The off-color intro
How much money is there in fashionable plumber's butt? It's a question I've been asking myself for several months, at least since last fall, when I began salivating over the prospects of several retailers who make plenty of cash peddling scandalous clothes to teens and 20-somethings. I don't know if you've noticed, but the denim trade has been pretty brisk lately, and everywhere you look, women and teenage girls are packing themselves into low-rise jeans. My wife's a high school teacher, and she comes home almost every day with an appalling crack 'n' thong sighting to tell me about. I'm not going to get into whether this is a good thing or a bad thing. As an investor, it's just a thing I see -- even though I make a great effort to avert my eyes. I just want to follow the money, to see whether some of it can end up in my pockets.

That's why I pay plenty of attention to communal backside as I'm strolling the boulevards of the D.C. metro area. I want to know what people are buying. Are the teens crowbarring themselves into the latest low-hipped abominations from Abercrombie & Fitch (NYSE:ANF), or are they getting their ripped and stained goods at AmericanEagle Outfitters (NASDAQ:AEOS) or Aeropostale (NYSE:ARO)?

One brand I don't see much in the wild is True Religion Jeans, from True Religion Apparel (OTC BB: TRLG). But over the past year, it's been impossible to pick up a fashion magazine without catching the True Religion buzz. This has been the (and I mean the) hot hotpant, proudly worn by fashionistas from Gwen Stefani to the Bush twins.

(What's that? You don't page through fashion magazines? Put down the Popular Science for a few minutes, Poindexter. You're missing out on some valuable investment ideas. But that's another topic entirely.)

Hem the hips, hoist the price
True Religion's main product is jeans. Low-cut jeans. Low-cut jeans that look like they've been worn by a Harley mechanic for the past 10 years. Low-cut, ripped, stained, Harley-mechanic jeans that cost a couple hundred bucks, actually. Where does one find these expensive, painstakingly crafted totems of blue-collar America? Naturally, at high-end retailers like Barney's, Nordstrom (NYSE:JWN), and Neiman Marcus (NYSE:NMGA).

By now you may think I'm joking, or some kind of perv -- and not the good kind -- but hear me out. Let's start with a generalization: Luxury good; bargain bin, not so much. Purveyors of high-end retail goods have been beating up on their lower-end peers for a while. There was a time when $400 purses and backpacks seemed pretty silly. But look here before you snicker at shareholders in Coach. And lest you think (silly non-shopper) that True Religion suffers some kind of lone arrogance in marketing jeans in this price range, keep in mind that this is an established denim niche, nurturing players such as Citizens of Humanity and Seven for All Mankind.

Last year, True Religion came screaming into this space to sell $27.7 million worth of high-priced denim. And sales are continuing to sprint ahead.

"So what?" you say. "How is its product any different from the lower-priced competition?" (Or the higher priced, for that matter?) Well, here's the essence of the competitive advantage of its products: They make your butt look good.

Seriously. That's the word, from fashion magazines to Internet chat to celebrity interviews.

Now, having only seen these well-loved dungarees in photos, on stickish A-listers like Angelina Jolie, who can make an onion sack look good, I'll defer judgment on the veracity of this claim. For the purposes of this argument, it's sufficient to me that everyone believes these jeans make their butts look better. And given the eye-burning anatomical atrocities that I've seen committed to the public posterior by lower-priced competition, I genuinely hope it is true.

The collection plate
If you're still with me, you will by now be wondering why I'm discussing a bulletin board stock. Well, this is no ordinary over-the-counter equity. As I mentioned above, it did more than $27 million in sales last year. It's got at least three analysts following it. The firm's market cap is around $260 million. On an average day, more than $6.2 million worth of shares change hands.

The sales for 2004 were more than 10 times 2003's $2.4 million. Obviously, True Religion won't be able to maintain 1,074% gains for too long, but for the latest quarter, the $20 million does represent a 640% clip over the prior-year quarter and a healthy 47% sequential jump over the preceding quarter.

And there are earnings, too. For last year, the tally came to $0.20 per diluted share, up from zilch in 2003. Again, for the just-completed first quarter of 2005, True Religion expects to report $0.15-$0.16 per share, a major jump over the $0.01 booked for Q1 last year.

While the trailing P/E reads 65 these days, the P/E on next year's estimates (for $0.63) is closer to 20. That might look downright cheap considering the 215% EPS growth baked into those estimates. It might look that way even though the stock has zipped up to $13 from well under a buck during the past year.

Heavenly holding or shareholders' Jamestown?
Convinced yet? Ready to sign up for some budget supergrowth? Put down the Kool-Aid for a second, and take a look at the rock on which True Religion is founded.

If there's a class of equity that's got a crummier reputation than the gold rush startup, I've never heard of it. This is the original penny-stock scammers' dreamland. It's been that way for over a century. (Reread your Twain, specifically Roughing It, if you think I am lying.) Oddly enough, this is the strange heritage of True Religion.

