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TRLG > SEC Filings for TRLG > Form 10-Q on 29-Jul-2013All Recent SEC Filings

Show all filings for TRUE RELIGION APPAREL INC

Form 10-Q for TRUE RELIGION APPAREL INC


29-Jul-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We generally identify forward-looking statements in this report using words like "believe," "intend," "expect," "estimate," "may," "plan," "should plan," "project," "contemplate," "anticipate," "predict," "potential," "continue," or similar expressions. You may find some of these statements below and elsewhere in this Quarterly Report. These forward-looking statements are not historical facts and are inherently uncertain and outside of our control. Any or all of our forward-looking statements in this report may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this report will be important to determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially.
Factors that may cause our plans, expectations, future financial condition and results to change are described throughout this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed on March 1, 2013 (the "2012 Annual Report"), particularly in "Risk Factors," Part 1, Item 1A of that report, and include the following:

the negative general economic conditions and the current global financial crisis;

                      our ability to predict fashion trends;

                      our ability to continue to maintain our brand image and
reputation;

                      competition from companies with significantly greater
resources than ours;

                      increases in the price of raw materials or their reduced
availability; and

                      our ability to continue and control our expansion plans.

Among the forward-looking information set forth in this Quarterly Report on Form 10-Q is a discussion of the Merger Agreement that we recently entered into. Risks, uncertainties and assumptions include, but are not limited to:
(1) the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement; (2) the inability to complete the proposed Merger due to the failure to obtain stockholder approval for the proposed Merger or the failure to satisfy other conditions to completion of the proposed Merger, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the transaction; (3) the failure to obtain the necessary financing arrangements set forth in the debt and equity commitment letters delivered pursuant to the Merger Agreement; (4) risks related to disruption of management's attention from the Company's ongoing business operations due to the transaction; and (5) the effect of the announcement of the proposed Merger on the Company's relationships with its customers, suppliers, operating results and business generally.

The forward-looking information set forth in this Quarterly Report on Form 10-Q is as of July 29, 2013, and we undertake no duty to update this information.
Shareholders and prospective investors can find information filed with the SEC after July 29, 2013 at our website at www.truereligionbrandjeans.com or at the SEC website at www.sec.gov.

RESULTS OF OPERATIONS

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.


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The following table summarizes our stores by format:

                                           As of              As of              As of
Store Count                            June 30, 2013    December 31, 2012    June 30, 2012
U.S. Stores
Regular Price                                     90                   86               83
Outlet                                            40                   36               33

U.S. Store Total                                 130                  122              116

International Stores
Regular Price                                     23                   20               14
Outlet                                            10                   10                9

International Store Total                         33                   30               23

Total U.S. and International Stores              163                  152              139

Recent Developments

On March 19, 2013, we announced that Jeff Lubell had decided to step down as Chairman, Chief Executive Officer and Creative Director and employee of the Company. We simultaneously entered into a separation agreement ("Separation Agreement") and a separate consulting agreement ("Consulting Agreement") pursuant to which his employment agreement was terminated. Under the Separation Agreement, Mr. Lubell received certain payments and benefits, including, among other things, a severance payment of $5.1 million, the vesting in full of certain unvested restricted stock, and other benefits (collectively, "Severance Costs"). Pursuant to the Consulting Agreement, Mr. Lubell agreed to provide consulting services to the Company for a period of two years at a fee of $1.0 million per year (the "Consulting Costs"). In consideration of the Consulting Costs, Mr. Lubell agreed to restrictions on his future activities during the term of the consulting agreement, including, without limitation, restrictions on his employment with Company competitors for one year, hiring of Company employees for two years, and disclosure of confidential Company information.

The combination of the Severance Costs and the Consulting Costs, totaling $7.5 million (the "Separation Costs"), were included as a component of selling, general and administrative expenses in the Core Services segment in the accompanying condensed consolidated statements of income for the six months ended June 30, 2013. In addition to his Separation Costs, the Separation Agreement provided that Mr. Lubell will be paid a pro-rated share of the 2013 annual bonus payable during the three months ended March 31, 2014; as of June 30, 2013 we have accrued $0.8 million for this obligation.

On May 10, 2013, we announced that we entered into a definitive merger agreement with TowerBrook Capital Partners L.P. ("TowerBrook"), the New York and London-based investment management firm, in a transaction valued at approximately $824 million (the "Merger"). Under the terms of the merger agreement (the "Merger Agreement"), TowerBrook will acquire all of the outstanding shares of True Religion common stock for $32.00 per share in cash. The merger is subject to approval from our stockholders, regulatory approvals and other customary closing conditions. The transaction is expected to close in the third quarter of 2013. Pursuant to the Merger Agreement, we have suspended our regular quarterly dividend through the earlier to occur of the closing of the merger or expiration of the Merger Agreement.

