Denim is the New Black

Over at the Cody Blog, Cody Willard mentioned that Denim is the New Black.  I can’t agree more.  I’ve know a couple people to shell out 200 bucks for a pair of acid wash, tight fitting jeans. 

Since I can’t resist but to look at everything through the eyes of a portfolio manager here are some investment ideas to play off the "Denim is the New Black" trend.  The only reason I bring up a fasion-based stock idea is because its so financially compelling.  Denim is cheap to make and produce.  Yet people are willing to spend $300 on a pair if it fits right and has some cool stains on it.  That spells huge margins.  Plus, its a trend that can be broad based.  You don’t have to live in NY to wear cool jeans – but you looked like a fool wearing all black attire in Cleveland, OH. 

True Religion Apparel
TRLG
Range: $1–$15
Market Cap: $330MM
Shares: 23.1MM
Daily Volume: 464,900
Debt/Capital: 0%
Cash From Ops: $1.3 mln
P/E: 21x
2006 P/E: 15x

True Religion Apparel, Inc. manufactures, markets, distributes and sells "True Religion Brand Jeans." True Religion Brand Jeans are sold at upscale department stores and boutiques and cost between $150 and $300 a pair.   

When Cody said Denim is the new black, he wasn’t kidding.  From the looks of TRLG’s revenue growth, you’d think that no one in NY owned a pair of jeans before last year.  Sales during Q4’04 increased 913% to $13.6MM, with EPS of $0.12 vs. $0.01 a year ago.   If that wasn’t enough, Q1’05 was even better.  EPS in Q1 was $0.17, versus $0.01 a year ago, and revenues increased 646% to $20.1MM. 

How much money can you make selling $300 jeans?  Well, gross margins in Q1 were 50.8%.  That compares to 46% for Liz Claiborne (LIZ) and 38% for Jones Apparel (JNY). 

The company was brought public in June 2003 through a reverse merger with Gusana Explorations, Inc., a shell company engaged in the exploration and acquisition of mineral properties.  As with all companies that go public like this, you expect to have hair on it.  However, this one looks better than most.  The company actually generated free cash flow in 2004 and the company has no debt.  While there are of option and stock grants, some lawsuits, and a "non-big Four" accounting firm, I think those things are par for the course for a company of this size that did a reverse merger. 

I don’t have a position in the stock, nor do I plan to have one since its not my style to speculate on small cap fashion stocks which have already had a huge move.  However, for those who do, this is probably one worth doing some more research on.  The trend could last for a while.