true religion apparel, inc. - University of Oregon Investment Group

Transcription

UNIVERSITY OF OREGON
INVESTMENT GROUP
November 19, 2010
Consumer Goods
TRUE RELIGION APPAREL, INC.
Stock Data
Price (52 weeks)
Symbol/Exchange
Beta
Shares Outstanding
Average daily volume
(3 month average)
Current market cap
17.30 – 34.17
TRLG / NASDAQ
1.66
24,755,000
442,257
SELL
4778.514 M
Current Price
Dividend
Dividend Yield
19.33
N/A
N/A
Valuation (per share)
DCF Analysis
Comparables Analysis
Target Price
Current Price
15.71
27.96
19.75
19.33
Summary Financials
Revenue
Net Income
Operating Cash Flow
2009 Actual
311,000,000
46,996,000
53,590,570
BUSINESS OVERVIEW
True Religion was founded in 2002 by Jeffrey Lubell and is based in Vernon, California. The company went public in
2003. Lubell, who is still to this day the CEO, wanted to create a product that the premium denim industry had never
experienced before. His goal was to create quality, American-made 1970s inspired designs that appealed to today’s
consumer. True Religion Apparel, Inc. sells its products on six continents. Their products include jeans, shirts,
Covering Analyst: Elena Pinder
Email: [email protected]
The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational.
Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be.
Members of UOIG may have clerked, interned or held various employment positions with firms held in UOIG’s portfolio. In
addition, members of UOIG may attempt to obtain employment positions with firms held in UOIG’s portfolio.
TRUE RELIGION APPAREL, INC
university of oregon investment group
http://uoig.uoregon.edu
jackets, sweats, shorts, skirts, sunglasses, bags and shoes. True Religion operates in four segments: US Wholesale,
International, Consumer Direct and Other, which includes licensing activity.
BUSINESS SEGMENTS
Consumer Direct:
The Consumer Direct segment consists of US branded retail stores and e-commerce sales. True Religion currently
has 89 stores open in the US, with eight of those opening during the third quarter. They expect to open six more
during the fourth quarter 2010. The branded retail stores offer a full range of branded merchandise, in an
environment that emphasizes the “Malibu hippy-bohemian chic” image of which True Religion bases its brand. Ecommerce sales are made through a third-party who receives sales commissions off of the merchandise in exchange
for operating the website. They hold merchandise on consignment and fulfill customer orders through this inventory.
Consumer Direct is the biggest segment for True Religion, contributing about 50% of their total net sales, according
to the Q3 earnings report.
U.S. Wholesale:
The U.S. Wholesale segment sells True Religion Brand Jeans products to leading nationwide premium stores, specialty
retailers and boutiques throughout the U.S. Stores where these products are sold include Bloomingdale’s, Neiman
Marcus, Nordstrom and Saks Fifth Avenue. They are also sold in approximately 800 specialty retailers and boutiques.
The wholesale segment also sells excess merchandise to off-price retailers, but they are currently in the process of
reducing this sale to the off-price channel to maintain the brand’s premium positioning image. The U.S. Wholesale
segment accounts for approximately 29% of net sales.
International:
True Religion’s International Segment makes up about 19.4% of total sales. This is the segment in which the
management of the company sees extreme room for growth. True Religion Brand Jeans apparel can be found across
six continents, sold in major cities throughout Africa, Asia, Australia, Europe, the Middle East, North America and
South America. The company has offices in Japan and Hong Kong, where their focus is to keep expanding the brand
throughout this region. This year, full-priced retail stores have been opened in London, England and Tokyo Japan.
During Q4, True Religion plans to open a location in Toronto, Canada. During the Q3 conference call, management
discussed a business model that will be released in full detail in February 2011 for expanding the International
segment.
Licensing Business:
This business segment consists of royalties received through licenses that are contracted out for merchandise
including footwear, fragrances, headwear and swimwear. The brand name and logo is selectively licensed to be
included on products sold by other companies. The license recipients obtain the right to design, manufacture and sell
at wholesale, specified categories of products under trademark. Everything must be approved before it is available for
sale. The most recent 10-Q states that True Religion’s licensing business accounts for 1.6% of net revenue.
BUSINESS AND GROWTH STRATEGIES
2
True Religion Apparel, Inc. plans to grow by implementing many strategies. These include continuing to develop
trend-setting styles, growing the Consumer Direct segment, increasing international presence, improving the
wholesale business and reducing sales to wholesale off-price channels. They have expanded their product line
offerings and added completely new products, so they are able to offer a more complete collection to the customer.
The consumer direct business has grown rapidly since 2005 when True Religion opened its first branded store in the
US. By the end of 2010 the plan is to have 94 stores opened in the US. No plans for further stores being opened
have been discussed for years beyond 2010. The increased stores are expected to drive net sales growth and
profitability.
Increasing International presence: In 2008, True Religion established a company-owned business in Japan. Believe
that company-owned branded retail stores in key international markets will provide growth in future years. In 2009,
opened a regional office in Hong Kong and hired a general manager for the Asia Pacific region to continue
developing business in Japan, South Korea, Hong Kong and China. Branded retail stores have been opened in
London and Tokyo this year, and another is expected to open this quarter in Toronto, Canada. In the Q3 conference
call, there was talk of a plan being released in February 2011 focusing specifically on creating a business model for the
international segment.
True Religion plans to improve their wholesale business by identifying market opportunities and partnering closely
