UNIVERSITY OF OREGON INVESTMENT GROUP

March 5, 2010 Consumer Goods

TRUE RELIGION APPAREL, INC. BUY / HOLD Stock Data Price (52 weeks) Symbol/Exchange Beta Shares Outstanding Average daily volume (3 month average) Current market cap

$7.80 – $28.90 TRLG / NASDAQ 1.51 25,350,000 519,547 $649,180,000

Current Price Dividend Dividend Yield

$25.63 N/A N/A

Valuation (per share) DCF Analysis Comparables Analysis Target Price Current Price

$30.47 $30.92 $30.69 $25.63

Summary Financials Revenue Net Income Operating Cash Flow

2009 Actual $311,000,000 $46,996,000 $53,590,570

BUSINESS OVERVIEW True Religion Apparel, Inc. was first incorporated in Nevada in 2001 under the name Gusana Explorations Inc. In June of 2003, the company acquired Guru Denim, Inc, a private manufacturing and apparel company, specializing in jean production. Following the acquisition, Gusana Explorations changed its name to True Religion Apparel, Inc. and reincorporated in Delaware in 2005. True Religion currently designs, markets and sells high end fashion apparel under the “True Religion Brand Jeans” name to consumers on six continents and in more than 50 countries. The Covering Analyst: Alexander Leiken Email: [email protected]

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True Religion Apparel Inc.

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company‟s primary revenue driver is its denim jeans brand, but other products including hoodies, t-shirts, sweats, jackets, sunglasses and designer bags offer additional sources of revenue. The business is broken down into four distinct but integrated segments: U.S. Wholesale, International, Consumer Direct and Other, which includes licensing activity. The business segments share product design, manufacturing and marketing resources. They are described in greater detail below. OPERATING SEGMENTS  U.S. Wholesale Segment The U.S. Wholesale Segment sells True Religion products to leading nationwide premium retailers and boutiques that carry both the image and merchandising expertise required for presentation of True Religion products. In 2009 company products were sold in Bloomingdale‟s, Neiman Marcus, Nordstrom, Urban Outfitters and Saks Fifth Avenue, as well as in 900 specialty retailers and boutiques. The Wholesale segment also sells prior season merchandise to off-price retailers. For fiscal year ended December 31, 2009, U.S. Wholesale net sales decreased 19.6% to $123.2 million, largely due to the sharp decline in boutique store sales. Deteriorating economic conditions contributed to a challenging retail environment for boutiques, as they depend largely on external financing. Sales to major retailers fell 11.6% over the prior year as True Religion customers adopted more conservative inventory strategies. Sales to off-price retailers including Nordstrom Rack, Sacks off Fifth, and Neiman Marcus Last Call, increased on a year over year basis. The U.S. wholesale segment is True Religion‟s second largest revenue driver, contributing 39.6% of total revenue.  International Segment True Religion Apparel distributes products internationally through a network of distributors and its wholly owned subsidiary, True Religion Japan, KK, which was formed in the second quarter of 2008. True Religion products can be found in major cities throughout Africa, Asia, Australia, Europe, the Middle East, North America and South America. Apparel is sold internationally much like in the U.S. wholesale segment, through major foreign premium retailers. For fiscal year ended December 31, 2009, International sales increased 36% to $54.5 million, driven primarily by demand in Asian and Western European markets. In 2008, 81% of the company‟s international revenue came from sales via its 5 largest distributors. This segment contributed 17.5% of overall revenue in 2009, up from 14.8% in 2008.  Consumer Direct Segment The Consumer Direct segment includes True Religion‟s branded retail stores and e-commerce sales. Through year 2008, 27 retail branded stores were added, giving True Religion Apparel a total of 42 stores. For fiscal year ended December 31, 2009, an additional 28 stores were added, bringing the total to 70. True Religion owns and operates stores across the United States in upscale shopping areas, including street, mall, and a limited number of outlet locations. Specifically, 13 stores can be described as off-price outlet stores, while the other 57 sell apparel at full price. The branded retail stores provide consumers with easy accessibility to all of True Religion‟s products and apparel, including many of their licensed products. This is in contrast to the larger department stores which focus mainly on the denim part of the product line. The size of their retail locations range from 1,400 to 2,500 square feet and emphasize the company‟s unique “Malibu hippy-bohemian chic” image and feel. E-commerce sales are made through a third-party who receives commission on sales in exchange for operating the „True Religion Brand Jeans‟ website. They accept and fulfill customer orders from a distribution center, where merchandise is held on consignment. For fiscal year ended December 31, 2009, sales from the Consumer Direct segment increased 71.3% to $129 million, which represents 41.5% of company revenue. Same store sales including e-commerce were up 25.3% from their 2008 levels.  Other /Licensing True Religion Apparel, Inc. licenses their brand name and logo to be included on products sold by other companies, thereby enhancing and extending the „True Religion Brand Jeans‟ name. Each licensing partner pays a royalty based on wholesale sales to use the True Religion name and logo. At year end 2009, True Religion licensed merchandise 2

