Can True Religion Be Saved?

No matter how much the Great Recession got us down, those of us in the trenches could cheer ourselves with the knowledge that the tony set was keeping itself elbow-deep in posh gloves and brocade satchels. The luxury retail market was one of the few sectors that actually gained during the recession, despite having raised prices. Such was the case with True Religion Apparel (NAS: TRLG) , which was up until its Q4 earnings report, when it started to fall apart at the seams. The company managed to turn in earnings and revenue numbers that missed analysts' predictions by $0.09 and $9 million, respectively. That's quite an accomplishment for an outfit that charges between $150 and $429 for a pair of jeans.

Luxury stocks are usually an investor's dream. Wealthy customers who crave the latest and most trendy styles are their stock in trade, and they seldom disappoint. Handbag and accessory giant Coach (NYS: COH) has seen its stock rise nearly 24% in just the last three months, and there seems to be no stopping Michael Kors (NAS: KORS) , which has turned in stunning sales and earnings reports since its hugely successful IPO late last year. Despite the economic doldrums enveloping Europe these days, Kors managed to triple its revenue from that part of the globe.

And let's not forget Polo Ralph Lauren (NYS: RL) , whose recent upgrading to "buy" status by Argus Research was a direct response to its exemplary performance on growth, expansion, and pricing. This reinforces a "conviction buy" call by Goldman Sachs earlier in the year, when analysts there commented that Ralph Lauren's expansion in Asia is expected to fuel growth this year.

Less revenue, more spending
Why the malaise at True Religion? Up until a short time ago, this company was going great guns, particularly for an entity that started out as Gusana Explorations. Soon after acquiring Guru Denim in 2003, the company converted to True Religion and got down to the business of selling high-priced denim jeans. Like other high-end retailers, it weathered the economic downturn with aplomb, raising prices successfully, as its peers did, when cotton prices spiked. Cotton eventually came down, but clothing prices did not, which should have helped True Religion's bottom line immensely. Alas, it didn't.

Analysts have been digging for answers, and experts at Benchmark purport that the issue is overspending rather than a lackluster balance sheet, noting that the company had $0.04 less earnings per share in 2011 than in 2008, despite bringing in over 55% more revenue.

Some of the miss on revenue can be attributed to True Religion's reduced activity in the off-price channels in Korea and the United States. Experts feel that the company should have cut back spending based on this move, which was not reflected in its EPS and revenue numbers. Overall, the company gives the impression of stagnating; something that always makes investors uneasy.

A Fool's take
Has the company strayed too far from the flock? Perhaps not. In the long run, True Religion's movement out of the wholesale channels is a move toward its own bricks-and-mortar stores, where it realizes higher margins. Meantime, True Religion needs to tighten its belt and rein in spending if it is ever to get back into investors' good graces. Watch for movement toward that goal in the company's next earnings report, which should produce better EPS and revenue numbers than this past one, then pounce. This outfit won't stay in neutral forever.

While you're waiting for True Religion to shape up, I'd suggest taking a good, hard look at Michael Kors. I have been tracking this company since its IPO last December, and I can't imagine an investor who wouldn't salivate at the performance of this company. Its stock price has nearly doubled since its debut, so socking away a bundle of these shares before they climb even higher should definitely be on your radar screen.

Click here to add Michael Kors to your personalized stock watchlist.

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At the time thisarticle was published Fool contributorAmanda Alixowns no shares in any of the companies mentioned in this article.The Motley Fool owns shares of Coach.Motley Fool newsletter serviceshave recommended buying shares of Coach. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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