with wholesale customers. They expect to do this through the recent hire of a Chief Operating Officer. The
company also plans to reduce sales to the wholesale off-price channel, because they wish to maintain their premium
brand position. They will talk with the off-price customers and ask them to stop selling merchandise in locations
nearby premium shopping centers. Management plans to take control in Spring 2011 of the wholesale segment,
attempting to make the True Religion experience in wholesale stores more similar to the branded retail store
experience. They plan to do that with help of the vice president of US Wholesale sales, who has strong experience
directly managing floor space with other premium denim.
Management has briefly mentioned the development of a 5-year business plan, which will “allow us to focus and
invest in initiate that will drive our business in both the short and the long term”
MANAGEMENT AND EMPLOYEE RELATIONS
Chief Executive Officer – Jeffrey Lubell
Jeffrey Lubell founded True Religion in 2002, and has been CEO, Chairman of the Board of
Directors and Chief Merchant since 2003 when the company was incorporated. Lubell was also
the CEO of Guru Denim, the subsidiary company of True Religion. Before True Religion,
Lubell was Creative Director at multiple jean companies, and also was the President and CEO of
Jeffrey Lubell Textiles from 1978-1998.
President – Michael Egeck
Michael Egeck became President of True Religion Apparel, Inc. on June 4, 2010. Before coming
to True Religion, Egeck was President of VF Corporation’s Contemporary Brand Coalition as
well as CEO for Seven For All Mankind, a company recently acquired by VF Corporation. Egeck’s career with VF
Corporation began in 2000 as President of The North Face.
3
Chief Operation Officer – Lynne Koplin
Lynne Koplin became COO of True Religion on January 6, 2010. She has over 30 years in the apparel industry, most
recently serving as President of the Tommy Bahama women’s division.
True Religion Apparel, Inc.’s most recent announcement of employees was 1,238 as of December 31, 2009. Of these
1,238, 976 worked in retail stores, 138 in design and production, and 124 in general administrative.
PORTFOLIO HISTORY
Tall Firs Portfolio: Purchased 620 shares on 3/9/2010 @ $27.47/share for a total of $17,031.40.
Svigals Portfolio: Purchased 137 shares on 6/7/2010 @ $24.81/share for total of $3406.97.
RECENT NEWS
True Religion 3Q profit slips, outlook weak – Associated Press, November 3, 2010
“For the July to September period, True Religion reported net income of $11.8 million, or 48 cents
per share, down from a profit of $14.1 million, or 58 cents per share, in the same quarter a year
ago.”
True Religion’s 3rd quarter fell short of Wall Street’s expectations, not making the amount of revenue projected. This
may have had a great deal to do with the decline of the wholesale business. The company is rescaling its forecasts for
the year, predicting profit to be less than originally expected.
Show Me the Money, True Religion Apparel – The Motley Fool, October 25, 2010
“Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check
the cash flow statement. In general, by taking a close look at the cash moving in and out of the business, you can
better understand whether the last batch of earnings brought money into the company, or merely disguised a cash
gusher with a pretty headline.”
This article says that a company cannot be judged based on its earnings alone, but free cash flow should play a role as
well. Cash flow sources should be identified, to make sure it is coming from reliable and credible sources. In regards
to True Religion, the report states that 22.5% of True Religion’s operating cash flow comes from questionable
sources. Thus, investors should be weary and closely analyze the numbers.
True Religion Proselytizes U.S.: Best in Class – TheStreet, October 12, 2010
“Despite exorbitant cost, True Religion's products are growing in popularity. Since 2007, True Religion has grown
sales 32% annually, on average, as its stock returned 10% a year.”
4
This article states that despite the expensive price tag of the True Religion Brand, the company is thriving. It
references deals secured with department stores such as Nordstrom, Saks Fifth Avenue and Macy’s, and how this will
provide them with a secure backing and guaranteed sales. The company’s cash position is also mentioned, saying that
it can finance an expansion with cash and that its “escalating expansion and fat margins appeal to analysts.” The
article ends by saying that despite high unemployment and the start of holiday shopping should deter the purchase of
True Religion stock, discount valuation proves that it is a good investment.
INDUSTRY
True Religion Apparel operates in the textiles and apparel industry. Within this industry, they would be described as a
luxury goods provider. Although the economy has not been ideal for a company that bases its revenue off of jeans
priced between $172-$350, True Religion has managed to maintain an adequate income of revenue. True Religion’s
target market are people who are “fashion-conscious, affluent consumers who shop in our own branded retail stores,
premium nationwide stores, select boutiques and specialty stores, and who want to wear and be seen in the latest and
most fashionable premium jeans and related apparel.” Since this is their target market, True Religion is relying on the
notion that the economic state of the country is not affecting their sought after customers.
Though they have remained afloat through the economic downturn, True Religion could have the potential to gain
more revenue once the “pained but patient” consumers (in regards to spending in the economy) have some extra
disposable income. However, this may not be the case because once these people can spend more money on luxury
goods, they still have a very wide variety to choose from when it comes to premium goods/denim. The affect it could
possibly have on True Religion would be quite small in the big picture.
Once the economy is in full swing, there is also the possibility that consumers will be much more conscious about
what they spend their money on, and save move than in the past for fear of a recession occurring once again.
S.W.O.T. ANALYSIS
Strengths:



