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| TRLG > SEC Filings for TRLG > Form 10-K on 1-Mar-2013 | All Recent SEC Filings |
1-Mar-2013
Annual Report
We design, market, sell and distribute premium fashion apparel, centered on our core denim products, using the brand name "True Religion Brand Jeans." Our products include jeans, pants, woven and knit tops and outerwear made from denim, fleece, jersey and other fabrics. We are known for our unique fits, washes and styling details. Our products are distributed through multiple wholesale and retail channels on six continents, including North America, Europe, Asia, Australia, Africa and South America.
Overview
True Religion Brand Jeans was started near the end of 2002 and has become a premium denim brand that is known around the world. Ten years later, we achieved the highest annual net sales ($467 million) and annual operating income ($78 million) in our Company's history. We also initiated a cash dividend to our shareholders, which totaled $20 million in 2012. Our brand is known on six continents for men's and women's merchandise that is sold in branded retail stores and via premium wholesale accounts. This business approach has withstood macroeconomic and fashion trend changes.
Our strategy for 2013 and beyond focuses on three specific opportunities. First, we intend to increase our sales of women's merchandise, which has decreased as a percentage of our total sales. We will introduce a new 'core denim' assortment in 2013, which we expect will resonate with a larger number of consumers. Also, we have split our design process so the women's jeans will be differentiated from the men's jeans. This should result in styles that appeal to more women. Second, we are shifting some merchandise design and buying responsibilities for international markets to our offices in Europe. The team in Europe will incorporate local market preferences into the merchandise that we sell outside of North America and will reduce supply chain costs, so we can price our merchandise more competitively. And third, we have begun a consumer preference study that we expect will provide insights that will influence our future design and sales efforts.
We believe that by focusing on these three opportunities we will increase our future sales and earnings, which are two key aspects of improving returns for our shareholders.
2012 Compared to 2011
The following table summarizes results of operations for 2012 compared to
2011 (dollar amounts in thousands, except per share data):
Years Ended December 31,
2012 2011
Amount % Amount % Change %
Net sales $ 467,285 100.0 % $ 419,798 100.0 % $ 47,487 11.3 %
Gross profit 299,523 64.1 % 271,829 64.8 % 27,694 10.2 %
Selling, general and
administrative expenses 221,406 47.4 % 197,218 47.0 % 24,188 12.3 %
Operating income 78,117 16.7 % 74,611 17.8 % 3,506 4.7 %
Other expense (income), net (94 ) 0.0 % 637 0.2 % (731 ) (114.8 )%
Provision for income taxes 31,513 6.7 % 28,197 6.7 % 3,316 11.8 %
Net Income attributable to
True Religion Apparel, Inc. $ 46,015 9.8 % $ 44,967 10.7 % $ 1,048 2.3 %
Earnings per share
attributable to True Religion
Apparel, Inc.:
Basic $ 1.83 $ 1.81 $ 0.02 1.1 %
Diluted $ 1.82 $ 1.80 $ 0.02 1.1 %
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Net Sales
The following table summarizes net sales by segment (dollar amounts in
thousands):
Years Ended December 31, Change
2012 2011 Amount %
U.S. Consumer Direct $ 281,583 $ 251,334 $ 30,249 12.0 %
U.S. Wholesale 99,215 86,268 12,947 15.0 %
International 83,824 78,974 4,850 6.1 %
Core Services 2,663 3,222 (559 ) (17.3 )%
Total net sales $ 467,285 $ 419,798 $ 47,487 11.3 %
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The following table summarizes percentage of total net sales by segment:
December 31, Change
2012 2011 %
U.S. Consumer Direct 60.3 % 59.9 % 0.4 %
U.S. Wholesale 21.2 20.5 0.7 %
International 17.9 18.8 (0.9 )%
Core Services 0.6 0.8 (0.2 )%
Total net sales 100.0 % 100.0 %
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U.S. Consumer Direct segment's net sales increased 12.0% to $281.6 million from the expansion of our retail store count since January 1, 2012 and a Same Store Sales increase in 2012 of 2.7%. We started 2012 with 109 stores and we had 122 stores at the end of 2012. The Same Store Sales increase was driven by favorable men's merchandise sales trends in both denim and non-denim categories, which was partially offset by a sales decrease in the women's denim category. We expect to open 14 new branded retail stores in 2013.
