The hottest stock in retail today is undoubtedly Lululemon (Nasdaq:LULU), whose share price is ready to vault into triple digits. I've written extensively about the company and while I don't agree with its valuation, you can't argue with its success. Sometimes, investors are willing to throw the rulebook out the window and that's OK, because it gives a great comparative for making a case for True Religion (Nasdaq:TRLG) instead. Here are three reasons why I think this stock will outshine Lululemon some day soon. (To analyze retail stocks, investors need to be aware of the most common metrics used as well as the company-specific and macroeconomic factors. See Analyzing Retail Stocks.)
Tutorial: An Introduction To Fundamental Analysis

True Religion's Financials
For me, investing is always about relativity. In the trailing 12 months, True Religion's revenues were $364 million, compared to $712 million for Lululemon. Based on sales alone, common sense suggests that investors will pay the same amount for $1 in revenue. Not so. In this instance, True Religion investors will pay $1.85 per dollar in revenue while Lululemon investors are willing to pay $9.20, or 5.4 times as much. Supporters of the yoga brand will counter that P/S is heavily influenced by earnings, so let's look at profitability. In the trailing 12 months, Lululemon made $180 million in operating income compared to $70 million for True Religion. Therefore, I'd reason this justifies a price-to-sales multiple 2.5 times that of True Religion, or a share price of $43.17, although its current prices is about 1.5 times higher. I can already hear the LULU fanatics crying foul. If I'm wrong and the LULU valuation is reasonable, then an equally strong argument can be made by both groups that True Religion's valuation is woefully low. So the million-dollar question is: Just how low is it?

Consolidation Continues at TRLG
More than a year ago, I wrote about how the denim market was consolidating. Since then, Rock and Republic went bankrupt and was picked up in March for $57 million by VF (NYSE:VFC); it should do nicely alongside its other premium brand, 7 For All Mankind. This is only the beginning in my estimation. There are too many brands chasing business in a fickle market once big on skinny jeans and now moving back toward bell bottoms. Only the strongest businesses will survive this many gyrations, and this puts True Religion in a wonderful position.

Lucky Brand Jeans, part of Liz Claiborne (NYSE:LIZ), is struggling to find its way despite bringing in a new CEO (in 2010) with stints at Williams-Sonoma (NYSE:WSM) and Gap (NYSE:GPS) on his resume. Lucky finished 2010 with revenues of $387 million, 12% less than in 2009. Same-store sales and sales per square foot declined by 13.5% and 13.3% respectively. Liz Claiborne will tell you it was a period of retrenchment and that's OK except that this turnaround is in its sixth year. Lucky should be sold before it becomes irrelevant or worse, dead and buried. True Religion, on the other hand, saw revenues increase by 16.9% in 2010, and more importantly, same-store sales at its own retail stores increased 9.6%. As the potential that other jean makers will fade away increases, companies such as True Religion and VF stand to benefit the most.

Cash Position
Motley Fool contributor Sean Williams makes the argument that True Religion's cash position relative to debt is better than many of its peers. This can be attributed to the company's strong gross margins and excellent inventory management. According to Williams, TRLG's retail inventory per square foot increased 1% in 2010 compared to a 9.6% increase in same-store sales. That's outstanding. By comparison, Lululemon's retail inventory per square foot increased 8.9% in 2010 with a 37% same-store sales increase. To put this in perspective, LULU's same-store sales would have needed to grow something like 85% in 2010 to equal True Religion's inventory management. In addition, this past year saw revenues for True Religion's direct-to-consumer segment surpass those of its wholesale segment for the first time ever. With 72.4% gross margins in the direct-to-consumer segment, cash is going to accumulate even faster than it already has. Unless it hits a hiccup, there's little evidence that TRLG will ever need to take on any substantial debt loads - and that's always a good thing.

The Bottom Line
The denim market hit a bit of a lull in 2010, but it appears to be doing well so far in 2011. By year's end, I see True Religion's stock price testing its 52-week high of $34.17.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  7. Stock Analysis

    Analyzing Porter's Five Forces on Under Armour (UA)

    Learn about Under Armour and how it differentiates itself in the competitive athletic apparel industry in light of the Porter's Five Forces Model.
  8. Stock Analysis

    The Biggest Risks of Investing in Qualcomm Stock (QCOM, BRCM)

    Understand the long-term fundamental risks related to investing in Qualcomm stock, and how financial ratios also play into the investment consideration.
  9. Stock Analysis

    The Biggest Risks of Investing in Johnson & Johnson Stock (JNJ)

    Learn the largest risks to investing in Johnson & Johnson through fundamental analysis and other potential risks. Also discover how JNJ compares to its peers.
  10. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  1. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  2. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  3. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  4. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  5. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
  6. What is the formula for calculating earnings per share (EPS)?

    Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, ... Read Full Answer >>
Trading Center