True Religion Apparel, Inc.

True Religion Apparel, Inc. ( TRLG - Snapshot Report ) delivered solid first quarter 2012 results on May 1 with both sales and earnings per share (EPS) beating the Zacks Consensus Estimates. In fact this premium jeans retailer has beaten the Zacks Consensus Estimate in five of the last seven quarters with an average earnings surprise of 6.26%.

This Zacks #2 Rank stock also has a smart 2.7% dividend yield, which makes it attractive to income-seeking investors.

Solid First Quarter

True Religion’s first quarter 2012 adjusted earnings of 41 cents per share surpassed the prior-year figure and the Zacks Consensus Estimate each by approximately 13.8%. Better-than-expected earnings were driven by solid top-line growth and expense control.

Total sales grew 13.9% year over year to $106.8 million, which surpassed the Zacks Consensus Estimate of $102 million. The top-line growth was driven by a solid 22.6% revenue increase at the U.S. Consumer Direct segment, the largest in the company. The segment includes True Religion’s retail stores and the e-commerce business. Sales at this segment were propelled by a sharp 13.3% rise in same-store sales owing to strength in men’s merchandise despite the soft women’s line.

Gross profit expanded 13.4% to $68.9 million on solid top-line growth. The operating profit increased 16.0% to $17.2 million, fueled by sales growth and expense leverage.

The company ended the quarter with a cash balance of $204.2 million, up approximately 30% year over year. True Religion remains a zero-debt company.

First Time Dividend

The company paid its first ever quarterly dividend of 20 cents per share in May this year, resulting in an annualized dividend yield of 2.7%. It will also repurchase up to $30 million of its common stock.

Outlook Retained

For 2012, the company maintained its top-line growth guidance of 7% to 10%, with consistent performance in every quarter. The company aims to open 27 stores in 2012.

Earnings in the second quarter are, however, expected to be 35 cents, lower than the first quarter figure, as strength in the U.S. Consumer Direct will be offset by softness in the International segment.

The Zacks Consensus Estimate has moved up by 1.0% to $1.97 for 2012 over the last 60 days.

Reasonable Valuation

True Religion currently trades at a forward price-to-earnings (P/E) ratio of 14.9x, reflecting a 40.7% premium to the peer group average of 10.59x. However, its return on equity (ROE) looks attractive. The stock has a trailing 12-month ROE of 16.5%, which is above its peer group average of 15.2%.

Given the long-term growth projection of 15.0%, the PEG ratio comes in at 0.99, marginally below the benchmark of 1 for a fairly priced stock.

Chart Showing Recovery

Shares of True Religion reached its 52-week high of $37.82 on February 8, 2012 and thereafter fell sharply after announcement of lower-than-expected fourth quarter 2011 results on February 9. However, shares have started recovering from the sharp decline and are trading in the range of $26 to $30 since early April 2012. Moreover, the stock is currently trading above its 50-day moving average, which stands at $27.85. In fact, the stock has been consistently trading above its 50-day moving average since April 24, 2012. Volume is fairly strong, averaging roughly 345K daily.

The Bottom Line

Despite the overall weakness in the economy, spending on premium and luxury products has been arguably stable. True Religion’s strong standing in the premium jeans market, new retail store openings, solid cash flows and a smart dividend yield should provide upside potential going forward.

Based in Vernon, CA, True Religion makes premium men's and women's jeans, and sportswear under the True Religion brand. It sells these products in its own branded retail stores as well as department stores and boutiques in 50 countries.

The company had 109 company owned retail stores in the United States and 18 internationally at the end of March 2012. The company has a market cap of $758.5 million.