U.S. Wholesale segment's net sales increased 15.0% to $99.2 million, primarily due to an increase in sales to the Off-Price and Specialty Stores channels, which was partially offset by a decrease in sales to Majors. Off-Price channel's sales increase reflects our decision to sell slow-moving merchandise through this channel. The demand for men's merchandise in the Specialty Stores channel spurred this channel's sales increase. Sales to Majors declined as the number of doors offering our women's product declined while the number of doors offering men's product remained consistent.
International segment's net sales increased 6.1% to $83.8 million in 2012 primarily due to a 104.3% increase in retail sales as we have steadily increased our international store count since the beginning of 2012. We started 2012 with 16 stores and we had 30 stores at the end of 2012. In 2013, we expect to open five to eight international retail stores. The increases in our retail sales were partially offset by declines in our wholesale business in the Asia Pacific region, Canada and Germany. Our most significant decline in the Asia Pacific region was due to brand repositioning in Korea.
Core Services segment's net sales decreased 17.3% to $2.7 million in 2012, due to the non-renewal of a licensing agreement and reduced sales by other licensees. It is our intention to refocus our internal resources on enhancing our relationships with our successful licensees and explore licensing opportunities in other merchandise categories.
Gross Profit
The following table summarizes gross profit by segment (dollar amounts in
thousands):
Years Ended December 31, Change
2012 2011 Amount %
U.S. Consumer Direct $ 197,328 $ 178,341 $ 18,987 10.6 %
U.S. Wholesale 50,452 44,445 6,007 13.5 %
International 49,080 45,821 3,259 7.1 %
Core Services 2,663 3,222 (559 ) (17.3 )%
Total gross profit $ 299,523 $ 271,829 $ 27,694 10.2 %
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The following table summarizes gross profit as a percentage of net sales ("gross margin") by segment:
December 31, Change
2012 2011 %
U.S. Consumer Direct 70.1 % 71.0 % (0.9 )%
U.S. Wholesale 50.9 51.5 (0.6 )%
International 58.6 58.0 0.6 %
Core Services 100.0 100.0 0.0 %
Total gross margin 64.1 % 64.8 % (0.7 )%
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Overall gross margin declined from 64.8% of net sales in 2011 to 64.1% of net sales in 2012, primarily due to the 90 basis point decrease in the U.S. Consumer Direct segments' gross margin, which was partially offset by a 60 basis point increase in the International segment's gross margin.
U.S. Consumer Direct gross margin decreased to 70.1% in 2012 from 71.0% in 2011 primarily due to a sales mix shift toward our lower-margin outlet store merchandise and increased markdowns in our outlet stores in order to clear slower-moving women's merchandise.
U.S. Wholesale gross margin decreased to 50.9% in 2012 from 51.5% in 2011 due to an increase in sales to the Off-Price channel, which earns a lower gross margin. Also contributing to the decrease was a sales mix shift within the Off-Price channel towards increased sales of slow-moving merchandise, which earns a lower gross margin than designed-for-outlet merchandise.
International gross margin increased to 58.6% in 2012 from 58.0% in 2011 primarily due to the sales mix shift towards our international retail business, which earns a higher gross margin than our wholesale business. We have experienced pressure to our gross margin in our international retail stores compared to the prior year as we have increased our promotional activity, revised our pricing strategy in certain markets and shifted our mix of retail sales to the lower-margin outlet channel.