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included: footwear, fragrances, eyewear, headwear, and swimwear. Handbags and outerwear were transitioned to inhouse development in 2008. The licensing segment contributed 1.4% of total revenue in 2009. PRODUCTS & MARKETING True Religion Apparel, Inc. relies heavily on its ability to market products to affluent, fashion conscious consumers. Since 2003, they have emphasized styling, fit, wash, and attention to detail in their brand. True Religion is also proud of the fact that 90% of their denim merchandise is produced and manufactured in the United States. The design team, which has 26 employees, is led by Chief Executive Officer Jeffrey Lubell. True Religion‟s design team is known for being on the cutting edge of current fashion trends, constantly developing new washes in reaction to consumer demand, while maintaining long term product durability by using the highest quality fabric and stitching methods. Most of True Religion‟s product line can be viewed online at www.TrueReligionBrandJeans.com but generally includes the following: denim jeans, corduroy pants and jackets, cotton, twill, linen and velvet pants, and jackets, fleece sweat suits and hooded sweatshirts, skirts, knit shirts, t-shirts, shorts and sportswear for men, women and children including sunglasses, swimwear, and footwear. For the year ended 2008 sales categorized by gender were 58% to women, 38% to men, and 4% to children. BUSINESS AND GROWTH STRATEGIES True Religion is undergoing a major change in their business model. Primary revenue drivers switched in 2009, from the U.S. wholesale segment, (sales from independent boutiques and major retailers), to the consumer direct segment, (sales from True Religion Brand Jeans freestanding stores). The economic downturn and high mall vacancy rates have provided attractive leasing opportunities for True Religion and they‟ve taken advantage, adding 28 stores in 2009. The company seeks to add another 30 branded retail stores in 2010, 27 of which will be located domestically. The other three locations will represent the company‟s first international venture in branded retail. The stores will be located in Tokyo, London, and Toronto and are expected to be fully operational by Q3 2010. True Religion Apparel, Inc. has no debt and as such, expansions are funded by cash flow from operations. The company sees an immense opportunity to expand internationally, as currently the vast majority of sales come from domestic markets. In particular 2009 saw a 36% increase in international sales, with the strongest growth coming from Germany and Japan. As mentioned above, True Religion has taken the initiative to expand its retail branded stores to international markets, with the hopes of becoming a globally recognized premium brand. They have made provisions for significant investments in East Asia, planning to develop networks in Hong Kong, Japan and Seoul Korea. These initiatives will cause the company to incur a one-time expense of $6.5 million in 2010, accounting for a new brand manager, sales team, and some incremental advertising. Sales resulting from these investments will likely be stronger on the back half of 2010 and into 2011 than in early 2010, as building a network of boutiques and major retailers to carry True Religion Brand Jeans apparel will take time. Aside from growing revenue through expansion, they seek to grow internally through increased efficiency. In 2009, True Religion employed a team to improve employee sales techniques. The results were positive across the board. The conversion rate, units per transaction, and sales per hour were all higher in 2009. True Religion has also worked to improve its replenishment capabilities and inventory stocking. By keeping more popular clothing lines and sizes in stores and filtering out slower selling merchandise, True Religion can improve the bottom line. These factors should help further increase same store sales in 2010 and going forward. During the economic downturn and difficult consumer retail market, True Religion has seen a substantial increase in sales to the off-price wholesale channel. In order to maintain the brand‟s integrity and premium image, management has decided to cut sales to such retailers by $10 million in 2010 and by a similar amount again in 2011. Ideally, they want less than 10% of U.S. wholesale sales to be through the off-price channel, and the vast majority of those sales to be through their own outlet stores. This decision will have a negative impact on earnings, but will likely keep the 3

