The ransacking of the retail sector continued last week after premium denim retailer True Religion Apparel (Nasdaq: TRLG ) reported fourth-quarter results that failed to live up to Wall Street's expectations.
The stock lost a whopping 28% in response to the earnings miss and trio of analyst downgrades. For the quarter, True Religion posted a profit of $0.62 on sales of $119.4 million versus the consensus expectation of $0.71 on sales of $128 million. It also forecast revenue to be in the range of $450 to $460 million in 2012 with EPS ranging from $1.88 to $1.95. The Street had been looking for earnings of $2.37 and sales of $494 million.
A number you can ignore
One of the primary reasons True Religion's sales growth slowed to 7.7% during the quarter was due to weakness in its wholesale business. In response to a warm winter and fickle consumer spending habits, department stores significantly cut back their spending, which affected True Religion's wholesale segment. To me this seems relatively meaningless since the company has made it abundantly clear that it's transitioning into a brick-and-mortar retail model. Back in 2010, its U.S. wholesale business accounted for 29% of sales -- now it accounts for less than 18%.
The important aspect of True Religion's growth model remains its bricks-and-mortar locations, which showed same-store sales growth of 11.1%. This was actually an increase over the 10.2% same-store sales jump it noted in the third quarter.
It's all about the margins
Despite a more cost-conscious consumer, margins aren't being affected. In short, True Religion doesn't have to discount its merchandise in order to move it. For the fourth quarter, gross margin improved by 120 basis points to 64.8%, but was down 70 basis points from the third quarter.
The same can't be said for the trio of Abercrombie & Fitch (NYSE: ANF ) , Urban Outfitters (Nasdaq: URBN ) or American Eagle Outfitters (NYSE: AEO ) , which have also succumbed to earnings disappointments lately. All three have dealt with surging levels of inventory and the need to discount to move merchandise. Also not surprisingly, all three boast forward P/E ratios that are higher than that of True Religion -- Urban Outfitters leading with a P/E of 17, followed by American Eagle (13) and Abercombie (12). True Religion's P/E? Just 8.
The company is also growing its cash balance at an extraordinary rate, ending the year with $200 million (a 28% increase from year-end 2010) and no debt. As True Religion continues to expand internationally, it can rely on this $8 in cash per share without the fear of debtors breathing down its neck. With this much cash on hand, I also wouldn't rule out the possibility for a future dividend.
Am I disappointed that True Religion's 2012 EPS forecast only calls for growth of 4% to 7%? Absolutely. But I know the company is capable of much more than this. True Religion has an easily identifiable brand name and consumers willing to pay top dollar (and full price) for its denim products. As the company continues to transition out of the wholesale segment and opens more stand-alone stores, there may be hiccups, but the move into a higher-margin segment will pay off for shareholders in the long-run.
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