Time to Find Some "Religion"? $$

Stumbled across this yesterday and the more I look at it, the more I like it.

If I told you I had a company you could by a pieces of for 7 times earnings that was growing EPS >50% a year, would you be interested? Me too..

True Religion Apparel, Inc. (True Religion) designs, markets, distributes, and sells apparel under the brand name True Religion Brand Jeans to consumers in more than 50 countries on six continents: North and South America, Asia, Africa, Europe and Australia. The Company’s products are sold in the United States in national premium stores, including Bloomingdale’s, Neiman Marcus, Nordstrom, Saks Fifth Avenue, and in over 2,000 boutique and specialty stores. Its products can be categorized as denim, knit and non-denim, and most come in tops and bottoms. Knit styles include hoodies, t-shirts and sweats, and non-denim fabrics include corduroy and twill. The Company sells men’s women’s and kid’s styles for its products. True Religion operates in four segments: United States Wholesale, International Wholesale, Consumer Direct and Corporate, which includes licensing activity.

Here is a look at earnings since inception:

Now, the argument against the company would be: “In a recession. who will spend $200 for a pair of jeans?” Valid point. Let’s look at the jean market.

Who is their customer?:

Looking forward:

Think of True Religion and their product a bit like Starbucks (SBUX). They have a similar demographic. The difference is that True is not trying to sell their products through 14,000 locations. While Starbucks is finding that a large percentage of the millions of customers they need to serve in order to grow have become very price conscious, True is still small enough that there is plenty of folks who will spend $200 on jeans at the 42 locations they currently have. This will not avoid a slowdown but will buffer them against deterioration.

Why the discount then?

Due to the recession, for fiscal 2009 selling jeans in specialty boutiques and major department stores such as Saks (SKS) and Nordstrom Inc (JWN), expects to earn between $1.73 and $1.81 a share (essentially flat over 2008) on revenue between $290 million and $297 million (vs $273 in 2008). Dept. store sales are expected t fall 17% to 19%. Still, at $11 a share, that means at the low end you are paying 6.3 times 2009 earnings for shares.

Key assumptions embedded in the Company’s full year 2009 guidance, as compared to the full year 2008, are identified below:

· Forecasted net sales growth within the Company’s consumer direct segment of 60% to 65% will be driven by the addition of 25 new branded retail stores in 2009 and the 27 stores opened in 2008.
· Net sales in the U.S. wholesale segment is expected to decline by 17% to 19% driven by a sharp reduction in sales to boutiques and a mid-single digit decline in sales to Majors and off-price retailers.
· The Company’s International segment is forecasted to increase its net sales by low single digits, driven by an increase in net sales to Japanese wholesale customers.

What does it all mean? True gives up plenty of downside protection. With $57 million in the bank, True provides investors with $2.38 a share in cash on the books. This means 22% of the share price is just the cash in the bank. What about debt you say? There is none. The cash is free and clear.

At its current market cap, True is valued at just under 1 times 2009 sales and just over 1 times 2008’s. Too low.

What if the recession deepens and profits actually fall? Say they fall 10%? Will the stock then trade for 5 times those earnings? Or is it likely the current price reflects a general feeling profits may fall more than currently projected and any shortfall in results will be met with a stagnant share price? Who knows but my impression is that the latter is most likely.

Think about it. If you owned the company outright and someone offered you $8.62 for it ($11 share price – the $2.38 per share you have in the company’s bank account) would you take it or tell the potential buyer where to stick it? Me too. Now reverse it. If someone owned it and offered the company for $11 and included in the price was the $2.38 in the bank would you jumo at it? Me too.

That is essentially what is happening right now with the share price. Should you rush out and buy shares? No. I’m not but they are high up on the watch list. I want a bit more clarity on the macro environment before I buy. This isn’t to say I see shares cratering anytime soon, just that they could remain flat as the economy sours more.  Should the maco environment show no visibilty as the year progresses, one would assume True shares mirror that. 

But, as soon as I see strength in the macro condition, assuming I have not missed a huge run up, if shares sit near where they are now they would be almost irresistable…

It would be a “sin” not to buy them in that case….Sorry, had to do it…

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Disclosure (“none” means no position):None

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