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brand sheltered from overexposure long term. The difficult retail environment contributed to lower revenues from the U.S. wholesale segment, (boutiques and major premium retailers) in 2009, though such retailers have maintained True Religion shelf space in their stores. True Religion recognizes the need for a more collaborative sales process with major retailers and is making investments to stimulate revenue growth in the segment going forward. Further growth opportunities exist in the smaller boutique stores. True Religion Brand Jeans merchandise is available in over 800 boutiques, compared to some competitors who have merchandise in upwards of 1,600 boutiques. By getting sales people out on the road, True Religion is confident in its ability to expand its brand through partnering with additional specialty boutiques across the country. INDUSTRY ANALYSIS True Religion Apparel, Inc. operates in a sub industry of the apparel and footwear industry known as “Apparel, Accessories and Luxury Goods.” The general outlook for apparel and footwear is negative, but True Religion‟s subsector is expected to outperform. True Religion serves a niche market of affluent and fashion conscious individuals who care about the design and quality of a product far more than its price point. In general, throughout the economic downturn, this niche group has not suffered to quite the same extent as has the average consumer. Because of this, sales of luxury goods and accessories have outperformed traditional apparel and footwear. This more exclusive market segment offers differentiated fashion products, that is, products which stand out in some way from everyday brands or, “conversation products”. True Religion Brand Jeans, with their superior fit, design, and quality, satisfy the above condition. Still, going forward True Religion will be susceptible to lack of disposable income from the consumer, as the “aspirational luxury shopper,” fails to make purchases. The economic downturn has contributed to lower levels of core consumer price inflation, personal consumption expenditure, disposable income, employment, housing prices, consumer credit outstanding, consumer sentiment, and the real wage. Though many of these broad economic indicators remain at depressed levels, a few have shown recent signs of life. In January, the retail sector added 52,000 jobs, implying that firms expect higher consumer demand going forward. The chart below is the ICSC-Goldman Sachs Weekly Chain Store Sales Index. A value above zero represents an expansion. As you can see, store sales have recently been trending upward. On the manufacturing side the ISM PMI has remained above 50 for 7 straight months, implying the sector is going through an expansion. These factors are reflected in the Q4 headline GDP increase of 5.9%. That number could be a little misleading, as a large portion of the increase was due to “change in private inventories,” while only 1.9% of the growth was generated by real consumer demand. These results might imply only an inventory bounce, rather than any significant long term improvement. Considering the unemployment rate remains at 9.7% and the 4-week moving average of weekly unemployment claims is trending upward, which implies future job losses, the inventory bounce theory is looking more and more likely. In other words, firms are acting cautiously given the current economic environment, showing a reluctance to hire, which further depresses the real wage and thus, consumer spending. In terms of how this affects True Religion, tentative U.S. wholesalers will hold less inventory, which will lead directly to lower sales. In the near term, declining housing prices and home sales will cause further deterioration of family balance sheets, leading to a squeeze on disposable income, and likely a higher savings rate as Americans attempt to rebuild equity in their homes. The high unemployment gap will depress real wages and cause deflationary pressure on consumer goods. This is not the type of macroeconomic environment one wants to operate under as a premium retailer. That 4

