True Religion (Nasdaq: TRLG ) is on the chopping block -- or auction block, I get those confused. Either way, the company has announced that interested parties have been sniffing around, and True Religion isn't going to turn them away just yet. That's good news for the jeans company, which has been struggling recently, watching its share price fall from $35 near the beginning of 2012 to just above $21 through yesterday. Today, the stock popped, up 22% at midday. But who would be interested in this lagging brand?
First, let's take a look at why True Religion isn't just going to shoot down the interest right out of the gates. While revenue has been steadily increasing, much of that increase has simply come from expansion. Operating and profit margins have been falling as SG&A expenses have been rising faster than revenue, with much of the increase focused on expanding the line overseas.
But the focus on growth has left True Religion exposed to competition. Both Guess? (NYSE: GES ) and The Buckle (NYSE: BKE ) have tapped into True Religion's market, and have made in-roads with a large audience due to their relatively low price points. True Religion's men's jeans come in around $200 a pair, while Guess? and Buckle both sell a range of denim under $100. While True Religion initially benefited from celebrity exposure, that has largely died down.
Deep pockets, please
It's clear why True Religion is courting offers -- it needs to get its act together. But who would be interested in the company? Guess? doesn't have as much to gain, as it would get very little out of the brand name. Guess? only sells its own jeans, and there's no reason for it to expand that lineup. Buckle might make more sense. Buckle stores sell not only Buckle-made jeans, but a range of other brands as well, including True Religion. That's not a bad fit.
Buckle currently operates around 440 stores, all of them located in the U.S.. True Religion runs about 120 stores in the U.S. and about 25 internationally . With today's jump, True Religion is valued at $659 million on the open market, while Buckle is a $2.2 billion company. Buckle would certainly have the ability to raise the money needed to pick up True Religion, but it could also just let True Religion go, and pick up market share as True Religion tanks.
The other option
So assuming that a competitor doesn't swoop in, who else could make use of owning a high-end jeans company? It's tempting to think that a department store could get some use out of the brand, but True Religion is so high-end that the buyer would really need to be a brand like Nordstrom (NYSE: JWN ) . But Nordstrom doesn't need to make its own jeans, and it wouldn't get anything but a headache from having to run the business.
J.C. Penney (NYSE: JCP ) could really use its own fashionable, profitable jeans line. But Penney also isn't known for carrying $200 pairs of jeans, and the company recently launched its Levi's denim bar, which would put it in an odd competitive position. Every other version of the department store suffers one of those two issues: being too successful to need the brand, or too value-focused to want it.
The likely -- last -- option
So if it's not a competitor and it's not a department store, who would be interested? Oh, right, who buys everything these days? -- activist investors. In the most likely case, someone like Jana Capital, which had a stake in Barnes & Noble earlier this year, would love to get its hands on True Religion. The company is a perfect buy, fix, and sell opportunity. With a strong brand, international exposure, and climbing operational costs, a good firm could get in and clean house, then dump the company back on the market.
And to be honest, that would be good for everyone. The rebuild would certainly help True Religion get its act together. The downtime would give Guess? and Buckle a chance to get their own houses in order with less competition. And the investors would take on a limited risk to get a strong brand. I expect that by the end of the year, we'll see an offer from a private investor accepted, and True Religion will come off the market.