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True Religion Searches for Answers

By Andrew Marder - Apr 1, 2013 at 2:59PM

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The denim design company is losing its founder and struggling to remain relevant.

Last week, jeans retailer True Religion (NASDAQ: TRLG) announced that its CEO, founder, chairman, and creative director Jeff Lubell was stepping down. Lubell founded True Religion in 2002, and quickly made the brand a fashion leader. But in recent years, the company has struggled to stay relevant and bring in new customers. With his departure, Lynne Koplin will step into the CEO role. The change is just one of many twists in the company's road over the last few months, but this one may signal something more meaningful for investors.

The headless dragon
True Religion's biggest problem has been its inability to bring in new customers. Last quarter, the company managed a small 1.5% increase in comparable sales, but the quarter before, comparable sales dropped 4.7%. The company also forecast a small decline in the first quarter of this year. That's a reflection of two main points. First, True Religion is participating in a very competitive market. Companies like Gap (GPS -8.32%) and Buckle (BKE -8.55%) are attacking the market from every possible angle, and it takes a strong brand to stand out. The second point is directly related: True Religion isn't a strong enough brand.

That weakness has meant that a lot of merchandise that should be moving at the retail stores is flowing over to the outlet stores, and being sold at a discount . Operating margin only hit 18.5% last quarter, a 2-percentage-point decline from the previous year. As a comparison, Buckle managed a 27% operating margin last quarter.

While Lubell's departure from the CEO position will give the company a chance to look at opportunities differently, the more important move is his departure from the creative director position. It's clear that whatever Lubell has been doing recently hasn't been turning customers' heads. Compare that lackluster sales growth to what Gap has been able to do over the past year-and-a-half. Comparable sales were up 5% last year, based largely on the company's refocusing on its denim line.

Refocusing on what works
But it hasn't been all bad news at True Religion. The company has made some progress in its international segment, opening 14 stores last year. In 2013, True Religion is forecasting a 20% growth in international revenue, and is planning to open a handful of new locations. The drawback is that the brand has had to be more promotional in the U.K. than it had originally planned. But new products coming out later in the year may help bring in new full-priced customers.

Overall, True Religion needs to find a way to bring in new, fashionable customers. The sales growth under Lubell was weak, but hopefully a new designer at the helm will make a difference for the brand. If all else fails, the company could continue to pursue the "strategic alternatives" that it announced in October. That may end up being the best outcome for shareholders, especially if new designs fail to bring in new customers. Investors looking for more stability would be better served by checking out Buckle or Gap.

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