Selling, General and Administrative Expenses
The following table presents the components of selling, general &
administrative expenses ("SG&A") by segment (dollar amounts in thousands):
Years Ended December 31, Change
2012 2011 Amount %
U.S. Consumer Direct $ 103,602 $ 89,888 $ 13,714 15.3 %
U.S. Wholesale 6,119 7,329 (1,210 ) (16.5 )%
International 41,185 29,894 11,291 37.8 %
Core Services 70,500 70,107 393 0.6 %
Total selling, general and
administrative expenses $ 221,406 $ 197,218 $ 24,188 12.3 %
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The following table summarizes SG&A as a percentage of segment net sales ("SG&A rate") by segment:
December 31, Change
2012 2011 %
U.S. Consumer Direct 36.8 % 35.8 % 1.0 %
U.S. Wholesale 6.2 8.5 (2.3 )%
International 49.1 37.9 11.2 %
Core Services NM NM NM
Total SG&A rate 47.4 % 47.0 % 0.4 %
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U.S. Consumer Direct SG&A increased $13.7 million, from $89.9 million in 2011 to $103.6 million in 2012. This increase is directly related to the store expansion over the prior year, from 109 at the end of 2011 to 122 at the end of 2012. Also contributing to the increase were merchandise planning and buying resources to support this segment's sales growth. As a percentage of net sales, the U.S. Consumer Direct SG&A rate increased from 35.8% in 2011 to 36.8% in 2012 primarily due to the increases in merchandise planning and buying resources. The 4-Wall SG&A rate decreased from 31.8% in 2011 to 31.2% in 2012.
U.S. Wholesale SG&A decreased $1.2 million or 16.5%, primarily due to a decrease in bad debt expense. In 2011, we wrote off a $0.7 million receivable from a former customer as a result of their bankruptcy filing. The decrease in SG&A costs combined with the segment's increase in sales contributed to the U.S. Wholesale SG&A rate decreasing from 8.5% in 2011 to 6.2% in 2012.
International SG&A increased $11.3 million, from $29.9 million in 2011 to $41.2 million in 2012, primarily due to planned expansion, including an increase in the number of retail stores from 16 at December 31, 2011 to 30 at December 31, 2012. As a percentage of net sales, the International SG&A rate was 49.1% in 2012 versus 37.9% in 2011. The SG&A rate increase was driven by the wholesale sales decrease and the sales mix shift to the direct retail business, which has a higher SG&A rate than the wholesale business. In addition, the segment opened 14 stores in the year, which nearly doubled our International store count. In general, the 4-Wall SG&A rate for International stores exceeds the 4-Wall SG&A rate at our U.S. Consumer Direct stores due to the higher occupancy costs to operate stores.
Core Services SG&A remained relatively flat at $70.5 million, which represents a 40 basis point increase in the Core Services SG&A rate. Included in the SG&A expenses for the year ended December 31, 2012 were costs associated with the review of strategic alternatives of $1.0 million. Included in the SG&A expenses for the year ended December 31, 2011 were net separation costs of $1.2 million associated with the resignation of a former executive. Excluding the costs associated with the review of strategic alternatives and net separation costs from the respective periods, the Core Services SG&A rate decreased to 14.9% for 2012 from 16.4% for 2011 due to sales growth which produced leverage on fixed costs.
Operating Income
The following table summarizes operating income by segment (dollar amounts
in thousands):
Years Ended December 31, Change
2012 2011 Amount %
U.S. Consumer Direct $ 93,726 $ 88,453 $ 5,273 6.0 %
U.S. Wholesale 44,333 37,116 7,217 19.4 %
International 7,895 15,927 (8,032 ) (50.4 )%
Core Services (67,837 ) (66,885 ) (952 ) (1.4 )%
Total operating income $ 78,117 $ 74,611 $ 3,506 4.7 %
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The following table summarizes operating income as a percentage of net sales ("operating margin") by segment:
December 31, Change
2012 2011 %
U.S. Consumer Direct 33.3 % 35.2 % (1.9 )%
U.S. Wholesale 44.7 43.0 1.7 %
International 9.4 20.2 (10.8 )%
Core Services NM NM NM
Total operating margin 16.7 % 17.8 % (1.1 )%
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Operating income totaled $78.1 million, an increase of 4.7% over 2011. Operating margin was 16.7% in 2012 versus 17.8% in 2011 The operating margin decline was primarily due to the expansion costs made in the International segment to take control of sales and support long-term growth.
U.S. Consumer Direct operating margin decreased from 35.2% in 2011 to 33.3% in 2012 primarily due to reduced gross margin and higher SG&A rate. The 4-Wall operating margin was 38.9% in 2012 versus 39.3% in 2011.
U.S. Wholesale operating margin increased from 43.0% in 2011 to 44.7% in 2012 driven by the 15.0% growth in net sales.
