True Religion Gets Low: Time to Bounce Back?

Shares of True Religion Apparel (Nasdaq: TRLG  ) hit a 52-week low yesterday. Let's take a look at how it got here to find out whether there are still cloudy skies ahead.

How it got here
This hasn't been True Religion's first punch in the gut this year. Yesterday's big plunge was only a repeat of its February fall, both responses to weak earnings and poor forward guidance. Analysts expected $494 million in sales for the year when True Religion issued its 2012 guidance, and the company now projects $450 million to $455 million in annual sales. That's barely a dip from previous guidance of $450 million to $460 million issued early this year. The market's reaction seems overblown in light of widespread earnings misses and macroeconomic headwinds that investors should by now be well-acquainted with.

Whether you agree with the double whammy or not, those two big hits have now made True Religion the worst-performing jeans-focused company on the market. This is a rather dubious distinction, as only Gap (NYSE: GPS  ) and Joe's Jeans (Nasdaq: JOEZ  ) have posted any real gains over the past 52 weeks:

TRLG Total Return Price Chart

TRLG Total Return Price data by YCharts

Does True Religion deserve its position at the bottom of the heap? Let's look closer at this sector's key numbers to find out.

What you need to know
If True Religion had a luxury premium before, it's looking downright bargain-bin cheap now. The stock now trades very closely in line with the valuations of its profitable peers, particularly Guess (NYSE: GES  ) and The Buckle (NYSE: BKE  ) .

Company

P/E Ratio

Price to Free Cash Flow

Net Margin (TTM)

3-Year Annualized Income Growth

True Religion 11.4 14.8 10.6% (0%)
Gap 18.1 15.5 5.7% (3.7%)
Joe's Jeans NM NM (0.1%) NM
Guess 11.1 11.5 9.3% 8.0%
The Buckle 11.3 10.2 14.3% 11.4%

Source: Morningstar. NM = not material because of negative results.

With the exception of The Buckle, these companies have all suffered through a period of weak earnings. Gap, despite its sector-leading stock performance, is back to zero in terms of profit growth for the past half-decade. True Religion's had a tough time maintaining consistent growth, which must weigh heavily on investors' minds with every mediocre round of forward guidance:

TRLG Net Income TTM Chart

TRLG Net Income TTM data by YCharts

Joe's Jeans has had a tough time regaining profitability, but it's eked out narrowly positive margins in the past two quarters. Its long-term chart was skewed by a huge tax-loss spike in 2009, but the company has otherwise had a difficult time remaining profitable.

True Religion has some Foolish supporters, particularly Sean Williams, who's been a fan of the company through its tough times. Tamara Rutter also thinks highly of True Religion's long-term prospects. They're opposed by Caris & Co, the analysts that downgraded True Religion after its big drop yesterday. It may be fashionable to pile on, but that doesn't make it right.

What's next?
Where does True Religion go from here? At its current lows, it simply has to find a way to grow again and the market should change its tune. But as we've seen, profit growth has been rather elusive for jeans companies over the past few years. Much will depend on the brand's continued appeal, which may also prove elusive -- few fashion brands can stand the test of time.

The Motley Fool's CAPS community has given True Religion a three-star rating, with 87% of our CAPS players expecting the company to charge back to market-beating gains.

Interested in tracking this stock as it continues on its path? Add True Religion to your watchlist now, for all the news we Fools can find, delivered to your inbox as it happens. For a few other great stock ideas, why not take a look at The Motley Fool's "Middle-Class Millionaire Makers"? Our free report outlines three stocks that, like True Religion, are flying a bit under the mainstream radar. Don't miss out -- click here for the free information you need.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

The Motley Fool owns shares of Guess and The Buckle. Motley Fool newsletter services have recommended buying shares of Guess and The Buckle. Motley Fool newsletter services have recommended writing covered calls on Guess. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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