One of the premium denim pioneers, True Religion Apparel Inc., says there might be a true believer out there who would buy it for a premium price.
The Vernon-based jeans maker announced last week that its board had formed a special committee to explore strategic options, including a sale of the company. The move came in response to inquiries from potential buyers.
Analysts estimate True Religion could sell for about $650 million to $930 million.
Shares of the company quickly spiked Oct. 10 to close at $25.71, a gain of 24 percent for the week. The company was the second biggest gainer on the LABJ Stock Index. (See page 30.)
Founded in 2002, True Religion became a trend setter in distressed and frayed denim jeans. The company originally made and sold jeans in department stores that sold for around $200. In 2005, it expanded by opening brand-name stores; the company now has 116 stores in the United States and 23 in foreign countries.
Ilse Metchek, president of the California Fashion Association in downtown Los Angeles, said the company stands out from the crowd of jeans makers, including local players such as Citizens of Humanity in Huntington Park, Joe’s Jeans in Commerce and Paige Premium LLC in Los Angeles, thanks to its stores. Its brand recognition and stores might make the company an attractive takeover target.
“It’s very rare for a manufacturing brand to become a major retailer,” Metchek said. “At this point, their worth is based on real estate and the brand. They have done a fabulous job building a brand and today it’s all about brand rather than product.”
Paul Zaffaroni, an investment banker who specializes in apparel at Roth Capital Partners in Newport Beach, said possible strategic buyers for True Religion include fashion houses such as Warnaco in New York or conglomerate PPR in Paris. Alternately, a private-equity firm with experience in apparel could buy the company.
For any buyer, the challenge is to improve operational efficiency and grow the company by moving beyond denim into other types of clothing, following the model set by Guess Inc., another L.A. company that started in jeans but now sells a range of apparel and accessories.
“The opportunity is to further their development from a denim brand to a lifestyle brand, which will include international expansion,” Zaffaroni said. “A lot of these premium denim companies have shown good growth and have been attractive investments. As they evolve, the goal is to extend their brand into other categories of apparel.”
Edward Yruma, an analyst at KeyBanc in New York, takes a more pessimistic viewpoint. He said in a note to investors Oct. 10 that True Religion has made some mistakes this year and believes the brand has lost its appeal to consumers because of its high price. He gives the stock a “hold” rating.
“True Religion has all of the hallmarks of a fad,” the note stated. “It enjoyed its heyday, overexpanded and lost its core customer. We note that the premium denim market has a highly fickle consumer and that True Religion’s ubiquity may have dampened its desirability.”
Yruma cited a timing issue as well. His noted stated that Chief Executive Jeffrey Lubell’s employment agreement ends next year “and we view his participation as vital to any proposed transaction.”
Diana Katz, an analyst at Lazard Capital Markets in New York, wrote in a note to investors Oct. 10 that a sale could help True Religion stage a revival with an expanded consumer base.
“A significant issue that True Religion faces is that its customer is predominantly a male ‘urban’ customer,” the note stated. “The fear is that when the brand is no longer hot the customer will move onto the next label.”
Katz noted that Tommy Hilfiger, a brand once exclusively for young males, has avoided this peril by broadening its appeal to other groups.
“Someone with the right marketing muscle and experience could reposition the True Religion brand over time and restore it to historical mid-20 percent operating margins,” she wrote.
Since True Religion came on the scene with its high-price distressed jeans a decade ago, competitors have joined the market at lower price points. While True Religion still sells jeans between $200 and $350, Paige Premium sells luxury jeans between $140 and $170, for example.
Guidance issues
Prior to the announcement of the potential sale, True Religion’s stock had slumped 39 percent since the beginning of the year, despite consistent profitability and growth.
For the second quarter, the company reported net income of $9.8 million, up 4.3 percent from the same quarter the previous year. Revenue was $105 million, an increase of 6.8 percent.
A spokeswoman for True Religion declined to comment for this story.
The company’s stock declines stemmed from guidance downgrades. In February, it issued guidance for 2012 revenue of $450 million to $460 million, far below analyst average expectations of $494 million. The stock price immediately fell more than 25 percent.
In July, the company estimated annual earnings per share for 2012 between $1.80 and $1.86, down from earlier guidance of $1.88 to $1.95.
Dorothy Lakner, an analyst at Caris & Co. in New York, calls the guidance missteps self-inflicted wounds that don’t reflect True Religion’s core strength.
“We’ve remained believers in the long-term growth story of True Religion,” she wrote in a note to investors Oct. 10, after the sale was announced. “The possibility of a sale, likely we think at a much higher price, may bring more believers into the True Religion fold.”
Lakner calculated the value of the company at $36.51 a share. A report from Citigroup estimated the buyout price for the company between $32 and $35 per share.
Katz at Lazard put the buyout price between $26 and $37 per share. However, “given the issues surrounding the premium denim industry as well as the demographic shift that True Religion has encountered, it is more likely to receive a bid at the lower end of the range,” she said.
California Fashion Association’s Metchek said if True Religion sells for a premium price, it could encourage other L.A.-based denim brands to pursue a retail strategy in hopes of increasing their company value.
The company’s special committee has not set a timetable for reviewing its options, and it made no guarantee of an eventual sale.
But whatever the outcome, Metchek said True Religion should stay in Los Angeles.
“If you try to move denim from Los Angeles, you lose the very thing that made it successful,” she said. “We have the finishing companies and we have Hollywood, which sets the standard in denim fashion. If the owners try to move True Religion, it’s not a smart move.”
