True Religion: An Update

This is an update to a Feb. 26 post on True Religion (TRLG) when shares cost $11.

In that post I said:

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 jump at it? Me too.

Today True released results:

Net sales for the first quarter increased 19.1% to $63.6 million compared to $53.4 million in the first quarter of 2008. Growth within our consumer direct and international businesses was partially offset by a decline in our US wholesale business. Gross profit grew 27% to $38.7 million or 60.9% of net sales from $30.5 million or 57.1% of net sales in the first quarter of 2008.

Our gross margin benefitted from the ongoing segment mix shifts towards our higher margin consumer direct business and the increase in our international segment’s gross margin. This was partially offset by the planned decline in our outlet stores gross margin.

And:

Operating income for the first quarter increased 15.0% to $13.1 million or 20.5% of net sales compared to $11.4 million or 21.2% of net sales in the prior year period. The year-over-year reduction in operating margin was primarily driven by the decrease in our consumer direct segment’s operating margins.

Turning now to our segment information, within our US wholesale segment, sales for the first quarter decreased 11.0% to $28.9 million versus $32.5 million in the prior year period. The decrease in the US wholesale segment’s net sales is due to a decline in sales boutiques and majors partially offset by an increase in sales to outside customers. Michael will expand on these trends in his comments.

International sales in the first quarter increased 26.0% to $11.2 million from $8.9 million in the prior year period. The year-over-year increase is primarily due to increased sales of Japan as well as increased sales to our European and North American distributors.

Consumer direct net sales which include our branded retail stores and e-commerce site increased 95.8% during the first quarter to $23.1 million from $11.8 million in the prior year period. The growth in our consumer direct segment is attributable to the expansion of our retail stores which totaled 49 at the end of the first quarter of 2009 compared to 18 retail stores at the end of the first quarter of 2008. Our total square footage at the end of the first quarter was 88,700 square feet compared to 31,900 total square feet at the end of the first quarter of 2008.

Nothing short of fantastic….

For the rest of the year:

While it is still early in the year, we are optimistic that the earnings from these favorable trends will offset the impact as the increase in the effective tax rate and the stock-based compensation accounting method change. Therefore, we continue to expect that the company’s 2009 earnings per share will be between $1.73 and $1.81 per share with an encouraging outlook, thanks to the improved sales order trends.

Now it trades at $20 a share or 11 times the low end of their estimates. Cash per share has risen to $2.92 and debt remains a non issue.

Did I buy some back then? No. Am I kicking myself? Yes. Is there a natural instinct to go buy some today because of the this missed chance? Yes. Will I? No. Before you do something rash when investing, stop, take a breath and look at what you did do.

What did I buy instead of True? In the Feb/March time frame I bought General Growth Properties (GGWPQ) (avg. $.49/today $1.02), RHI Enterntainment (RHIE)(avg. $2.02/today $3.44), Dow Chemical (DOW) (avg. $7.25/today $15).

Note: Dow Chemical shares have been owned for years and avg. cost for all shares is different, the cost referenced reflect just those shares bought in the mentioned time period for comparison.

So on an apples to apples comparison, we are doing just fine. Am I still upset that the cash I have sitting in the account was not put to use in True? Yup. But, looking back at what I did do diminishes that angst and DOES give me confidence that I am finding great value picks out there, even if I do not always pull the trigger for whatever reason.

Should we get the sell-off I expect, the chance of me letting this one slip away again are pretty slim…

Earnings call transcript

Disclosure (“none” means no position):Long GGWPQ, DOW, RHIE, none