Losing Its Religion
Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
True Religion Apparel (NASDAQ: TRLG) may soon be losing its religion. The trendy denim company, whose trademark is a horseshoe branded on the back denim-jean pocket, has essentially put itself up for sale. The company's board of directors has formed a special committee -- led by Guggenheim Securities on the finance side and Greenberg Traurig on the legal end -- to explore the possible sale of the company. True Religion is reportedly already engaging potential suitors, including private equity and strategic buyers, according to The Wall Street Journal.
The niche denim company's pricey jeans, which cost upwards of some $300 per pair and have been adorned on the likes of Jessica Simpson and Britney Spears, has lost some of its allure with retailers. True Religion is increasingly losing shelf space at major department stores -- including Bloomingdales, Nordstrom, and Neiman Marcus -- to the latest fads, including J. Brand and Paige Denim.
True Religion has also faced increasing pressure from Gap (NYSE: GPS), which offers its own version of less expensive skinny cotton jeans in various bright colors. For its part, Gap has been growing its presence in China since last year, most recently with its first outlet store in the region. Shares are trading at levels not seen since July 2000. The stock is doing its part to lift the retail sector -- which is outperforming the broader S&P 500 -- higher this year.
As for True Religion, a sale is not imminent. The company stated in a press release:
"No decision has been made to engage in a transaction or transactions, and there can be no assurance that any transaction or any other strategic alternative will occur or, if undertaken, the terms or timing thereof."
Nonetheless, the company may never increase its market saturation -- even in an industry where some $250 billion is spent each year in the U.S. alone -- without the resource muscle of some larger player. True Religion shares have shed nearly 40% year-to-date. The company continues to pay a $0.20 per share quarter dividend as of its second quarter, at which time Jeffrey Lubell, True Religion CEO, noted that the company has been conceding market share to discount jeans.
Fashion clearly is an international phenomenon and True Religion has not been expanding fast enough overseas, which -- coupled with lackluster earnings and revenue forecasts -- has played into its recent weakness. It’s not that the denim company hasn't been investing overseas and attempting to bolster its presence, because it has. But it hasn't been effective. The company continues to generate more than 50% of its revenue from its brick-and-mortar locations, including 116 in the U.S. and 23 overseas, as well as Internet sales.
Another niche apparel company, which incidentally has not had any trouble with its international presence, is Vancouver, British Columbia-based Lululemon Athletica (NASDAQ: LULU). This yoga-pants maker, which has exposure to China's slowing economic growth, has been helped by several macro-factors, such as cotton prices, which have been trending lower in recent years. Lululemon is also in a good position given the falling labor and production costs in China, according to CNBC, and is poised to benefit as international investors flee the Asian markets in favor of North American equity -- all of which stands to benefit Lululemon's stores. Lululemon, with a market cap of $10.4 billion, shares have soared nearly 25% since July.
The potential sale of True Religion seems to speak more to prospects of niche-brands rather than retail as a whole. It also underscores the global direction in which the economy and corporations appear to be heading. Nonetheless, given the most recent sale of Apex Tools to Danaher Corporation and Cooper Industries to Bain Capital for $1.6 billion, perhaps True Religion has chosen the right time to go on the block.
GerelynT has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Lululemon Athletica and True Religion Apparel. 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.If you have questions about this post or the Fool’s blog network, click here for information.