Why True Religion Apparel Is a Win-Win for Investors Right Now

Yesterday was both a vindicating moment for me as a longtime supporter of True Religion Apparel (Nasdaq: TRLG  ) and yet also a sad moment, as the company announced the hiring of Guggenheim Securities as its financial advisor and Greenberg Traurig as its legal counsel to assess buyout interest in the company.

The way I see it, True Religion has now set up its current shareholders for success no matter which path it follows. Allow me to quickly take you through a few scenarios and I'll show you why I feel that True Religion offers investors promising returns, even after yesterday's 22% pop.

Let's pretend True Religion gets purchased...
I was going through a myriad of different possible purchasing companies yesterday shortly after the news release, but discovered that my Foolish colleague Andrew Marder beat me to the punch and has already offered up his choices on potential suitors.

My initial thoughts focused on Guess? (NYSE: GES  ) as the suitor since it's focusing on brand expansion internationally and likely wouldn't mind inheriting True Religion's well-known brand within the United States. In its most recent quarter, Guess?'s sales actually dipped 3% in the U.S., so True Religion could give the company better selection and brand definition. However, Guess? has also pigeon-holed itself into a certain price range that True Religion simply doesn't fit into.

VF Corp. (NYSE: VFC  ) was another company that came to mind. Since some of its brands are largely denim-based, VF would be a logical choice to purchase True Religion since it understands the customer True Religion caters to. It also doesn't hurt that True Religion's balance sheet is debt free and rife with $160 million in cash. Perhaps the only deterrent here is VF's already high debt load.

Personally, I see private-equity as the most likely buyer since True Religion really operates within its own price and fashion niche. That's great news for investors because private-equity is likely going to be willing to pay more than one of True Religion's peers, and its uniqueness should only enhance a final buyout price.

Now let's pretend True Religion stays independent...
Even if the fairy-tale ending that True Religion gets purchased by a third-party doesn't come true, the company is still set up for future success.

First, consider that True Religion is making all the right moves when it comes to expanding overseas and moving away from the wholesale side of the business. When the majority of True Religion's revenue was tied to wholesale deals with Nordstrom (NYSE: JWN  ) and Bloomingdale's, which is owned by Macy's (NYSE: M  ) , it had very little control over its inventory or its cost controls. If sales declined at Macy's or Nordstrom, the two could simply cut back on orders and suddenly True Religion would be sitting on stockpiles of unwanted merchandise that could quickly fall out of fashion. In pushing to open bricks-and-mortar stores, True Religion has taken charge of its own inventory, given itself the tools to control its costs, and drastically improved the chances for its margins to head higher.

As I previously mentioned, True Religion has remained debt-free throughout the process of expanding internationally. This should allow the company added flexibility to open stores and expand abroad should opportunities arise. Many of its peers, like VF Corp., for instance, are mired in debt and may not be offered those same luxuries.

The final aspect worth mentioning is that True Religion's long-term vision remains intact as long as Jeffrey Lubell, its founder, remains as CEO. Founding CEOs often have a vested interest in seeing their company (and their wallet) grow, so their interests are often aligned with those of shareholders.

It's a win-win
Whether True Religion is purchased or decides to stay independent appears is a moot point to me, as I foresee gains to be made in either scenario.

Agree? Disagree? Let me and your fellow Fools know in the comments section below.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 11, 2012, at 1:26 PM, rbishnoi wrote:

    Why would Private Equity buyer pay higher price than the acquire from same domain? Usually peers pay more because that txn brings synergies, cross selling on top of operational efficiencies. PE buyers on the other hand are just looking for medium term exit strategy using financial engineering with the help of increased incentives which will be better aligned with PE buyer.

  • Report this Comment On October 11, 2012, at 1:29 PM, rbishnoi wrote:

    Typo in the last post. Please read as following

    acquire -> acquirer

    increased incentives -> increased incentives for the top management

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