On Tuesday evening, True Religion Apparel
With a hot brand and sky-high price tags, True Religion is among the illuminati of the premium denim market. The company nearly quadrupled sales from 2004 to 2005 and was still seeing solid year-over-year growth near 60% for the first six months of 2006. In its usually seasonally strong third quarter, though, they missed analyst revenue estimates by nearly $5 million, raising the question of whether this four-year-old fashionista is starting to look out of style. Go to the Fool by Numbers for True Religion to get the rundown on this quarter's numbers.
Warme heute, nicht?
Addressing the weakness in results on the conference call, the management team pointed to unseasonably warm weather in Europe. CEO Lubell commented that since they are still a highly denim-based company, this warm weather had shoppers thinking more about buying shorts and tank tops than a new pair of distressed jeans. He said that the trend they are seeing is toward "buy now, wear now" clothing purchases.
To address this Achilles' heel, the company is aggressively moving into an assortment of non-denim apparel. On the call, Lubell read what seemed like a laundry list of new items and fabrics that they would be rolling out to expand beyond denim. The hope is that this will ensure that what's being put on the shelves "is wearable at the time." Currently, non-denim makes up 19% of True Religion's sales, but they are targeting 21% for year end, and a 50/50 split longer term.
Though the company only generated about 17% of sales outside of the U.S. and Japan, they are targeting Europe as a key growth market moving forward. Buckley noted that they have "enormous potential" in Europe, and as a result are in the process of engaging an executive search firm to find a President for their European operations. They believe that they will most effectively be able to address this market with a full team on the ground.
East of the Rhine
While Europe was apparently sweating it up and staying in lighter fabrics, Japanese sales picked back up for the company after drooping in the first and second quarter of this year. Sales in Japan came in at $5.7 million, which was up 100% over the second quarter, but roughly flat against a year ago. Management made it very clear that True Religion still remains the No. 1 brand for premium denim in Japan, but conceded that some of the shortfall in the full-year results would be a result of this market not living up to their original plan.
Coming to a mall near you ... if your zip code is 90210
On a happier note for the company, business in the U.S. remained strong in the third quarter, generating $30 million in revenue -- 71% of overall sales. In the quarter, the company added roughly 100 new specialty retailer doors, bringing them to a total of 650, and tacked on 30 new department store doors, taking that total to 244. Nicer still is the fact that sales per door increased from $18,000 in the third quarter of last year to $30,000 this year in specialty retailers, and from $36,000 to $42,000 in department stores. Management reported that they have not received any requests for markdown money, and they believe that they are not nearly penetrated in these channels for denim, let alone for their new non-denim offerings.
Meanwhile, pleased with results from their first retail location in Manhattan Beach, Calif., management is moving forward with plans to make True Religion a stand-alone retail name. Later this month they expect to open a second California location in Los Angeles, nestled between Beverly Hills and West Hollywood. Before the year end, the company also plans to open a third retail location in Soho in New York City. Swank destinations to follow in 2007 include Short Hills, N.J. and Lenox Square in Atlanta; the aim is to have 11 retail stores open by the end of 2007.
Of course, cynics may wonder why the company is pursuing the overhead-heavy retail strategy if the wholesale business is still doing so well. While I view the move as a risky strategy, it is obviously the direction the company was looking to go when they hired Buckley, formerly of Diesel, as President. To their credit, having a retail presence can give the company more influence over brand image and customer experience, a crucial ingredient when you're trying to sell jeans for $200. If it works, this could also provide a good differentiator for the company against an ever-growing number of competitors in the wholesale premium denim market, the likes of which include Seven Jeans (partially owned by Bear Stearns), Citizens of Humanity (partially owned by Berkshire Partners), Paige Premium Denim, and Rock & Republic -- among many others.
And the kitchen sink
As if the poor quarterly results, the non-denim push, and the retail plans didn't give investors enough to think about, Tuesday's call provided a number of other morsels to chew on:
- No True Religion call would be complete without questions of where the jeans were showing up. On this one, there was a claim of the jeans being sold at Marshall's. Buckley assured listeners that they were not working with Marshall's and further noted that future damaged and irregular jeans would be sold through True Religion's own outlets.
- Though Lubell mentioned that they are still very engaged with Goldman Sachs, and Lesser cited the engagement as part of the $800,000 in banking and legal expenses that the company took in the third quarter, they declined to comment on what exactly Goldman is doing for them.
- In the Us Weekly moment of the call (probably fitting for True Religion), one analyst said that traders have been talking about the potential for Jeff and Kim Lubell, who is a board member, to get divorced. Jeff declined to comment on the issue.
- And for those of us a little slow on fashion, listeners were reminded that skinny jeans are still in and colored denim is now making its way into what's hot.
Time to sink or swim
With 25% projected year-over-year growth and trading at 16.5 times 2006 EPS estimates, True Religion stock previously seemed to be a bit of a steal at $21. Now, growing at maybe 20%, and trading at less than 15 times 2006 EPS estimates, the price is cheaper but the risks seem higher.
If the company is able to execute on the items outlined in their call, and still keep margins as strong as they have been, this price could be a gift. If their growth continues to slow at this pace, though, and they keep stacking on overhead, the company could be bloated and sinking before the bankers at Goldman can say "M and A."
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Fool contributor Matt Koppenheffer does not own a single pair of skinny jeans , and if his jeans are colored, it's because he was painting in them. He does, however, own shares of True Religion. Thank the fashion gods for a Foolish disclosure policy that is never out of style.