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Needham Nov 4 BUY - November 4 2010 Christine Chen...

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November 4, 2010 Christine Chen [email protected] 415-262-4877 Paula Torch [email protected] 415-262-4869 Retail Apparel / Consumer True Religion Apparel, Inc. (TRLG) – Buy TRLG: Reiterate Buy but Lowering PT to $23, Down from $31 After F3Q Disappoints & FY10 EPS Guidance Lowered Due to Headwinds from US Wholesale & Int’l Transitions. TRLG is well-positioned for continued growth in Int’l wholesale and retail, which is far from reaching saturation in the U.S. market with only 81 stores. The retail channel is driving sales growth, has higher margins, enables TRLG to better control pricing and is now 49.9% of sales vs. 39.6% LY. Long term, we expect TRLG to become more of a retailer than a wholesaler. TRLG is one of the top brand names in premium denim offering highly differentiated fashion denim with an aspirational lifestyle image. Thus, TRLG is one of the few brands offering compelling merchandise to customers and getting Full Price for it. Despite a weaker consumer environment, we believe that TRLG will continue to experience strong sales momentum and build market share. At ~9x our FY11 EPS estimate of $2.09 (7x excluding ~$5 in cash), TRLG is trading significantly below the sector average of ~15x and at a discount to its conservative long term organic growth rate of about 10% to 15%. Therefore, we believe fair market value of TRLG is at least 11x our FY11 EPS estimate of $2.09, or about $23 a share and reiterate our Buy rating. TRLG reported F3Q EPS of $0.48 vs. $0.58 Y/Y, missing our estimate, consensus, and guidance of Flattish by 10 cents. F3Q revenues grew +12.5% to $92.8 M vs. $82.4M LY, slightly below our estimate and consensus of $94 million, driven primarily by growth in the retail segment (with SSS up +9.0%). Excluding the $0.11 severance charge, TRLG lowered its FY10 EPS guidance to $1.84 to $1.89 vs. $1.92 LY, down from $1.99 to $2.09. TRLG slightly lowered FY10 revenue guidance range to $355 to $360MM, or 14% to 16% growth vs. $311MM LY, down from $360MM. We are lowering our F4Q and FY10 EPS estimates to $0.62 and $1.86, respectively, down from $0.75 and $2.09. We are lowering our F2Q, F3Q, F4Q, and FY11 EPS estimates to $0.49, $0.50, $0.69, and $2.09 respectively, down from $0.50, $0.66, $0.85, and $2.42. EPS & Price Target Change Price (11/03/10) $20.13 12-Month Price Target $23.00 52-Week range $33.11-17.54 Shares Out. (MM) 24.7 Market cap (MM) $498.1 Avg. daily volume (000) 412.8 Financial Data Total Debt/Cap. 0.0% Price/LTM Rev. 1.4x Tangible BVPS $9.34 Net Cash Per Share $5.16 Market Data True Religion is a premium denim lifestyle brand selling jeans, sportswear, and various licensed products for Men, Women, and Children. The company designs, manufactures, and distributes its premium denim and sportswear. True Religion denim and apparel are distributed domestically and internationally through premium department stores, specialty boutiques, 65 Full Price and 24 Factory stores. True Religion Apparel, Inc. Price 11/03/10 16 18 20 22 24 26 28 30 32 34 Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Volume (000) 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov FY FY FY 12/31/09 A 12/31/10 E 12/31/11 E Old New Old New Rev. (MM) $311.0 $368.7 $353.0 $418.0 $400.5 Growth 15.2% 18.5% 13.5% 13.4% 13.4% Op. Mar.
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