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Caris Nov 4 Buy - Consumer Specialty Retail Ratings Change...

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Dorothy Lakner (917) 464-1564 [email protected] Caris & Company 500 Fifth Ave. Suite 1640 New York, NY 10110 FINRA SIPC For full disclosure, please see end of report 1 C o n s u m e r : S p e c i a l t y R e t a i l Ratings Change True Religion (TRLG: $20.13) 2*/Above Average Thursday, November 04, 2010 Price Target: Old-$40; New-$30 MARKET DATA 52 Week Range ADT - 3 month Market Cap (Bill) Shares Out Float EARNINGS DATA Earnings Per Share (FD Operating) FY-Dec FY09A FY10E FY11E 1Q $0.32 $0.34 NA 2Q $0.45 $0.42 NA 3Q $0.58 $0.48 NA 4Q $0.59 $0.66 NA FY * $1.92 $1.88 $2.32 Prior EPS $2.10 $2.54 EV/EBITDA 3.1x 3.8x 2.7x P/E 10.5x 10.7x 8.7x FINANCIAL DATA FY FY09A FY10E FY11E Sales $311 $359 $421 EBITDA $125 $103 $141 EBITDA % 40.2% 28.5% 33.5% EBIT% 25.0% 20.8% 22.2% ROA 23.7% 19.6% NA ROE 27.8% 22.5% NA Debt/Capital 0.0% 0.0% 0.0% BV/Share $8.02 $8.84 NA BALANCE SHEET 3Q10A Cash & Equivalents $128 Accounts Receivable $27 Inventory $52 Current Assets $224 PPE $46 Goodwill $0 Total Assets $273 Current Liabilities $27 Total Debt $0 Total Liabilities $40 Shareholders Equity $231 Financial data in millions unless otherwise stated 25.5 23.7 $17.30-$34.17 437,046 $0.51 TRLG 3Q Shakes Our Faith, But We Remain A Believer; Lowering Ests on Lower Guidance, Rating to 2*/Above Average, PT Lowered to $30 Summary and Recommendation TRLG missed our and Street estimates in 3Q, on slightly lower sales but a big decline in gross margin, in part due to continued softness in its dept. store business but also due to structural changes the company is making to its international business where sales missed our estimate as well. That said, its consumer direct sales were better than we expected, with expectations that comps can be positive in 4Q against a very tough comparison. In addition, its boutiques business also continued positive, providing another sign that its product and brand are working with its key customers. TRLG still has the most square footage growth of any company we cover, and targets more affluent consumers who still have money to spend and continues to demonstrate that they are willing to spend in TRLG’s stores and high-fashion boutiques. While we are trimming our rating from 1*/Buy to 2*/Above Average on the miss and our lower estimates, TRLG shares remain very cheap at ~8X even our new 2011 estimate and boasts $5.16 in cash. PT lowered to $30 from $40 based on a 13X our 2011 estimate of $2.30, below its 2-year high of 13.7X and well below its 5-year peak of ~20X. Risks to our PT include fashion risk, deterioration in consumer spending and international risks. 3Q10 Another Miss. EPS was $0.48 vs. $0.58 LY, below our $0.60 and Street’s $0.58. Sales of $92.8M (+12.5%) were below our $95.4M estimate and consensus of $94.M. GM down 260 bps to 62.1% (we expected flattish at 64.9%) due to sell-through of higher cost merchandise in the new German joint venture, increased outlet store sales as TRLG cleared out older inventory, and lower IMU on some women’s jeans to match competitor pricing. Inventory +36.3%, but 75% of increase due to growth in retail stores, with inventory per sq. ft.
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