On March 25, I recommended buying True Religion Apparel (TRLG) in the Forbes Growth Investor investment newsletter. The stock was selling for $11.60 at the time. On May 8, a few days after the company released first quarter results, I told subscribers to sell. The stock closed that day at $21.97.
While the stock is not obviously overvalued, it's no longer a screaming buy. The company reported a 19% year-over-year increase in sales. That's impressive in a recession, but it's also a considerably lower growth rate than TRLG posted in recent periods. Furthermore, the company's largest segment, U.S. Wholesale, saw an 11% decline. In addition, the operating profit margin fell 70 basis points and net income climbed by only 9.8%, well below the increase in revenues.
Yet with $76.5 million in cash and no debt, TRLG is a very healthy company. Even in this severe recession, the company has had no problem convincing fanatically devoted customers to purchase its overpriced jeans. During the first quarter, TRLG commanded an average price of $262 for a pair of ladies' jeans in its full-priced stores. Perhaps more amazingly, it got $287 for each pair of men's jeans. More than 40% of its sales now come from the men's category.
TRLG is trying to increase the number of branded stores and is pushing for growth in the more profitable Consumer Direct and International segments. However, if it hits the high end of management's guidance, full-year revenues will be up only a modest 10%. EPS will be down slightly. I believe management is being deliberately conservative with its projections. Nonetheless, unless the recession ends quickly and more consumers develop an urge for high-priced jeans, growth at this company will likely continue moderating.