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being said, broader industry conditions have yet to adversely affect True Religion‟s bottom line in a meaningful way. Declines in sales via U.S. wholesalers were more than offset by increases in the higher margin consumer direct and international segments. Finally, pending the U.S. economy enters into a real recovery phase, high end retail will likely outperform other industry, as pent up demand from the “aspirational luxury shopper,” will drive both revenue and margins higher. MANAGEMENT AND EMPLOYEE RELATIONS Chief Executive Officer Jeffrey Lubell founded True Religion Apparel, Inc. in 2002. He has served as Chairman of the Board, Chief Executive Officer and Chief Merchant since June 2003. He also heads the True Religion Brand Jeans design team. The company is a reflection of Mr. Lubell‟s creativity, vision, and love for the premium denim business. Before True Religion, Mr. Lubell was President and Creative Director (Men‟s) of Hippie Jeans based in Commerce, California. Mr. Lubell has over 30 years of executive experience in the business. From 1978 to 1998 Mr. Lubell was the President and CEO of Jeffrey Lubell Textiles, based in Los Angeles, California, a textile design and distribution firm that Mr. Lubell founded. Director Marcello Bottoli was recently appointed as Director in March of 2009. He served as CEO of Samsonite Corporation from March, 2004 through January, 2009. From September, 2001, until March, 2004, Mr. Bottoli served as division CEO at Louis Vuitton Malletier S.A. Mr. Bottoli‟s past experience in premium retail management makes him a valuable asset to the True Religion team. Chief Operating Officer True Religion Apparel, Inc. recently hired Lynne Koplin as Chief Operating Officer. Ms. Koplin brings over 30 years of experience in the apparel industry, having worked in operations, product development, manufacturing, and retail. She came to True Religion after leaving her position as President of the Tommy Bahama women‟s division. Prior to Tommy Bahama, Ms Koplin served as President and Chief Executive Officer at Apparel Ventures, Inc. RECENT NEWS True Religion Opens New Branded Retail Store at Washington Square in Portland, OR – February 23, 2010 (Business Wire) -- “True Religion Apparel, Inc. (Nasdaq: TRLG) today announced the opening of a new branded retail store at Washington Square in Portland, Oregon. The 1,485 square-foot branded retail store will offer shoppers the entire True Religion collection for men, women and kids, including its signature jean styles, its expanding denim, sportswear and handbag collection, and a full range of licensed merchandise.” Washington Square is recognized as one of Oregon‟s premier shopping destinations, housing the state‟s largest Nordstrom and over 170 specialty shops and restaurants. Over 400,000 residents with average annual household income exceeding $80,000 live within five miles of Washington Square. Expanding the branded retail business is an important part of True Religion‟s growth strategy going forward. The development of new stores, providing exposure and brand accessibility to affluent and fashion conscious customers, is imperative for future growth of the True Religion brand. True Religion Spikes on Overseas Growth – February 25, 2010 (TheStreet.com) “No matter how bad the economy gets it seems shoppers love their denim, and not just the cheap brands. True Religion, which sells jeans for as much as $300 a pop, is spiking after it topped Wall Street's fourth-quarter forecast and announced plans to open its first stores overseas.” True Religion Apparel, Inc. came out with better than expected fourth quarter earnings and guided earnings of $2.00 - $2.10 per share for fiscal year 2010, slightly below analyst estimates at $2.13. The company expects to incur a few one-time expenses that will adversely affect earnings in 2010 as they position themselves for future growth opportunities. True Religion expects an $0.11 per share hit for construction of a Hong Kong office, and other $0.16 per share hit from the hiring of a new Chief Operating Officer. 5

