Presentation on theme: "SECTOR: Consumers COMPANY: True Religion"— Presentation transcript:
1 SECTOR: Consumers COMPANY: True Religion Anna: Hello we are the Consumers sector and we research TRLG. My name is Anna and you will hear from the junior analysts Amanda, Bridget, Moly, Jonathan, Pradeep, and Andrew. And Jonathan will get started.Sr. Analysts: Anna BraetJr. Analysts: Amanda Cannizzio, Bridget Eastes, Moly Fang, Jonathan Garnick,, Imran Hossein, Jenny Kwong, Leslie Mullings, Pradeep Mahtani, Andrew Walters
2 Investment Recommendation CompanyRecommendationBUYCurrent Price23.311yr Target Price31.79% Upside36.4%Key investment drivers1. International Expansion2. Movement to Consumer-Direct-based Business Model3. Attractive ComparablesJonathan: Just walk us through this logically. “after conducting our research and valuation we recommend TRLG as a BUY with a current price of and a 1 year target price of which is a 36.4% upside! Our key investment drivers are ….
3 Premium Brand Denim & Apparel Industry The Premium Brand Denim & Apparel Industry consists of companies that design, manufacture, and distribute high-end apparel and accessories through distributors and company retail stores, with a specialized focus on luxury denim products to be sold to young-adults with high discretionary income.By RevenueIndustry Market Share by RevenueTextile and Apparel $305 BApparel 49%Denim/Apparel20%Luxury Denim 3%Jonathan: give us the definition quickly and explain briefly the charts – luxury denim is 3% of the textile and apparel industry etc…. And TRLG takes up 2% of the industry market share broken down by revenue.. Etc…Then transition: ex: Next is Andrew who will introduce you TRLG
4 True Religion Company Snapshot Market CapRevenueBetaGross MarginEBITDAEPSP/E570.42M$311M1.7263%84M1.7510.8Andrew: just give us the basics on this slide … that TRLG follows the S&P 600 and even outperformed the benchmark during the recession
5 Outsource Production to U.S. (denim), In-House Distribution TRLG Value ChainDESIGNOutsource Production to U.S. (denim),Mexico, AsiaRaw MaterialsIn-House DistributionShowrooms (CA and NY)Direct from TRLG to CustomersBrandedRetailersDepartment Stores & BoutiquesAndrew: You know what to say! Juts walk us through this logically – design in california… etc…. Give % too if you can –- make sure to explain exactly what we mean by consumer direct, branded retailers, and wholesale etc…. Christian wants us to be sure to clarify everything. Also, Christian wanted me to add In-House to show that TRLG runs its own showrooms…Transition to Moly with information on ExpansionL- 1.4CD- 41.5Wholes 39.6Int 17.5LicensingAccessory Manufacturers
6 International Expansion Headquarters: Switzerland, Japan, South Korea, Hong Kong, GermanyJoint Venture with German Distributor UNIFA PremiumReduce Distribution costsMoly: Trend: International Expansion: headquares show where they are putting most of their attention in terms of expansion > talk about Japan/Korea and other if you want (opportunities: The size of the denim market in India is about million pairs. It’s a large structured industry growing at about 15-20% a year.)Then discuss joint venture which will reduce distribution costs and increase efficiency>> explain that TRLG plans to open 3 (minimum)-5 (maximum) stores every year in the area to be run by German distributorTransition: say something like and now Pradeep with more on TRLG’s expansion3/25/2017BU Finance & Investment ClubSource: Company Filings
7 BU Finance & Investment Club TRLG ExpansionTotal Store Openings:101 stores in 5 yearsSaturation around 1000 storesExpanding faster than competitorsVFC: 50% marketing on sportswearBKE: not abroadGES: approaching saturationPradeep: This slide is all about how well TRLG is positioned for growth (both internationally and domestically).1.) TRLG is positioned well for growth – opened 101 stores in 5 years and most apparel retailers reach saturation points at 1000 stores (meaning they have already filled most of their growth potential when they hit 1000 stores…. So TRLG has a lot of room to grow)(7 -4 in japan, 1 in uk, 1 in canada, 1 in germany in 2010… open 8 more this year abroad, and 15 domestically)2.) explain graph a little – opened first store in 2005 and have shown great historical growth – plans for 2011 show continuation of this growth3.)Talk about main competitors – TLG expanding faster : VF Corp is using resources to market new sportswear lines – not expansion, Buckle is not abroad, and Guess is already close to saturationTransition: pass along to Amanda to discuss changes in business model… something like that3/25/2017BU Finance & Investment ClubSource: Company Filings
8 Movement to Consumer Direct Motivations:Department storesProfit marginsPremium BrandMaintain >30% gross marginAmanda: This slide and the next go together so the notes will tie in together as well. These two slides should be relatively quick but don’t rush… just briefly touch on the chart showing % sales breakdown and reasons TRLG wants to move away from wholesale >> you don’t have to say all of them but definitely touch on the Dept stores issue and the fact that having their own stores maintains premium brand identity, etc..**** Recap on what each segment means: Consumer direct is brick and mortar TRLG stores and internet sales. Wholesale is sales to department stores and boutiques… etc… the e-board just wants us to clearly explain the difference between c.d. and wholesale….3/25/2017BU Finance & Investment Club