True Religion has a large amount of cash and little debt, they can finance expansion or have a cushion
for the future
True Religion has managed to stay afloat despite being a premium brand retailer during a recession
Offers numerous products and many different styles which broaden appeal to more consumers, while
still remaining a “unique” feel
Weaknesses:


Design team does not have ability to predict future trends, which could lead to merchandise going to
waste or having to be sold at lower costs
True Religion is one of the smaller premium denim brands, with less resources than some of its biggest
competitors
Opportunities:
5


Greater International expansion could unlock a great deal of revenue for the company
Expanding the Consumer Direct segment would lower costs because there would be no middleman,
like with the US Wholesale sales
Threats:



Styles of clothing change all the time without a great deal of explanation
Brands can expand/new brands emerge and True Religion does not have any power over the success
of others
Continued state of a depressed economy can affect consumer’s disposable income
PORTER’S 5 FORCES ANALYSIS
Supplier Power

Supplier power is medium, currently prices of cotton are high therefore the apparel industry will be affected
Barriers to Entry

Barriers of entry are relatively low, with the right business plan and support the apparel industry is easily
penetrated
Buyer Power

Buyer power is high because the amount of disposable income allocated to premium denim goods is going to be
lower than it has been in the past.
Threat of Substitutes

Threat of substitutes is very high because there are countless designer companies that are all vying after the same
target market as True Religion. Other premium denim companies are not only substitutes, but less expensive
pairs of denim as well, since consumers are not able to spend as much disposable income on fashion denim.
Degree of Rivalry