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They‟re also planning to lower sales to off-price wholesalers by $10 million, instead, focusing on their higher margin consumer direct segment, and selling year end excess inventory through their own off-price factory outlet stores. True Religion Apparel: Is It Worth Being a Slave to Fashion? – February 26, 2010 (Seeking Alpha) “I tend to be a skeptic by nature. So at a time when the economy is weak, employment numbers are terrible, consumer credit is contracting, and foreclosures are rising, I am particularly skeptical of high flying stocks whose fortunes depend on spendthrift consumers.” The industry fundamentals certainly don‟t look good. Retail sales have seen an upward trend but remain at relatively depressed levels, personal consumption expenditure is expanding, but slowly, consumer confidence is both low and volatile, and home prices and sales continue to fall. The combination of all these factors should, in theory, lead to the tightening of household balance sheets, that is, less disposable income, which would adversely affect premium retail sales going forward. Contrary to what the fundamentals are telling us, True Religion‟s margins hold steady, and they keep selling $250 jeans. S.W.O.T. ANALYSIS Strengths  True Religion is in a strong financial position with no outstanding debt and a large cash position.  The company manufactures 90% of its denim products in the United States, assuring that its factory workers are paid a decent wage, a point of issue for many of True Religion‟s customers.  True Religion posted strong year over year growth with large margins, despite the difficult premium retail market and trying economic times.  The company trademarks, intellectual property, and marketing have allowed True Religion to position itself as the premier premium denim retailer. Weaknesses  True Religion operates in a niche market and earnings rely heavily on the ability of design and management teams to predict future fashion trends.  True Religion faces intense competition in their market from other premium denim brands, some of which are backed by larger corporations with greater resources. Opportunities  International expansion will yield opportunities for revenue growth going forward, as most foreign markets are relatively unsaturated.  Transition from U.S. wholesale to Consumer Direct will yield lower SG&A and thus higher overall profit margins.  Further expansion into specialty boutiques can be a source of future revenue growth. True Religion apparel is sold in roughly 800 specialty boutiques while some of its competitors hold shelf space in up to 1,600. Threats  Though it hasn‟t yet had a strong affect on revenue growth or operating margins, a prolonged global recession will squeeze disposable income and make operations more difficult.  True Religion, if it continues to expand at its current pace, will run the risk of over saturating the market. The Washington Square location could be an example. They‟ve opened a store within 500 feet of two other locations selling True Religion Brand Jeans. COMPARABLES ANALYSIS True Religion Apparel, Inc. operates in the high end retail and apparel manufacturing industry, with the largest portion of its revenue coming from premium denim. As such, it competes directly with other premium denim brands: Rock & Republic, Seven for all Mankind, Lucky Brand, and Hudson, all of which are either privately held, or part of larger corporations. The lack of publicly traded pure play competitors for True Religion, with the exception of Joe‟s Jeans, led me toward other premium lifestyle and apparel companies. Such companies were selected based on several 6

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criteria: (1) the company‟s served market. I wanted all of my comparables to be high end retailers. Companies in the same sector operate under similar macro based constraints and are subjected to the same market risks. (2) I looked for companies with similar capital structure. True Religion finances all of its investing activities from operating cash flow and has no outstanding long term debt. I didn‟t want leverage to play a big role in the operations of my comparables for that reason. (3) Finally, I sought companies with a similar business model, that is, companies whose revenue streams can be broken down into segments similar to True Religion‟s. Based on the above criteria, I found 5 solid comparable companies: Coach Inc. (COH), Joe‟s Jeans Inc. (JOEZ), Polo Ralph Lauren Corp. (RL), Guess ? Inc. (GES), and Liz Claiborne Inc. (LIZ). Coach, Inc. (20%) “Coach, Inc. engages in the design and marketing of fine accessories and gifts for men and women in the United States and internationally. The company’s primary products include handbags, women’s and men’s accessories, footwear, jewelry, wearables, business cases, sunwear, travel bags, fragrance, and watches,” (yahoo finance). I chose Coach as a comparable because both the company‟s structure and business model are very similar to True Religion‟s, albeit on a much larger scale. Coach has a U.S. and International Wholesale segment, in which they partner with major premium retailers like Saks and Nordstrom. They have over 400 branded retail stores located throughout the United States, Europe, and East Asia, as well as over 100 factory outlet stores. Coach Inc. carries almost no long term debt on its balance sheet and maintains a relatively similar cash position to True Religion‟s. Beyond the structural similarities, Coach and True Religion are comparable based on their susceptibility to similar market risks, as they both operate in the highly competitive premium retail market. For these reasons Coach, Inc. was given a weight of 20%. Liz Claiborne Inc. (15%) “Liz Claiborne, Inc. engages in the design and marketing of a range of apparel and accessories worldwide. It offers men’s, women’s, and children’s contemporary apparel, denim and casual sportswear, fashion apparel, business-casual apparel, career sportswear, intimate apparel, activewear, and jeans.” (Yahoo Finance) Liz Claiborne Inc. offers products under a number of different brands: Juicy Couture, Kate Spade, Lucky Brand Jeans, DKNY Jeans, Claiborne, Liz Claiborne New York, and more. I chose Liz Claiborne as a comparable because their position in the premium retail market is similar to True Religion‟s. Both have a market cap of roughly $650 million, though Liz has over $500 million in outstanding long term debt. With regards to specific brands and apparel, Liz Claiborne is close to a pure play competitor, deriving a majority of its revenue from its Juicy Couture and Lucky Brand Jeans, brands. Both companies target affluent fashion conscious consumers to generate sales. I weighted Liz Claiborne only 15% because of their reliance on leverage to conduct every day operations and their recent inability to maintain positive profit margins. Joe’s Jeans Inc. (22%) “Joe's Jeans Inc. engages in the design, development, and marketing of apparel products worldwide. Its product line comprises women's, men's, and children's denim jeans, pants, shirts, sweaters, jackets, and other apparel products under the Joe's brand.” (Yahoo Finance) Joe‟s is True Religion‟s best publicly traded pure play competitor. Both companies earn the vast majority of their revenue from sales of premium denim apparel. Both 7

