in any security discussed herein or in related securities and may make, from time to
time, purchases or sales thereof in the open market or otherwise. The information and expressions of opinion contained herein are subject to
change without further notice. The herein mentioned securities may be sold to or bought from customers on a principal basis by this firm. Additional
information with respect to the information contained herein may be obtained upon request.
WEDBUSH MORGAN SECURITIES
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RESEARCH DEPARTMENT
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CONSUMER PRODUCTS AND SERVICES
Entertainment Software Publishing and Retail
Michael Pachter …………..…... +1 213 688 4474
Edward Woo, CFA ………….… +1 213 688 4382
Darren Cross….…..………….… +1 213 688 4514
Footwear and Apparel
Vera Van Ert………………..….. +1 213 688 4457
Carrie Vilaplana……………..…. +1 213 688 4529
Retail: Hardlines
Joan L. Storms, CFA …………. +1 213 688 4537
Joseph R. Blanding………….... +1 213 688 4403
Retail: Softlines
Adrienne E. Tennant. ….……... +1 213 688 4524
Jeff H. Mintz. …………………... +1 213 688 4518
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Michael Kostolansky..……..…... +1 908 273 7862
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Wireless and Telecommunications Software
Scott P. Sutherland, CFA ……. +1 213 688 4522
Jeff T. Porter…………………... +1 213 688 4427
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