SECTOR: Consumers
COMPANY: True Religion
SR. ANALYSTS: ANNA BRAET
JR. ANALYSTS: AMANDA CANNIZZIO, BRIDGET EASTES, MOLY FANG,
JONATHAN GARNICK,, IMRAN HOSSEIN, JENNY KWONG, LESLIE
MULLINGS, PRADEEP MAHTANI, ANDREW WALTERS
Investment Recommendation
Company
Recommendation
BUY
Current Price
23.31
1yr Target Price
31.79
% Upside
36.4%
Key investment drivers
– 1. International Expansion
– 2. Movement to Consumer-Direct-based Business Model
– 3. Attractive Comparables
2
Premium Brand Denim &
Apparel Industry
The Premium Brand Denim & Apparel Industry consists of
companies that design, manufacture, and distribute high-end
apparel and accessories through distributors and company retail
stores, with a specialized focus on luxury denim products to be
sold to young-adults with high discretionary income.
By Revenue
Textile and
Apparel $305 B
Apparel 49%
Denim/
Apparel
20%
3
Luxury
Denim 3%
Industry Market Share by Revenue
True Religion
Company Snapshot
Market Cap Revenue Beta
570.42M
Percentage Change from Jan. 2008
80%
$311M
1.72
63%
84M
1.75
10.8
TRLG Stock Performances from 2008-2011
60%
40%
20%
0%
-20%
S&P600
-40%
TRGL
-60%
-80%
4
Gross
EBITDA EPS P/E
Margin
Date
TRLG Value Chain
Raw
Materials
D
E
S
I
G
N
Licensing
Direct from
TRLG to
Customers
Branded
Retailers
Outsource
Production to
U.S. (denim),
Mexico, Asia
In-House
Distribution
Showrooms
(CA and NY)
Department
Stores &
Boutiques
Accessory Manufacturers
International Expansion
• Headquarters: Switzerland, Japan, South Korea, Hong
Kong, Germany
• Joint Venture with German Distributor UNIFA Premium
– Reduce Distribution costs
3/12/2016
BU Finance & Investment Club
Source: Company Filings
6
TRLG Expansion
Total Store Openings:
• 101 stores in 5 years
• Saturation around 1000
stores
• Expanding faster than
competitors
– VFC: 50% marketing
on sportswear
– BKE: not abroad
– GES: approaching
saturation
3/12/2016
BU Finance & Investment Club
Source: Company Filings
7
Movement to
Consumer Direct
Motivations:
• Department stores
• Profit margins
• Premium Brand
• Maintain >30% gross
margin
3/12/2016
BU Finance & Investment Club
8
Movement to
Consumer Direct
Benefits:
• Display space
• More control
• Avoid wholesale
pricing
• Maintain >30% gross
margin
3/12/2016
BU Finance & Investment Club
9
Attractive Comparables
• No debt – no plans to assume debt
• Cash financing of expansion
Gross
Margin
3/12/2016
4th Qtr SameSales per
Store Sales
Square Foot
Growth
Inventory
Turnover
63%
$1818
7.2%
3.83
16%
$428
6.3%
5.64
47%
$6691
-6.0%
1.79
BU Finance & Investment Club
10
Valuation
Year
FCF
2011(e)
$
2012(e)
68.46
$ 71.40
2013(e)
$
2014(e)
79.04 $
DCF
87.80
$
97.90
Comparables
WACC
13%
Price/Sales(25%w)
Growth Rate
2.5%
1yr Price
DCF Value
760.87
EV/EBITDA(25%w)
1yr Price
37.20
1yr Price
50% Weight
11
2015(e)
22.81
29.95
50% Weight
1yr Target Price
31.79
% Upside
36.4%
Risks & Sensitivities
Forecasted
Current
Raw Material Price
Increase
Brand Dilution
25%
$23.98
Consumer Direct
Does Poorly
25%
$29.20
Weighted Risks
12
25%
$24.76
Foreign Investments
Do Poorly
$22.00
25%
$28.44
100%
$26.60
$24.00
$26.00
Price per Share
$28.00
$30.00
$32.00
Recommendation
Company
TRLG
Recommendation
BUY
Current Price
23.31
1yr Target Price
31.79
% Upside
36.4%
Key Investment Drivers:
– 1. International Expansion
– 2. Movement to Consumer-Direct-based Business Model
– 3. Attractive Comparables
13
Questions?
3/12/2016
BU Finance & Investment Club
14
Back Up Slides
3/12/2016
BU Finance & Investment Club
15
Trends and Opportunities
• International Expansion:
– Japan, Europe
– India
• Cost Reduction:
– Lighter fabric for jeans
– $3 million in capital expenditures for new technology
• Product Development:
– Expansion of licensing for accessories
– Sportswear to compete against VFC
3/12/2016
BU Finance & Investment Club
16
TRLG Revenue Chain
Sales
Consumer Direct: 41.5%
U.S. Wholesale: 39.6%
International Sales: 17.5%
Licensing – 1.4%
17
Risks
• Cotton Price
– Cotton prices at end of October about $1.50 per
pound, an 80% increase from beginning of 2010
Cotton Future
High
Cotton Future
Low
Average Price of
Premium Denim
2010
125.26 (Oct.)
71.89 (Jan.)
~$180
2009
73.63
42.63
~$180
2008
77.75
42.17
~$180
NYTimes.com, WSJ, www.tradingeconomics.com
18