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companies enjoy strong cash positions and zero long term debt. The only major difference is where the companies are in terms of their respective development. True Religion is in the middle of a transition from generating revenue via its indirect wholesale segment, to focusing on its own, higher margin, branded retail stores. Joe‟s still generates revenue almost explicitly through major retailers. Currently, Joe‟s has only 2 full price branded retail stores in operation and has no concrete plans to open more. Joe‟s is weighted 22% because of their comparable target markets and market risks, their similar product line, and the similar capital structure. Guess ? Inc. (23%) “Guess?, Inc. designs, markets, distributes, and licenses lifestyle collections of apparel and accessories for men, women, and children. The company‟s products include collections of denim and cotton clothing, such as jeans, pants, overalls, skirts, dresses, shorts, blouses, shirts, jackets, and knitwear. It also grants licenses to manufacture and distribute a range of products, which comprise eyewear, watches, handbags, footwear, kids' and infants' apparel, leather apparel, swimwear, fragrance, jewelry, and other fashion accessories.” (Yahoo Finance) Guess was chosen as a comparable because their position in the premium retail market leaves them susceptible to market risks similar to those of True Religion. Guess‟ operating segments are also similar to True Religion‟s, as they sell and distribute through major premium wholesalers, as well as own, manage and maintain a number of their own branded retail stores. Guess has a negligible amount of long term debt and a low debt to equity ratio of 4.97% and like True Religion a strong cash position. For these reasons, I gave Guess Inc. the highest weighting in my comparables at 23%. Polo Ralph Lauren Corp. (20%) “Polo Ralph Lauren Corporation, together with its subsidiaries, engages in the design, marketing, and distribution of lifestyle products worldwide. It offers men’s, women’s, and children’s clothing; and accessories comprising footwear, eyewear, watches, jewelry, hats, and belts, as well as leather goods, including handbags and luggage.” (Yahoo Finance) The company sells its products indirectly through department stores, specialty stores, and golf and pro shops. They have a full-price direct segment in which they operate 163 branded retail stores in addition to their 163 off-price factory outlet stores. Ralph Lauren has a debt to equity ratio under 10% and a strong cash position, just like True Religion. They also have comparable betas, at 1.59 and 1.51 respectively. The above factors contributed to weighting Polo Ralph Lauren Corp. at 20%. Valuation Multiples In order to test True Religion‟s true market valuation with regards to its competitors, I used four different multiples: EV/Revenue, EV/Gross Profit, EV/EBIT, and EV/OCF. EV/Revenue gives an indication of a company‟s ability to generate revenue, controlling for its size, and taking into account leverage from debt along with its cash position. I used EV/Gross Profit as a way to measure how efficiently the company generates profit compared to its peers. I used EV/EBIT to show the profitability of the company, accounting for all of its expenses, as well as investments in long term capital. Finally, I used EV/OCF to show how well the company generates cash flow after covering its expenses. Each of these multiples values a slightly different set of operations within the company and were weighted at 25% each. 8