International operating margin decreased from 20.2% in 2011 to 9.4% in 2012 primarily due to retail sales growth that was insufficient to offset the start-up costs of retail expansion coupled with the decline in international wholesale sales.
Other (Income) Expense, net
Net other (income) expense was $(0.1) million in 2012 compared to $0.6 million in 2011. This increase is primarily due to interest income earned on investments offset by smaller net foreign exchange losses on our intercompany balances with our foreign subsidiaries.
Provision for Income Taxes
Our effective tax rate increased to 40.3% in 2012 compared to 38.1% in 2011.
. We recorded valuation allowances against certain International net operating
loss carryforwards, which increased our income tax provision by $1.7 million in
2012. The 2012 operating results at our Swiss subsidiary were below our
expectations, which necessitated the valuation allowance in 2012.
Net Income attributable to True Religion Apparel, Inc. and Earnings Per Diluted Share
Net income attributable to True Religion Apparel, Inc. was $46.0 million, or $1.82 per diluted share, for 2012 compared to $45.0 million, or $1.80 per diluted share, for 2011. This increase is primarily due to the increase in net sales driving higher operating profit offset by a higher effective tax rate.
2011 Compared to 2010
The following table summarizes results of operations for 2011 compared to
2010 (dollar amounts in thousands, except per share data):
Years Ended December 31,
2011 2010
Amount % Amount % Change %
Net sales $ 419,798 100.0 % $ 363,714 100.0 % $ 56,084 15.4 %
Gross profit 271,829 64.8 % 229,979 63.2 % 41,850 18.2 %
Selling, general and
administrative expenses 197,218 47.0 % 160,057 44.0 % 37,161 23.2 %
Operating income 74,611 17.8 % 69,922 19.2 % 4,689 6.7 %
Other expense (income), net 637 0.2 % (403 ) (0.1 )% 1,040 258.1 %
Provision for income taxes 28,197 6.7 % 26,690 7.3 % 1,507 5.6 %
Net Income attributable to
True Religion Apparel, Inc. $ 44,967 10.7 % $ 43,496 12.0 % $ 1,471 3.4 %
Earnings per share
attributable to True Religion
Apparel, Inc.:
Basic $ 1.81 $ 1.78 $ 0.03 1.7 %
Diluted $ 1.80 $ 1.75 $ 0.05 2.9 %
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Net Sales
The following table summarizes net sales by segment (dollar amounts in
thousands):
Years Ended December 31, Change
2011 2010 Amount %
U.S. Consumer Direct $ 251,334 $ 189,097 $ 62,237 32.9 %
U.S. Wholesale 86,268 104,874 (18,606 ) (17.7 )%
International 78,974 64,443 14,531 22.5 %
Core Services 3,222 5,300 (2,078 ) (39.2 )%
Total net sales $ 419,798 $ 363,714 $ 56,084 15.4 %
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The following table summarizes percentage of total net sales by segment:
December 31, Change
2011 2010 %
U.S. Consumer Direct 59.9 % 52.0 % 7.9 %
U.S. Wholesale 20.5 28.8 (8.3 )%
International 18.8 17.7 1.1 %
Core Services 0.8 1.5 (0.7 )%
Total net sales 100.0 % 100.0 %
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U.S. Consumer Direct segment's net sales increased 32.9% to $251.3 million from the expansion of our retail store count since January 1, 2011 and a Same Store Sales increase in 2011 of 10.9%. We started 2011 with 94 stores and we had 109 stores at the end of 2011. The Same Store Sales increase was driven by sales of sportswear styles, including shorts, non-denim pants, woven tops and t-shirts.
U.S. Wholesale segment's net sales decreased 17.7% to $86.3 million, primarily due to a decrease in sales of women's merchandise to major department store accounts and the planned $10.0 million reduction in sales to the Off-price channel. Partially offsetting these decreases was an increase in sales to our Specialty channel.
International segment's net sales increased 22.5% to $79.0 million in 2011 driven primarily by the expansion of our retail store count since January 1, 2011, and the transition in Germany from third party distributor to consolidated joint venture in August 2010. We started 2011 with seven stores and we had 16 stores at the end of 2011.
