Bloomberg News

True Religion Owners Seen Praying for Deal Erasing Loss

October 17, 2012

True Religion Owners Seen Praying for Bid Erasing Loss: Real M&A

True Religion Apparel Inc. was founded a decade ago by Chief Executive Officer Jeffrey Lubell, who began embellishing jeans as a teen growing up in New York. Photographer: Konrad Fiedler/Bloomberg

True Religion Apparel Inc. (TRLG:US), the maker of designer jeans worn by celebrities from Megan Fox to Angelina Jolie, stands to recover the 39 percent it cost shareholders this year by selling itself.

As True Religion evaluates options, including a sale, Citigroup Inc. says the retailer could draw as much as $35 a share in a takeover, 34 percent more than yesterday’s close and 42 cents above the stock’s level at the end of 2011. That would be a boon for investors after the company’s valuation relative to profit fell to a two-year low. The maker of $300 jeans has received interest from private-equity firms and other apparel companies, a person familiar with the matter said last week.

“It’s both an attractive LBO candidate and strategic acquisition candidate,” Jason Ronovech, an Albany, New York- based money manager for Paradigm Capital Management Inc., which oversees about $2 billion including True Religion shares, said in a telephone interview. “The stock this year had underperformed. Fashion in denim is a finicky type of end market to be in. But it’s a very strong brand. The balance sheet is very liquid.”

As analysts project a slowdown in sales growth after revenue rose four times more than the peer average since 2007, True Religion may be bought by Warnaco Group Inc. or another apparel company with the strength to rejuvenate the business, Citigroup said. True Religion also has no debt and almost twice as much cash versus equity as similar-sized U.S. clothing companies and specialty apparel retailers, according to data compiled by Bloomberg. Even after last week’s 24 percent gain, the company trades at 5.6 times earnings before interest, taxes, depreciation and amortization, less than 83 percent of the group, the data show.

Embellishing Jeans

True Religion was founded a decade ago by Chief Executive Officer Jeffrey Lubell, who began embellishing jeans as a teen growing up in New York. The company said on Oct. 10 that it formed a special committee to consider options after receiving interest from third parties about a possible transaction.

A spokeswoman for Vernon, California-based True Religion declined to comment beyond last week’s statement.

The company has a small overseas presence and little online retail activity, and a buyer with those capabilities would help, said the person familiar with the matter, who asked not to be named because the talks aren’t public.

While True Religion shares surged the most in more than three years on Oct. 10, the stock closed at $26.10 yesterday. That’s lower (TRLG:US) than this year’s peak of $37.29 from February and the end-of-December level of $34.58. The company, which has a market value of $673 million, had rallied three straight years before declining in 2012.

Slowing Growth

Today, True Religion shares rose 3 cents to $26.13 at 10:58 a.m. in New York.

True Religion’s revenue increased 142 percent from 2007 through last year, versus the average increase of about 34 percent for U.S. clothing companies and specialty apparel chains with market capitalizations larger than $100 million, data compiled by Bloomberg show. Now, growth is slowing as True Religion loses female customers because it maintained higher prices than rivals such as VF Corp. (VFC:US)’s 7 For All Mankind label.

“Investors had once believed that $300 jeans were here to stay,” Jeff Burchell, a Toronto-based money manager at Aston Hill Financial Inc., which manages about C$6 billion ($6.1 billion), said in a phone interview. “But the whole premium denim fad has sort of faded a bit. True Religion was known for very recognizable, flashy designs. The trend went against them and they haven’t really recovered from that.”

Worst Pace

Sales at True Religion will climb at the slowest annual pace ever in 2012 and 2013, expanding about 8 percent in both years, according to analyst estimates compiled by Bloomberg. Profitability has also dwindled. True Religion earned (TRLG:US) less than 18 cents in operating profit on each dollar of sales last year for the worst margin since 2003, when it posted a loss, data compiled by Bloomberg show.

