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True Religion Apparel (TRLG)Stock (Fashion Industry Industry, Retail Industry, Apparel - Clothing Industry)
What do Beyonce, Paris Hilton, and Eva Longoria have in common? They've all been photographed wearing True Religion (NYSE: TRLG) jeans. True Religion designs, manufactures, and sells one of the most popular (and most expensive) brands of denim on the market today. At around $150-$300 a pair, the brand was popularized in recent years by wealthy west-coast trend setters and celebrities. Since its founding in 2002, True Religion has leveraged its star appeal and high-margin product into rapid financial growth. The company’s net income increased by a factor of six between 2004 and 2006 (from $4M to $24M).[1] The company sells its denim in high-end department stores like Neiman Marcus, Saks Fifth Avenue, and Bloomingdales, as well as hundreds of specialty boutiques nationwide. At the end of 2006, the company also began to open its own stores in cities across the U.S., including Boston, Las Vegas, and New York City. These retail stores, coupled with several new licensing agreements, could play a key role in the company's future growth.
[edit] Company Overview[edit] Breakdown of HoldingsUp until the end of 2006, True Religion was entirely a wholesale-based company, selling its denim to large upscale department stores and smaller boutiques. At the end of 2006 however, the company began a slow retail expansion, opening several stores over the course of the following year. These stores accounted for 15% of True Religion sales from January to September 2007.[4]
[edit] Recent EarningsTrue Religion has shown solid growth over the past few years due to rapid brand expansion. Over the past few years, True Religion denim quickly transformed from a popular label in small California clothing boutiques to a highly visible brand in large upscale department stores both in the United States and abroad. The brand’s extreme popularity, coupled with high gross margins (around 56%[8]) form a recipe for strong earnings and a 25% increase in profitability in 2006[9]. [edit] Trends and Forces[edit] Dependency on Department StoresDepartment stores in the United States have undergone significant changes in recent years. In response to declining margins, stores have implemented tighter inventory controls and have scaled back the quantities of merchandise that they purchase from companies like True Religion. As a means of increasing market share, companies have also sought to differentiate themselves from the competition by demanding exclusive contracts and store-specific private labels (e.g. Ralph Lauren's "American Living" line for J.C. Penney). [10] Such dealings could weaken the control True Religion has over its brand image, which is very important for a company that depends so heavily on its brand's cachet. In addition, a series of mergers and acquisitions in the industry (e.g. Federated Department Stores' 2005 takeover of Marshall Field's) give the businesses that remain potentially greater power to negotiate lower prices with True Religion, thereby lowering sales. TRLG is still highly dependent on department stores, with over 85% of its revenue coming from its wholesale division, but since 2006 it has been establishing its own retail outlets, and has seen its retail sales grow rapidly. [edit] Volatility of Fashion TrendsTrends in the fashion world tend to change very quickly. Consumer tastes can vary widely from one season to the next, leading to large swings in a company's profits. But as jeans, perhaps the most basic of all wardrobe staples, account for the overwhelming majority of True Religion's revenue, the company seems less susceptible to such swings when compared to logo-covered handbags and extravagant designer apparel. But in spite of this competitive advantage, True Religion must still contend with the risks inherent to the high-end denim industry. As the company seeks to maintain the strong growth rates of recent years, it has become increasingly dependent on department stores for revenue. This may lead to overexposure, weakening the brand's prestige among exclusive boutiques and wealthier consumers. In addition, True Religion has been very dependent on the visibility celebrities have brought to the company's denim. Known for their fickleness when it comes to branded apparel, there is a strong possibility that True Religion could fall out of celebrity favor, which would serve as a significant blow to the brand's power. [edit] U.S. Economic ConditionsTrue Religion's bottom line is strongly dependent on its U.S. sales, and is therefore susceptible to shifts in the region's economy. As rocky economic forecasts tend to damper consumer spending, the company's recent rapid growth could decline. In the company's early years, Luxury Consumption: wealthy individuals formed the original core of True Religion's clientele. In an economic downturn, their spending should remain relatively stable. However, as the brand gained national exposure, trendy middle-class teens became a greater source of the company's revenue. But while the expansion of its customer base may be necessary for future growth, the cost of True Religion jeans may prove too high for younger clients with less disposable income. Accordingly, these consumers may decide to pass on True Religion products and purchase less-expensive trendy labels like Diesel or Seven For All Mankind. [edit] CompetitionTrue Religion apparel faces competition from several brands in the crowded premium jeanswear market. Its competitors include Seven For All Mankind, Citizens For Humanity, Rock and Republic, Diesel, and Guess? Jeans.
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