9 Movement to Consumer Direct Benefits:Display spaceMore controlAvoid wholesale pricingMaintain >30% gross marginAmanda: This slide shows what the % sales breakdown will look like this year. Plans to increase Consumer Direct by 20% this year and reduce wholesale by 20%. Benefits: more floor space and control and can avoid selling at a discount to wholesalers (definitely mention this) and will allow them to continue to maintain at least a 30% gross margin. Please explain that this change means an increase in brick and mortar TRLG stores and a decrease in sales to wholesalers in department store… etc…3/25/2017BU Finance & Investment Club
10 Attractive Comparables No debt – no plans to assume debtCash financing of expansionGross MarginSales per Square Foot4th Qtr Same-Store Sales GrowthInventory Turnover63%$18187.2%3.8316%$4286.3%5.6447%$6691-6.0%1.79Amanda: just retouch that TRLG is well positioned for changes and expansion because it has no debt and no plans to assume debt – plans to finance all through cash internally. Mention just Gross Margin being higher than competitors and 4th QTR same store sales growth too. Can say that Inventory turnover is in the middle showing an efficient turnover of resources.****Joes jeans sales per square foot is so much higher because it only has 6 stores. It has 2 full price stores and 4 outlet stores.Transition to Bridget with our Valuation of TRLG3/25/2017BU Finance & Investment Club
11 Valuation Year 2011(e) 2012(e) 2013(e) 2014(e) 2015(e) FCF $ 68.46 $$$$$DCFWACC13%Growth Rate2.5%DCF Value760.871yr Price37.20ComparablesPrice/Sales(25%w)1yr Price22.81EV/EBITDA(25%w)29.95Bridget:Say something along these lines….After valuating TRLg we projected unlevered Free Cash Flows from 2011 to In the discounted cash flow model we used a weighted average cost of capital (WACC) of 13% and a growth rate of 2.5% which gave us a total equity value of million $ and a 1 year target price of 37.2$. We compared TRLG using the price to sales multiple and EV/EBITDA giving respectively 1 year target prices of and We weighted the DCF and Comparables at 50% each which gave us a final 1 year target price of 31.79$ with a %upside of 36.4%.50% Weight50% Weight1yr Target Price31.79% Upside36.4%
12 Risks & Sensitivities 25% 25% 25% 25% 100% This graph shows TRLG’s sensitivity to risks such as increase in raw materials costs, brand dilution, and lack of success in the consumer direct or international segments. We then weighted all of the risks equally for a weighted risk 1 year target price of*** They might ask a question about why we weighted them equally instead of doing a “worst case scenario” risk…. And the answer is that we felt there was no substantial way to predict which risks are more likely to occur… but we do however feel like brand dilution is less likely as TRLG has taken steps to avoid this risk >>> such as moving form wholesale to brand name stores and reducing the number of inventory sales to discount retailers. Etc…25%100%
13 Recommendation Key Investment Drivers: 1. International Expansion CompanyTRLGRecommendationBUYCurrent Price23.311yr Target Price31.79% Upside36.4%Key Investment Drivers:1. International Expansion2. Movement to Consumer-Direct-based Business Model3. Attractive ComparablesBridget: conclude with a brief recap: We recommend TRLG as a STRONG BUY with a 1 year target price of 31.79$ and an upside of 36.4% based on TRLG’s international expansion, movement to consumer direct, and attractive comparables. Thank you and we now welcome questions.
14 BU Finance & Investment Club Questions?3/25/2017BU Finance & Investment Club
15 BU Finance & Investment Club Back Up Slides3/25/2017BU Finance & Investment Club
16 Trends and Opportunities International Expansion:Japan, EuropeIndiaCost Reduction:Lighter fabric for jeans$3 million in capital expenditures for new technologyProduct Development:Expansion of licensing for accessoriesSportswear to compete against VFCIndustry Trend is international expansionopportunites: The size of the denim market in India is about million pairs. It’s a large structured industry growing at about 15-20% a year.-will talk about Japan and Europe next3/25/2017BU Finance & Investment Club
18 RisksCotton PriceCotton prices at end of October about $1.50 per pound, an 80% increase from beginning of 2010Cotton Future HighCotton Future LowAverage Price of Premium Denim2010(Oct.)71.89 (Jan.)~$180200973.6342.63200877.7542.17MolyAs you can see, Price of premium denim had insignificant changes because these companies have such a high profit margin (revenue-COGS)/Revenue. And the price of designer deniim does not correlate to prices of cotton. However, Companies may begin to raise price if cotton prices continue to rise..NYTimes.com, WSJ,
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