True Religion Does Its Dance on the Catwalk

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I hate to say I told you so – but I told you so!

Consumer spending figures be damned – the market for high-end denim is stronger than ever and True Religion Apparel (Nasdaq: TRLG  ) is reaping the fruits of its hard labor.

One leg at a time
True Religion is a manufacturer, wholesaler, and now distributor of high-end apparel through its bricks-and-mortar locations, as well as through department stores. Last night, it reported second-quarter results that stomped expectations into the ground. The company pranced down the catwalk with revenue of $98.3 million and a profit of $9.4 million, or $0.38 per share. This compares with estimates for a profit of just $0.34 on revenue of $91.5 million and marks the second quarter in a row the company has just killed estimates.

Other than the fact that earnings jumped 25% over the year-ago period and revenue leapt 20%, perhaps the single most impressive stat of its entire report was its same-store sales growth. Revenue in stores open at least one year rose 14.8%. Allow me to repeat that just in case it didn't sink in: fourteen point eight percent!

The reason the company is able to grow so quickly has to do with its transition from a wholesaler of denim into a bricks-and-mortar retailer. While the company's wholesale revenue fell by 18%, its direct-to-consumer B&M stores showed a 42% jump in revenue. True Religion is successfully transitioning into a household name, and it has its successful marketing campaigns to thank for that.

Also of note is the strong growth that the company logged in international sales. It's true that some of this growth was derived from opening three new stores in Canada, but I wouldn't discount the strength in the bottom line figures from True Religion's German joint ventures.

Need less input
The one worry I had regarding True Religion entering last quarter was the rising price of cotton, which is the main component to the company's primarily denim lineup. Over the past few months, we've seen cotton prices head drastically lower, which has allowed True Religion's margins to creep steadily higher. For the quarter, gross margin gained 140 basis points to 65.5%.

Now it all raises the question: Is True Religion a bargain relative to its peers?

I think the answer is still yes, even with the company nearing its all-time high. Unlike The Jones Group (NYSE: JNY  ) , True Religion sports a debt-free balance sheet, while it also trades at a lower forward earnings multiple than Polo Ralph Lauren (NYSE: RL  ) . Even True Religion's projected long-term growth rate trounces teenage retail darlings VF (NYSE: VFC  ) , Abercrombie & Fitch (NYSE: ANF  ) , and American Eagle Outfitters (NYSE: AEO  ) .                   

Foolish roundup
In sum, as long as True Religion continues to surpass analyst estimates and rapidly grow its bricks-and-mortar business, I see no reason why it couldn't head significantly higher. Ending the quarter with $173.7 million in cash, no debt, and a highly profitable business sounds like a possible recipe for a dividend in the future.

Would you put money to work in True Religion at these levels? Share your thoughts in the comments section below and consider adding True Religion Apparel to your watchlist to keep up on the latest news in high-end apparel.

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. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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 that loves cotton products but detests cotton mouth.

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