The degree of rivalry is quite competitive for this company, they are constantly needing to stay with the trends
and other competitors.
COMPARABLES ANALYSIS
True Religion competes with many different premium denim brands, including 7 for All Mankind, Citizens of
Humanity, J Brand, Paige Denim, Rock & Republic, AG Jeans, Lucky Brand Denim, Joe’s Jeans and countless others.
Unfortunately, most of these are privately held companies or parts of larger corporations. The only comparable
found based on the fact that selling premium denim is its main revenue source was Joe’s Jeans. Other companies
6
explored were ones that offered similar products to True Religion, not only in the apparel sense but also that they
were high end goods, and had similar capital structures. The second part proved to be difficult because True Religion
has barely any long term debt and a very strong cash position. True Religion is also a very small company, many of
my comparables are a great deal larger. The comparable companies I ended up with were Joe’s Jeans (JOEZ),
Abercrombie & Fitch (ANF), Liz Claiborne, Inc. (LIZ), VF Corporation (VFC) and Coach, Inc. (COH).
Joe’s Jeans (25%)
“Joe's Jeans Inc. engages in the design, development, and
marketing of apparel products worldwide. Its product line
comprises women's, men's, and children's denim jeans,
pants, shirts, sweaters, jackets, and other apparel products
under the Joe's brand. The company also offers handbags,
clutches, belts, and small leather goods under a license agreement. It sells its products to various retailers, including
department stores, specialty stores, and distributors, as well as through its retail stores.” I chose Joe’s as a comparable
because they are the most similar in overall business model to True Religion. I weighted them 25% for this reason
also. One of the major differences between True Religion and Joe’s is that Joe’s has not made an attempt to expand
its branded retail store business, where true religion is taking great strides to do so.
Abercrombie & Fitch (20%)
“Abercrombie & Fitch Co., through its subsidiaries, operates as a specialty
retailer of casual apparel for men, women, and kids. The company sells casual
sportswear apparel, including knit and woven shirts, graphic t-shirts, fleece, jeans
and woven pants, shorts, sweaters, outerwear, personal care products, and
accessories under the Abercrombie & Fitch, abercrombie kids, and Hollister
brands. It also offers bras, underwear, sleepwear, and at-home products for
women under the Gilly Hicks brand. The company sells products through its
stores; direct-to-consumer operations; and Websites, which include
abercrombie.com, abercrombiekids.com, hollisterco.com, and gillyhicks.com. As
of January 30, 2010, it operated 1,096 stores in North America, Europe, and
Asia.” I chose Abercrombie because it has a similar business structure to True
Religion, though not quite the same. Abercrombie operates mostly out of its retail stores and internationally, while
True Religion does still have a stake in the US Wholesale business. I weighted this company 20% because of the
similarities.
Liz Claiborne, Inc. (10%)
“Liz Claiborne, Inc. engages in the design and marketing of a range
of apparel and accessories worldwide. It offers men’s, women’s,
and children’s contemporary apparel, denim and casual sportswear,
fashion apparel, business-casual apparel, career sportswear, intimate
apparel, activewear, and jeans. The company also provides various
accessories, including jewelry and handbags.” Liz Claiborne is the owner of some of
True Religion’s main competitors, including Juicy Couture, and Lucky Brand. I chose
7
the company because they have similar product lines, but only gave them a weighting of 10% because they are such a
large corporation with a very different capital structure.
VF Corporation (10%)
“V.F. Corporation, together with its subsidiaries, engages in the design, manufacture, and sourcing of branded apparel
and related products for men, women, and children in the United States. It sells its products through specialty stores,
department stores, national chains, and mass merchants, as well as through licensees and distributors.” VF
Corporation is another large company with different business structure as it is the owner of over 18 different brands.
Some of the brands that were similar to True Religion were 7 for All Mankind, Ella Moss, and Splendid. The
companies are in much different positions so this is why this company is weighted at 10% as well.
Coach, Inc. (25%)
“Coach, Inc. engages in the design and marketing of accessories and gifts
for men and women in the United States and internationally. The
company sells its products through company-operated stores; the Internet;
and the Coach catalog, as well as through wholesale department stores and
specialty stores.” Because Coach, Inc. operates in the same premium
goods category as True Religion and has a similar business structure, I
gave them a weighting of 25%. They are a vastly larger company than
True Religion though, which was a downside to this weighting.
Valuation Multiples
The valuation multiples I used were EV/Revenue, EV/Gross Profit, EV/EBITDA, EV/Free Cash Flow. I
weighted them all 25% because I felt that they all represented important aspects of the valuation. EV/Revenue shows
how a company is doing in producing revenue relative to their size. This was important since True Religion is so
much smaller than many of the comparables. EV/Gross Profit shows how the company operates in producing
profits compared to other companies. EV/EBITDA gives a sense of how well the company can turn revenues into
