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True Religion Apparel, Inc: CEO Exit Sets Stage For Acquirer Entry?

 March 25, 2013 09:28 AM

(By Mani) True Religion Apparel, Inc. (NASDAQ: TRLG) recently announced that Jeff Lubell has decided to step down as Chairman, Chief Executive Officer, Creative Director and employee of the company. The Board has appointed Lynne Koplin, President of True Religion, to serve as the Interim Chief Executive Officer.

The resignation was expected two weeks ago when the Board announced that they were not renewing Lubell's contract. Under Lubell, who became CEO in 2003, the company posted slower growth in recent years and missed out on a number of trends, such as colored denim and its international expansions into Japan and Italy have failed to bring in sales.

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In this scenario, the management change creates a situation where potential acquirers, with the ability to bring in their own management team (with limited severance costs), will look even more favorably to buy the company.

The company would continue its ongoing review of its strategic alternatives, which was announced on Oct.10, 2012. The company has retained Guggenheim Securities, LLC as its financial advisor, and Greenberg Traurig, LLP as its legal counsel to assist with the strategic review process.

So, the takeover theory gained further ground with the departure of Lubell, who since being the founder may want to take the company private himself due to sentimental reasons. However, his financial situation may not allow him to put a bid for the company as he sold a major part of his stake to finance his divorce in 2007.

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Currently, he owns little more than 2 percent of True Religion. So, the presence of Lubell may have made potential acquirers hesitant as they may need to award Lubell more than $20 million in the event of takeover according to his contract.

"We believe now, with the potential issue of Jeff's severance/desire to stay on post-transaction settled, that the odds for a sale of True Religion have increased and the way is clear for a new buyer to install (at a much lower cost) their own management team if they desire," Brean Capital analyst Eric Beder said in a client note.

Speculation about potential buyers has ranged from a leveraged buyout by a private equity firm to privately held apparel companies to conglomerates such as PVH Corporation (NYSE:PVH). Private equity buyers may be attracted due to the company's cash flow metrics.

As of Dec. 31, 2012, the company had $76.8 million of cash and cash equivalents and $140.8 million of short and long-term investments, which combined equals to $217.6 million.

"Continue to view the $32 level, or 10.8X our cash adjusted 2014 EPS as the minimum value level in a private equity transaction for the company," Beder said.

A $32 price represents a 23 percent premium to the current $26 price levels. The stock, which has a market cap of more than $665 million, is trading 13.6 times its 2013 consensus earnings estimate and 12 times its 2014 estimate.

Even if no deal occurs, True Religion is in capable hand with Koplin as the design function is ably and deeply staffed to maintain the fashion DNA of the True Religion brand.

Koplin, who joined the company in January 2010 as Chief Operating Officer, was promoted to President in August 2011. Koplin has been instrumental in improving merchandise planning, buying and allocation for the company's retail stores and wholesale business as well as increasing the overall productivity of the True Religion Brand Jeans retail stores.

Further, Koplin has done a strong job of leveraging the company's ability to react to fashion shifts quickly and maximize returns.

"We view True Religion, with a deeper focus on the right pricing for women's bottoms and a dominant position in men's as well positioned in 2014 to finally register top, and more importantly, bottom line momentum," Beder added.

So, if a deal is not completed, Lynne, a highly competent CEO would be able to drive more visible and consistent returns. This shift, with or without deal, is a positive for True Religion shareholders.

True Religion Apparel makes design-based jeans and jeans-related sportswear brand. The company designs, manufactures and markets True Religion Apparel products, including its premium True Religion Brand Jeans. As of Dec. 31, 2012, it owned and operated 122 retail stores in the United States and 30 international stores.



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