The Truth For True Religion

Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The clothing retailer True Religion Apparel (NASDAQ: TRLG) saw its stock pushed up over 20% after posting earnings last week; is the stock now too expensive to consider it a buy? It doesn't appear so. The retailer's EPS came in at $0.55, compared to analysts' estimates of $0.53, with revenue up 14.7% from the same quarter last year. What really helped push the stock up was upgraded guidance. The company boosted first quarter 2013 EPS guidance to a range of $0.33 to $0.35, and full year 2013 EPS $1.89 to $1.95. The mid-range full year 2013 guidance now falls above previous analyst expectations of $1.91 per share. This better than expected performance and upgraded guidance suggests that True Religion's turnaround is showing signs of taking hold.
 
The apparel business should be able to see positive revenue growth from a rebounding economy and higher employment. Retail numbers came in strong (reported earlier) for January, which has shown a strengthening in consumer spending. This should be helped even more by the low cost nature of the apparel business. True Religion designs and makes fashion apparel, centered on denim jeans. After a couple years of tough performance, being pressured by a decline in consumer spending, and overexposure to the jean market, the stock is now considered a turnaround play. 
 
Other major clothing retailers include V.F. Corporation (NYSE: VFC)Ralph Lauren Corp (NYSE: RL)
Warnaco Group (NYSE: WRC), and PVH Corp (NYSE: PVH)All of these major retailers have also been showing strength via positive earnings releases. VF Corp posted 3Q results of $3.52, compared to $2.87 for the same period last year. Its staple brands, North Face and Vans, were big parts of its outperformance, while its struggling Timberland brand is working toward growth in profitability. To boot, the retailer pays a 2.3% dividend yield (check out a SWOT analysis of VF Corp). Ralph Lauren recently posted its 3Q results, with 3Q 2012 EPS of $2.31, compared to $1.78 for 3Q 2011. This was on the back of 2% higher same store sales and 4% higher total sales. 
 
PVH posted 3Q earnings per share of $2.34 compared to $1.89 in 3Q 2011, even with the exit from its Izod women's and Timberland wholesale sportswear businesses. Its key performers included its high-margin Calvin Klein and Tommy Hilfiger units. PVH has also agreed to purchase Warnaco for $51.75 in cash and 0.1822 PVH shares. The deal will unite the Calvin Klein brand, where Warnaco previously licensed Calvin Klein jeans from PVH. The deal will also combine Warnaco’s presence in emerging markets with PVH’s North American and European operations.

Back to True Religion, there has also speculation that the company could be a takeover target. It has been reported that the likes of WWD and Sycamore Partners could be interested in purchasing the company. In late 2012, Nike sold off its Cole Haan unit to private equity firm Apax Partners for $570 million. From a valuation perspective, True Religion is indeed cheap, trading the lowest on both a price to earnings (next year earnings) and price to operating cash flow basis: 

<table> <tbody> <tr> <td colspan="1" rowspan="1"> </td> <td colspan="1" rowspan="1"><strong>True Religion</strong></td> <td colspan="1" rowspan="1"><strong>VF Corp</strong></td> <td colspan="1" rowspan="1"><strong>Ralph Lauren</strong></td> <td colspan="1" rowspan="1"><strong>Warnaco</strong></td> <td colspan="1" rowspan="1"><strong>PVH Corp</strong></td> </tr> <tr> <td colspan="1" rowspan="1">Price to Earnings (next year earnings)</td> <td colspan="1" rowspan="1">13.1</td> <td colspan="1" rowspan="1">14</td> <td colspan="1" rowspan="1">19</td> <td colspan="1" rowspan="1">16.6</td> <td colspan="1" rowspan="1">16.8</td> </tr> <tr> <td colspan="1" rowspan="1">Price to Operating Cash Flow</td> <td colspan="1" rowspan="1">12</td> <td colspan="1" rowspan="1">13.9</td> <td colspan="1" rowspan="1">17.1</td> <td colspan="1" rowspan="1">20.7</td> <td colspan="1" rowspan="1">15.2</td> </tr> </tbody> </table>
 
Not only is the valuation compelling, the company's leading position in profitability and balance sheet strength make it even more attractive: 
 
<table> <tbody> <tr> <td colspan="1" rowspan="1"> </td> <td colspan="1" rowspan="1"><strong>True Religion</strong></td> <td colspan="1" rowspan="1"><strong>VF Corp</strong></td> <td colspan="1" rowspan="1"><strong>Ralph Lauren</strong></td> <td colspan="1" rowspan="1"><strong>Warnaco</strong></td> <td colspan="1" rowspan="1"><strong>PVH Corp</strong></td> </tr> <tr> <td colspan="1" rowspan="1">EBITDA Margin (TTM)</td> <td colspan="1" rowspan="1">19.80%</td> <td colspan="1" rowspan="1">14.80%</td> <td colspan="1" rowspan="1">19.30%</td> <td colspan="1" rowspan="1">11.90%</td> <td colspan="1" rowspan="1">13.80%</td> </tr> <tr> <td colspan="1" rowspan="1">Debt Ratio</td> <td colspan="1" rowspan="1">0%</td> <td colspan="1" rowspan="1">25%</td> <td colspan="1" rowspan="1">0%</td> <td colspan="1" rowspan="1">14.70%</td> <td colspan="1" rowspan="1">26%</td> </tr> </tbody> </table>
 
True Religion remains an interesting play in the niche retail business, as well as the small-cap industry, with a market cap that is below $750 million. Billionaire Jim Simons is one of True Religion's big-name hedge fund owners (see Simons' new picks here). Other top fund owners include Chuck Royce and Joel Greenblatt (check out all the hedge funds loving True Religion). The real thesis for True Religion shareholders includes the possibility of being rewarded with the likes of special dividends and buybacks. The retailer had over $165 million in cash at the end of the third quarter and no debt. The stock also pays investors a 2.9% dividend yield.


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