The deceleration in True Religion’s business is weighing on the company’s shares, which had surged 178 percent from 2008 through 2011. They’re down 25 percent in 2012, and on Aug. 2, the company’s enterprise value was 4.08 times True Religion’s Ebitda, the lowest multiple since August 2010, data compiled by Bloomberg show.

The decline has left True Religion vulnerable to an acquisition, according to Dorothy Lakner, a New York-based analyst at Caris & Co.

Brand Restoration

“The stock had gotten to a point at which maybe both private-equity and strategic buyers became interested, much more so than they would have been when the stock was almost twice as high,” Lakner said in a phone interview. “Just from that perspective, all of a sudden it becomes much more attractive as a takeover candidate.”

Warnaco (WRC:US) and other strategic buyers may see an opportunity to restore the brand in the U.S. and boost its allure internationally, said Susan Anderson, a New York-based analyst at Citigroup.

Warnaco licenses the Calvin Klein Jeans brand from PVH Corp. (PVH:US), which bought Calvin Klein’s company from the designer in 2003. True Religion could now fill a hole for Warnaco after PVH said in March that it will reacquire the Calvin Klein Europe license, Anderson said.

Deborah Abraham, a spokeswoman for New York-based Warnaco, said the company doesn’t comment on speculation, when asked whether it’s interested in acquiring True Religion.

Baby Phat

True Religion may also be a logical target for closely held Kellwood Co., a Chesterfield, Missouri-based company that designs and markets a collection of apparel brands such as Baby Phat and XOXO, because it doesn’t have a premium denim line, Anderson said. Kellwood is currently owned by Boca Raton, Florida-based private-equity firm Sun Capital Partners Inc., which took it private in 2008.

Erin Haggerty, a spokeswoman for Kellwood, didn’t return a phone call or e-mail seeking comment. Chuck Dianis, a spokesman for Sun Capital who works at Stanton Public Relations & Marketing, said the firm declined to comment on whether it is interested in buying True Religion or has approached the company about a deal.

True Religion’s balance sheet also likely appeals to private-equity firms, Caris’s Lakner said. Cash and short-term investments amount to $6.22 a share, or 24 percent of the company’s market capitalization. That proportion is almost twice the industry average of 13 percent, according to data compiled by Bloomberg. True Religion also has no long-term debt.

Managing Stores

“Most companies that are in retail generate a lot of cash, and usually more than they need,” Lakner said. “That’s certainly the case here.”

The biggest challenge True Religion faces should it seek a buyer may be finding a company that wants to both manage the brand and run the stores, said Aston Hill’s Burchell. Companies that manage portfolios of clothing lines typically market and distribute the products to department stores and other shops, rather than operate retail outlets themselves, he said. True Religion operates 139 stores (TRLG:US).

“You’re not just buying the True Religion brand; you’re buying the stores, too,” Burchell said. “If it’s going to be taken out, it’s going to be a very unique buyer, which limits the list of people that would potentially bid. I just don’t see it.”

The last takeover of a publicly traded premium denim company was VF’s $775 million acquisition of 7 For All Mankind in 2007. Citigroup’s Anderson said that valued the jeans maker at about 9 times Ebitda.

Ebitda Multiple

True Religion won’t fetch a multiple that high because VF closed its transaction when “the premium denim market was a lot more attractive,” she said.

Still, a buyer could pay 6 to 7 times her estimate for True Religion’s Ebitda during the next 12 months, which implies a price of $32 to $35 a share, Anderson said. In the last four years, acquirers of U.S. apparel chains have paid a median of 8.4 times trailing 12-month Ebitda, data compiled by Bloomberg show.

Lazard Capital Markets LLC analyst Diana Katz estimates a takeover price up to almost $37 using valuation multiples from other retail deals, she wrote in a note to clients Oct. 10. Paradigm Capital’s Ronovech and Caris’s Lakner said that a fair takeover offer would be in the $30 range.

“It has been cheap for awhile,” Citigroup’s Anderson said. “A lot of investors have wanted to like it, including me, but it has been tough because of their issues,” the analyst added. “With obviously no debt and all this cash, a buyer could come in and lever it up, turn it around and continue to drive the business.”

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net


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