profits. EV/FCF measures the company’s ability to generate cash after it has accounted for all other costs
DISCOUNTED CASH FLOW ANALYSIS
To calculate my DCF, I used the percent of revenue method. Using this, I estimated revenues and ultimately got to
the Free Cash Flow. I discounted this amount to find the Present Value of the company, and from there I got the
implied stock price.
Beta
I derived my final beta by regressing it against the S&P 500 monthly for 5 years. I believe it is reasonable because it is
the same range as the comparables I weighted the highest. The two large corporations I have as comparables have
betas on opposite ends of the spectrum, one is much lower than True Religion’s beta, and one is much higher. I
believe mine falls right in the middle. I also ran a Vasicek beta and got 1.05. I felt this was much too low for my
company.
8
Revenues
To project revenues, I split the segments up so I could more easily estimate the growth that each different segment
would incur over the ten-year estimate.
In recent years, revenues have grown largely in part to opening of True Religion branded retail stores and through
international expansion. I kept these two segments increasing in growth because I believe they will be the main
drivers for the company in the future. Although both of these segments have grown substantially in the most recent
years, I believe the amount of growth will decrease overall, but stay at a relatively high amount through 2015. The
reason for this is that there has been talk of a 5-year business plan to keep the company performing well.
I projected the US wholesales segment to decrease in size and overall contribution to total revenue over the years.
Although True Religion says that they are working hard to keep their wholesale business alive, they see more potential
in their consumer direct and international segments, thus they will focus more on expanding them than putting effort
into the wholesale.
The Licensing business is a very small part of total revenue and there was no mention of a plan to expand licensed
merchandise after their last add-on in the beginning of 2010, so I trended it to stay about the same % of total revenue
each year.
Cost of Revenue
I projected the cost of revenues to decrease slightly, but not by much. I believe that the switch from US Wholesale
based revenue to Consumer Direct/International will lead to the decrease in this cost. The International segment
could affect the cost of sales, but the company has distribution centers and foreign offices in Europe and Asia, so this
will keep the costs lower.
Selling, General & Administrative
SG&A increased significantly from 2009 to 2010 because of the hire of a Chief Operating Officer, a US Wholesales
team and an international sales team. After this spike, I projected SG&A to decrease over the years, but remain
higher than it has been in the past because of expenses that come with hiring new employees, especially in the
international segment.
Depreciation and Amortization
D&A is projected to increase and stay higher than it has been in the past due to more branded retail stores. Though
the stores are leased, the company states in its most recent 10K that depreciation expenses are listed for items such as
computer systems, trade booths, furniture, fixtures, machinery & equipment, and leasehold improvements. The D&A
is also trended to be less than but close to capital expenditures.
Tax Rate
The tax rate in recent years has steadily decreased for the most part except for a large jump in 2007. This was due to
the fact that there was a larger portion of executive compensation being distributed, which was nondeductible. Since
then, they have lowered this amount and the tax rate has steadily come down as well. I forecasted the tax rate to stay
at 36% because of the company’s international segment, which could cause it to stay at a bit higher rate than the
average.
9
Capital Expenditures
Cap Ex is projected to increase over the next few years and then trend back down to around where they were before
the Consumer Direct segment started growing at a substantial rate. 2010 Q4 capital expenditure is projected to be
quite high because of six new stores being built during the quarter.
RECOMMENDATION
True Religion Apparel, Inc. is a company that has seen huge margins of growth in the past and will continue to see
growth, but not on the grand scale it once was. They have no talk of solid expansion plans or plans to build more
stores, as they have had in the past. Based on my comparables and discounted cash flows analysis, I came to an
implied price of $19.75. I weighted the comparables at 33% and my DCF at 67%. The reason for this was because of
the difficulty in finding comparables that when put together, made up my company as a whole. This implied price
states that True Religion is undervalued at 2.14%, as it’s current price is $19.33. My recommendation is a SELL for
Tall Firs and Svigals’ Portfolio.
10
APPENDIX 1 – COMPARABLES ANALYSIS
11
APPENDIX 2 – DISCOUNTED CASH FLOWS ANALYSIS
12
APPENDIX 3 – DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS
APPENDIX 4 – BETA SENSITIVITY ANALYSIS
13
APPENDIX 5 – REVENUE MODEL
14
APPENDIX 6 – SOURCES






Yahoo! Finance
FactSet
True Religion/all Comparables 10Ks and 10Qs
Seeking Alpha
The Motley Fool
Associated Press
15

true religion apparel, inc. - University of Oregon Investment Group

Transcription

Similar documents

Untitled

How To Complete This Form Printed Apparel for Work

EILEEN FISHER Business as a Movement

"Herb" Philipson`s Employee Discount Flyer 2014

Sept. 2014 - Present

Textiles Opico SA de CV

Saturday, Sept. 12, 2015 6:00 pm La Maison

TrueFit