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DISCOUNTED CASH FLOW ANALYSIS For my DCF analysis I used the percent of revenue method to better estimate future segment revenues, cost of sales and free cash flows. I then discounted the free cash flows to calculate the net present value of the company, and finally its implied stock price. A summary of the line items are below: Revenue In order to project revenues forward I built a revenue model based on several key economic factors affecting the apparel, accessories, and luxury goods industry. I went through a process of forecasting these variables, including CPI apparel, e-commerce sales, retail sales, consumer sentiment, year-over-year consumer credit outstanding change and GDP using various auto regressive integrated moving average (ARIMA) models. When forecasting these separate variables I looked for a good residual structure, a high R2 and a low AIC. I then back tested my forecasts against the actual data in order to better interpret the efficiency of each model. Once I had the forward looking data based on my forecasts I built a model, with True Religion‟s revenue acting as the dependent variable. Several models were tried, and one had some notaable problems. The results of the different models are in the graph below.

I used quarterly data throughout, and adjusted for seasonality using dummy variables. You can see a clear seasonal pattern in these projected trends, (as well as the raw data, though not shown here). Forecasts 1 and 2 differ based on the addition of a recession probability statistic. Forecast 3 had some significant issues resulting from the addition of the consumer credit change variable. Substantial and sudden swings in the series skewed the model downward significantly. I felt that forecast 3 was unrealistic based on both my own research as well as analyst expectations. For my revenue projections, I decided to use forecast 1, the blue line, with some manual changes to Q1-Q3 of 2010 due to the one-time company expenses mentioned in previous sections. U.S Wholesale I projected the U.S. wholesale segment to shrink substantially as a percentage of revenue from 36.5% in 2009 to a long run state of about 15.7% by 2015. The company has made clear its intention to invest in its higher margin consumer direct segment, as well as expand its brand internationally. I used Coach and Liz Claiborne‟s Lucky Brand Jeans as a benchmark for what the percentage of revenue structure looks like for more developed brands. Both Coach and Lucky derive percentage of revenue in the mid teens from U.S. wholesalers. International True Religion plans on further developing its presence in international markets and will build its first three full price international consumer direct stores in fiscal 2010. For this reason I have international sales increasing marginally as a percentage of revenue into 2017 where the segment stops growing at 22% of revenue. Aggressive moves by the 9

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company to build international sales could result in higher numbers as a percentage of revenue. At this juncture, I don‟t see a strong immediate change to the international segment as a percent of revenue because entering new markets is comparable to repeatedly “re-launching the brand”. It requires substantial investment in a time of uncertainty. Consumer Direct The consumer direct segment will continue to see substantial growth as a percentage of revenue. True Religion‟s branded retail stores are able to offer the company‟s full product line, including licensed products, as well as generate higher margins than U.S. wholesale. Management believes in the brand and will continue financing new stores until the market is fully saturated. This included the build out of 28 new consumer direct stores in 2009, with another 30 to come in 2010. Other In order to project licensing revenue as the company grows and develops, I again looked to some of its comparables for help. Coach Inc generates 1%-2% of its revenue from its licensed products. I felt this was reasonable for True Religion going forward, and in line with company levels in the most recent fiscal year. Cost of Sales True Religion‟s cost of sales is projected to decrease moderately as a percentage of revenue as the company transitions from sales generated by U.S. and international wholesale, to selling more through the consumer direct channel. The most eventful development in cost of sales came out of the international segment, where the addition of factory outlet stores in European and Asian markets contributed to much better gross margins for international sales. The gross margin is projected to widen over time, again due to increased sales through full-price branded retail stores in the consumer direct segment. Selling, General and Administrative Expense SG&A expense is projected to increase moderately in 2010 and subsequently level off. The initial jump is due to some one-time expenses for a new Chief Operating Officer, an international sales team, and a U.S. wholesale sales team. As a percentage of segment revenue, U.S. wholesale expense should fall as the company shifts its focus to the consumer direct segment. SG&A is projected to increase moderately for the international segment, as international expansion will be accompanied by more employees and high incremental advertising costs. Consumer direct SG&A is projected to remain relatively steady as the pattern over the last four years suggests. Depreciation and Amortization Depreciation and Amortization is expected to increase as a percentage of revenue due to capital expenditures from build outs and leases of 70 retail locations hitting the books. Past growth in capital expenditures, in combination with sustained future levels of capital expenditure should contribute to higher overall depreciation and amortization of certain assets. The trick here was trying to find the appropriate lag between the property, plant and equipment investment and levels of depreciation. For this reason, higher levels of depreciation lag behind the higher capital expenditure growth. Tax Rate The tax rate in 2010 is projected at 37.5% because of guidance issued by the company in the Q4 earnings call. The longer run tax rate, projected at 37% is lower than historical norms for True Religion, but reflects its expansion into international markets. Current Assets and Current Liabilities