Core Services segment's net sales decreased 39.2% to $3.2 million in 2011, as we have partnered with a licensee to reposition the licensee's merchandise to a higher price range and reduce its minimum royalties to levels more consistent with its sales.
Gross Profit
The following table summarizes gross profit by segment (dollar amounts in
thousands):
Years Ended December 31, Change
2011 2010 Amount %
U.S. Consumer Direct $ 178,341 $ 136,915 $ 41,426 30.3 %
U.S. Wholesale 44,445 53,362 (8,917 ) (16.7 )%
International 45,821 34,402 11,419 33.2 %
Core Services 3,222 5,300 (2,078 ) (39.2 )%
Total gross profit $ 271,829 $ 229,979 $ 41,850 18.2 %
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The following table summarizes gross margin by segment:
December 31, Change
2011 2010 %
U.S. Consumer Direct 71.0 % 72.4 % (1.4 )%
U.S. Wholesale 51.5 50.9 0.6 %
International 58.0 53.4 4.6 %
Core Services 100.0 100.0 0.0 %
Total gross margin 64.8 % 63.2 % 1.6 %
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Overall gross margin improved from 63.2% of net sales in 2010 to 64.8% of net sales in 2011, primarily reflecting the ongoing sales mix shift toward the higher-margin U.S. Consumer Direct segment and the increased margin earned by the International segment.
U.S. Consumer Direct gross margin decreased to 71.0% in 2011 from 72.4% in 2010 primarily due to a drop in the outlet gross margin, driven by increased markdowns and a higher percentage of the segment's net sales coming from the lower-margin outlet stores.
U.S. Wholesale gross profit increased to 51.5% in 2011 from 50.9% in 2010 as we increased prices on certain styles, which offset the impact of the denim fabric price increases we experienced in 2011.
International gross margin increased to 58.0% in 2011 from 53.4% in 2010 primarily due to the sales mix shift towards our international retail and wholesale businesses, which earn a higher gross margin than sales to international distributors.
Selling, General and Administrative Expenses
The following table presents the components of SG&A by segment (dollar
amounts in thousands):
Years Ended December 31, Change
2011 2010 Amount %
U.S. Consumer Direct $ 89,888 $ 72,274 $ 17,614 24.4 %
U.S. Wholesale 7,329 7,097 232 3.3 %
International 29,894 16,915 12,979 76.7 %
Core Services 70,107 63,771 6,336 9.9 %
Total selling, general and
administrative expenses $ 197,218 $ 160,057 $ 37,161 23.2 %
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The following table summarizes SG&A rate by segment:
December 31, Change
2011 2010 %
U.S. Consumer Direct 35.8 % 38.2 % (2.4 )%
U.S. Wholesale 8.5 6.8 1.7 %
International 37.9 26.2 11.7 %
Core Services NM NM NM
Total SG&A rate 47.0 % 44.0 % 3.0 %
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U.S. Consumer Direct SG&A increased $17.6 million, from $72.3 million in 2010 to $89.9 million in 2011. This increase is directly related to the store expansion over the prior year, from 94 at the end of 2010 to 109 at the end of 2011 and the $0.5 million increase in store impairment charges. As a percentage of net sales, the U.S. Consumer Direct SG&A rate decreased from 38.2% in 2010 to 35.8% in 2011 primarily due to the increase in Same Store Sales of 10.9%, which produced leverage on fixed costs.
U.S. Wholesale SG&A increased $0.2 million or 3.3%, primarily due to the $0.7 million write-off of receivables from a customer that shut down and filed bankruptcy in the second quarter of 2011. Partially offsetting this increase in 2011 were costs in 2010 associated with the transition from a sales agent to an in-house sales team that did not recur in 2011.
International SG&A increased $13.0 million, from $16.9 million in 2010 to $29.9 million in 2011, primarily due to planned expansion, including an increase in the number of retail stores from seven at December 31, 2010 to 16 at December 31, 2011; the addition of wholesale sales teams in Germany, the United Kingdom and Italy; and the set-up of a regional office in Switzerland.
Core Services SG&A increased $6.3 million or 9.9%, primarily due to an increase in merchandise, design, samples and production costs of $2.6 million; professional fees of $1.7 million; litigation settlements of $1.5 million; and . . .
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