Why Success Is Written in This Stock's Jeans

It's been just slightly more than a year since I introduced my list of 10 small-cap companies to rule them all. True Religion Apparel (NAS: TRLG) , a high-end denim retailer, was my fourth selection in the series, and today I thought it would be worthwhile to see how it's performed since then and what you can expect from the company going forward.

Company

True Religion Apparel

Performance Since Pick

11%

Price/Book

2.22

Forward P/E

11.7

Source: Yahoo! Finance.

Where it's been
This is actually a bittersweet 11% gain, as True Religion was up nearly 50% just two months ago before its fourth-quarter report wiped out more than one-quarter of its value. At the heart of True Religion's earnings shortfall was weakness in the company's wholesale division.


But as I mentioned in February, the wholesale weakness is one figure you can almost completely ignore. Since 2010, True Religion has reduced its reliance on the wholesale business from 29% of its sales to just 18%. Instead, the company is targeting expansion in its bricks-and-mortar stores and its high-margin online segment. Both its stores and Web division offer better margins than the wholesale segment, so I'd hardly fret over wholesale segment weakness.

Where it's headed
March same-store sales at traditional mall-based retailers have been off the charts considering that many consumers had a hard time getting to the mall last year to make purchases because of the nasty weather. Macy's (NYS: M) crushed estimates by growing same-store sales in March by 7.3% versus the expectation of just 4.8%. Teen-retailer Zumiez (NAS: ZUMZ) blew away already robust expectations of 10% same-store sales growth by reporting 14% same-store growth. Even perpetual underperformer Gap (NYS: GPS) grew same-store sales by 8% versus the 4.6% consensus estimates. My personal rule of thumb is to question any move higher by Gap, so I feel these weather-friendly results can be largely thrown out the window.

What really matters for True Religion is that it can continue to pass along price hikes to consumers. Cotton costs play a much larger role in True Religion's bottom line than most retailers, so be sure to watch swings in the commodity price with a careful eye if you're considering investing. Luckily for shareholders, the True Religion name is becoming synonymous with high-end luxury denim, and consumers are still paying in excess of $300 for its products.

I think investors have also overlooked True Religion's strong cash position. With no debt and $200 million in cash, it can use its clout and brand recognition to crush smaller rivals like Joe's Jeans (NAS: JOEZ) . Joe's has struggled recently with higher-than-expected advertising costs associated with launching its 55 Color campaign. True Religion has brand recognition that few other jean retailers can claim.

Foolish roundup
To assume the sun has set on True Religion's glory days after one poor quarter and an earnings forecast calling for EPS growth of 4% to 7% is a bit premature. The company has laid the groundwork for its higher-margin bricks-and-mortar stores and has more than enough cash to move its business forward. Despite being down on this CAPScall, I am betting on growth over the long term.

What's your take on True Religion Apparel: Is success in this company's jeans, or have its better days come and gone? Share your thoughts in the comments section below.

If you like companies with a competitive advantage, you might love our analysts' Top Stock Pick for 2012. Check it out for free for a limited time only.

At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 that'll always be there for you.

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