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True Religion: A Growth Story Worth Watching

After the release of True Religion's (Nasdaq: TRLG  ) fiscal fourth-quarter results in March 2006, I was quite optimistic about the potential for shareholders given the company's new focus on retail store development. At the time, it only had one retail store in operation, located in Manhattan Beach. Fast-forward to its fiscal 2007 second quarter, and the premium denim specialist now has eight stores up and running, with more on the way.

In True Religion's latest quarterly earnings conference call, management revealed that it upped its store development target for the end of the 2007 calendar year from 11 to 15. An added bonus is that all 15 should be operational by the holiday shopping season. With a clean balance sheet and suitable free cash flow levels, the company should have no problem financing this aggressive development strategy.

Retail development can unlock enormous value for a brand. Among other things, it allows a designer to showcase a complete merchandise set the way it wishes. Successful retail stores in turn can become a catalyst for wholesale and e-commerce growth. Guess? (NYSE: GES  ) and Polo Ralph Lauren (NYSE: RL  ) have benefited greatly from this strategy. Kenneth Cole (NYSE: KCP  ) is jumping on board with its new retail concept that is set for launch in early 2008.

Beyond an ever-developing denim category, True Religion retail stores are featuring a more diversified merchandise assortment. For example, the second quarter saw the introduction of its first swimwear collection. And by next year, stores will carry its first line of footwear and fragrances. Look for it to expand its men's assortment, too. Currently, 67% of sales are in the women's category, but the management team would like to get this down to around 53% by introducing more options for men.

Overall, I like what its second quarter displayed both in terms of double-digit revenue growth as well as expanding gross margins, each of which benefited from an increased retail presence. If I have a concern surrounding True Religion, it is that I do not want to see the management team get too aggressive with expansion efforts. This brand has enormous growth potential -- just in terms of store development opportunities and in filling out what remains a rather sparse merchandise assortment -- with ample time to realize it, if it doesn't put itself into a financial bind in the process.

So far, so good, but prospective investors should cast a watchful eye on True Religion's expansion efforts, making sure growth is achieved in a smart way that rewards management and shareholders.

True Religion has only a measly two-star rating (out of five) on The Motley Fool's newest investment advisory service, Motley Fool CAPS. Join the community of more than 60,000 participants from all over the world and share what you know, or think, about the market.

Fool contributor Jeremy MacNealy has a CAPS username of jmacn22, and is, at the time of posting, ranked No. 1,500. He has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.

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