The company was organized in 2001 as Gusana Explorations, a Nevada corporation that held a Canadian corporation of the same name that had "mineral properties." (I'm not kidding. Click here for a map of Gusana's Canadian claims.) In a story familiar to anyone who's watched the Canadian gold sector, the firm said it was unable to "obtain the capital necessary to survive and exploit our resources."

This, of course, is not surprising, since there were no resources. Nor was this a secret. The regular registration statements for Gusana basically admit that the "mineral properties" were bogus. The statements described them as follows: "We are a mineral exploration company with six mineral claims, title to which is held by an unrecorded warranty deed. The property has no proven or probable mineral reserves.... We intend to explore for gold on the property." (Emphasis is mine.)

Since the directors couldn't find a sufficient supply of... ahem... "investors" to furnish them the capital to do the whole gold thing, the directors later report: "They decided that it was in our company's best interest to concurrently pursue initiatives in the clothing industry."

Well, that's how the story goes now. What happened by the filings is that in June 2003, the four original Gusana shareholders and directors got $25,000 each and disappeared. Jeffrey Lubell, a well-known figure in the world of California denim design, took over the reins of the corporation after swapping his majority stake of a jointly owned company, Guru Denim, to Gusana in exchange for $250,000, the offices of president and CEO, 52% of Gusana stock, plus the assurance that the firm would raise $1.2 million in private placements of remaining equity.

As exciting as this sordid tale has been, it would be unfair to tar True Religion with Gusana's past. It's likely that the trio of new Gusana directors -- including Lubell's wife, Kymberly, and another fashion veteran, Mark Saltzman -- chose this dubious vehicle to launch the new jeans brand just to harvest the $343,000 worth of net losses that Gusana had incurred over the years.

Insiders first
Unfortunately for outside shareholders, True Religion's corporate governance seems to come from the school of "What's mine is mine, and what's yours is mine, too." For instance, Mr. Lubell gets most of his cash via a cut straight off the top, taking 3% of revenues. To add insult to injury, consider how the top line is managed to maximize Lubell's take. Shipping and handling costs are not netted out of revenues, but included as selling, general, and administrative expenses. Sounds reasonable, except that shipping costs subsequently "recovered from customers" are then "recorded as freight revenue and included in net sales." (I didn't see a breakdown on what this number might have been for 2004.)

As a prospective shareholder, I'm more than a little spooked by an incentive scheme that could conceivably reward a top executive for stuffing the channel as well as juggling shipping costs to kick them back to the top line. I'm not saying this has happened or will happen -- just that shareholders would be better served by a system that avoided the obvious conflict of interest, something incentives-based on cash flow or economic value added (EVA).

Unfortunately, that kind of long-term, shareholder-friendly motivation is absent from the management's contracts and incentives. They are uncomfortably skewed toward the short term. Terms of employment are a year at a time. None of this may surprise you if you know the jeans industry, where changing trends kill fashion houses with clocklike regularity and short attention spans are the norm. After all, Lubell has churned through Bella Dahl (bankrupted, in 2002), Hippie Jeans, Jefri Jeans, and Guru Denim -- well, technically, this is still a wholly owned True Religion subsidiary -- in the short period from 1998 until today.

And it gets worse. The company officers have the unfortunate habit of giving themselves lucrative incentives for continuing employment that is already quite richly rewarded. On Dec. 14, 2004, Lubell was "awarded" 200,000 "restricted" shares, worth $5.10 each at the time. They aren't under much restriction, however, as they become free on June 14, 2005. If the stock price merely holds steady until then, the shares will be worth $2.56 million. That's a nice bonus on top of the $979,000 cash and 1.15 million stock options he was already paid that year.

CFO Charles A. Lesser got 50,000 shares in the same restricted stock deal, on top of $180,000 cash and 200,000 stock options. His background includes a couple of billboard-traded technology firms that have gone through more name changes and business realignments than his denim-designing cohorts. I'm not sure what to make of that yet, but my gut feeling is that this is not a good thing.

You might argue that the folks running the show deserve all this compensation, but the fact remains that should you ever disagree, as an outside shareholder, you'll have precious little control (read, "none") over those payouts in the future, since directors and officers hold almost 43% of shares outstanding.

Foolish bottom line
Sometimes, beauty is only skin deep. Peeling back the denim here leaves me a bit grossed out. While I'm sure that True Religion will continue to see major growth in its sales and earnings over the next months, the management team's short-term outlook is more than enough to keep me away. You should consider this stock only if you really want to walk on the wild side. Fools know better than to sign up as part-owners of a firm that relegates them to third-class status.

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Seth Jayson loves a good rummage through SEC filings. At the time of publication, he had shares of Aeropostale, but no position in any other company mentioned. View his stock holdings and Fool profile here. Fool rules are here.