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True Religion Apparel Inc.

university of oregon investment group http://uoig.uoregon.edu

True Religion‟s current assets were adjusted because much of the cash position sits idly on the balance sheet and is not used to fund operations. I projected a slight increase in current assets as a percentage of revenue, reflecting the likelihood of True Religion holding more inventory as global economic conditions improve and as they expand their brand internationally. Current Liabilities stay relatively constant over the period, as does the current ratio at just under four. Capital Expenditures Capital expenditures will likely remain high over the next few years, as True Religion invests in information technology and more consumer direct branded retail stores. But at some point it will fully saturate the market, and capital expenditure as a percentage of revenue should decline. On my DCF, this transition begins in 2012 and ends with capital expenditure declining to 4% of revenue. Beta To calculate beta, I ran a simple regression of True Religion‟s 5 year monthly returns against the returns of the S&P 500. I arrived at a beta of 1.51 which I believe to be realistic for two reasons. (1) True Religion is a growth company and should thus perform better to the upside than to the downside and (2) because many of True Religion‟s competitors, with similar capital structure, enjoy similar betas across the board. RECOMMENDATION True Religion‟s position within the high end retail market is unique. They‟ve been expanding rapidly with zero debt, despite some of the worst economic conditions imaginable for a premium retailer. In the near term, the macroeconomic fundamentals behind this stock and its sector are not particularly good. However, based on my comparables analysis and DCF valuation, I believe True Religion will outperform other apparel and footwear retailers. My comparables and DCF yielded implied prices of $30.47 and $30.92 respectively. Weighted equally at 50% I arrived at an implied price for True Religion of $30.69, an undervaluation of 19.76%. Thus, I am rating True Religion Apparel, Inc. (TRLG) a BUY for both the Tall Firs and Svigals portfolios. We are currently underweight consumer goods in both portfolios. As for DADCO, True Religion‟s beta of 1.51 could help bring us closer to our benchmark, but the transaction costs associated with a buy would limit some of the upside. Because of the transaction costs, I am recommending a BUY/HOLD for the DADCO portfolio.

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True Religion Apparel Inc.

university of oregon investment group http://uoig.uoregon.edu

APPENDIX 1 – COMPARABLES ANALYSIS

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True Religion Apparel Inc.

university of oregon investment group http://uoig.uoregon.edu

APPENDIX 2 – DISCOUNTED CASH FLOWS ANALYSIS

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True Religion Apparel Inc.

university of oregon investment group http://uoig.uoregon.edu

APPENDIX 3 – DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS

APPENDIX 4 – BETA SENSITIVITY ANALYSIS

APPENDIX 5 - REVENUE MODEL – FORECASTS OF VARIABLES

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True Religion Apparel Inc.

university of oregon investment group http://uoig.uoregon.edu

APPENDIX 6 – SOURCES       

Standard & Poor‟s NetAdvantage Finviz.com Yahoo finance Google finance TrueReligionBrandJeans.com St. Louis Federal Reserve Data (FRED) True Religion SEC Filings (10-K, 10-Q, 8-K)

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