Small Cap Success Stories: True Religion Apparel

Jacob Harper  |

A sad truth of the free market is that penny stocks rarely make it big. The transition from micro-caps to even small-cap is a difficult one indeed, as overcoming the hurdles of undercapitalization, competition, and lack of name recognition often prove too difficult to overcome.

But occasionally a micro-cap (defined as having market capitalization under $50 million) can overcome the odds and become a bonafide player. And for investors that get in on the ground floor, penny stocks can be insanely profitable.

True Religion Apparel did just that. The jeans manufacturer transitioned from a struggling microcap to an $865 million megaforce in one decade. Their ascendance is a unique one, largely driven by the vision of one man, founder, former creative director and CEO Jeff Lubell.

The Origins of True Religion

Founded in December 2002 by Lubell, True Religion set out to sell one thing: premium American-made denim jeans. The company almost immediately went public, operating out of a single 6,000 square foot factory space in El Segundo, Cal. The company posted relatively paltry revenue of $2.3 million in its first year of existence.

But Lubell had a vision of what he wanted the company to be, and took an incredibly hands-on approach to directing the company. Lubell had 20 years of apparel experience before founding True Religion, and made the major decisions for nearly every aspect of the company. He designed the jeans, he picked out the fabrics. He designed the company's initial marketing strategy. He also insisted on keeping clothing production entirely domestic, with all manufacturing taking place in the United States. This is unusual for retailers, but not unprecedented in the early 2000s. The strategy had proven successful for red-hot (at the time) apparel company American Apparel (APP) , and Lubell embraced it.

But unlike American Apparel, Lubell went after the luxury market, initially selling his jeans for between $250 and $300 apiece. While the strategy might appear risky, the margin on True Religion jeans – which approached 50 percent a pair – more than sustained the company.

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A couple years in, the company finally started to catch on, first with fashion mavens, then with celebrities. Then the brand got name-dropped in the Black Eyed Peas hit “My Humps” in 2005, and sales exploded.

Massive Success, Then Contraction

Following the mention in “My Humps,” the company grew exponentially. By 2007 sales had climbed to $160 million. Their market cap increased to over half a billion dollars. The company could seemingly do no wrong.

Then, they did. The company first made an ill-conceived move into lower-priced skinny jeans (the company does not cater to the price-conscious “hipster” market.) The move proved disastrous, and the line was spun off. Then the company attempted to expand into Asia, which proved costly and unprofitable.

The company was overspending. Though revenue increased 55 percent between from 2008 to 2011, earnings per share only increased 4 cents. The meteoric rise was over.

Looking for, and Finding, a White Knight

In Oct. 2012, Lubell began actively courting a buyer for the company. While True Religion remained profitable, the board had lost faith in Lubell’s ability to stay on top of trends, and had declined to renew his contract as creative director of the company.

Lubell stepped down from the company in April 2013, getting a severance package of $5.9 million. It was the first time in the company’s history it existed without him at the helm. The company scrambled to find direction, and aggressively looked for outside investment to reinvigorate the company.

The company did not exist long as a public entity without Lubell. The company found a buyer in private equity firm TowerBrook Capital Partners LP, who had previously owned, then sold upscale shoe brand Jimmy Choo. The company announced in May 2013 that they had finalized the deal to buy True Religion for $865 million in cash.

That put True Religion’s stock at $32 a share. Investors who took a flyer on former penny stock at its low of 67 cents in 2004 saw one of the biggest penny microcap returns in recent times. Those lucky stockholders had gained 4,776 percent on their investment in just 9 years.

The deal closed on July 31, 2013, taking True Religion off the public market, ending the small cap's run for stockholders. But in it's short existence, True Religion proved that sometimes, a microcap can prove the doubters wrong and experience massive success.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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