For more information about the Merger, see our Current Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission, or the SEC, on June 27, 2013. A special meeting of our stockholders is scheduled for July 29, 2013, to vote on the proposed Merger. If the Merger is approved and is consummated, we will no longer be a publicly-traded company, and our shares will cease to be traded on NASDAQ.


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Second Quarter 2013 Compared to Second Quarter 2012



The following table summarizes results of operations for the three months ended
June 30, 2013 and 2012 (dollar amounts in thousands, except per share data):



                                               Three Months Ended June 30,
                                    2013                   2012                  Change
                              Amount        %        Amount        %        Amount       %
Net sales                    $ 116,563     100.0 %  $ 104,909     100.0 %  $ 11,564      11.1 %
Gross profit                    71,991      61.8 %     67,481      64.3 %     4,510       6.7 %
Selling, general and
administrative expenses         56,523      48.5 %     50,852      48.5 %     5,671      11.2 %
Operating income                15,468      13.3 %     16,629      15.9 %    (1,161 )    (7.0 )%
Other expense (income),
net                                (96 )    (0.1 )%     1,188       1.1 %     1,284        NM
Provision for income taxes       7,138       6.1 %      5,603       5.3 %     1,535      27.4 %
Net income attributable to
True Religion
Apparel, Inc.                $   8,353       7.2 %  $   9,777       9.3 %  $ (1,424 )   (14.6 )%
Net income per share
attributable to True
Religion Apparel, Inc.:
Basic                        $   0. 33              $    0.39              $  (0.06 )   (15.4 )%
Diluted                      $    0.33              $    0.39              $  (0.06 )   (15.4 )%

Net Sales



The following table summarizes net sales by segment (dollar amounts in
thousands):



                         Three Months Ended,
                              June 30,                Change
                          2013         2012       Amount      %
U.S. Consumer Direct   $    71,415   $  64,362   $  7,053    11.0 %
U.S. Wholesale              24,526      22,416      2,110     9.4
International               20,486      17,724      2,762    15.5
Core Services                  136         407       (271 ) (66.6 )
Total net sales        $   116,563   $ 104,909   $ 11,654    11.1 %

The following table summarizes the percentage of total net sales by segment:

Three Months Ended,

                              June 30,
                         2013         2012
U.S. Consumer Direct        61.3 %       61.3 %
U.S. Wholesale              21.0         21.4
International               17.6         16.9
Core Services                0.1          0.4
Total net sales            100.0 %      100.0 %

U.S. Consumer Direct segment's net sales (which includes our retail stores and e-commerce site) increased 11.0% to $71.4 million from the expansion of our retail store count. We ended the second quarter with 130 stores compared to 116 stores at the end of the second quarter 2012. Same store sales decreased 1.2% in the second quarter of 2013 as compared to the second quarter of 2012. Our Regular Price stores experienced a decline in sales of denim pants, which was partially offset by increases in sales of men's shorts and non-denim pants.

U.S. Wholesale net sales increased 9.4% to $24.5 million, primarily due to an increase in sales to the Off-Price channel, which was partially offset by a decrease in sales to the Specialty channel. Our decision to drop Specialty Stores customers who we found were re-selling our merchandise to unapproved wholesale accounts led to the decline in this channel's sales this quarter. Sales to Majors remained relatively flat as an increase in sales of men's merchandise was offset by a decrease in sales of women's merchandise.

International net sales increased by 15.5% to $20.5 million primarily due to a 35% increase in our international retail sales due to an increase in our retail store count from 23 operated as of June 30, 2012 to 33 as of June 30, 2013. The ten new stores contributed net


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sales of $3.0 million in the second quarter of 2013. Our wholesale sales in Korea declined by $0.9 million as compared to our sales in 2012 because of our ongoing brand repositioning.

Core Services net sales is comprised of royalties due under licensing arrangements. Core Services net sales decreased 66.6% to $0.1 million due primarily 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):



                         Three Months Ended,
                              June 30,               Change
                          2013          2012     Amount      %
U.S. Consumer Direct   $    48,091    $ 44,905   $ 3,186     7.1 %
U.S. Wholesale              12,744      11,204     1,540    13.7
International               11,020      10,965        55     0.5
Core Services                  136         407      (271 ) (66.6 )
Total gross profit     $    71,991    $ 67,481   $ 4,510     6.7 %

The following table summarizes gross profit as a percentage of net sales ("gross margin") by segment:

Three Months Ended,

                              June 30,          Change
                         2013         2012        %
U.S. Consumer Direct        67.3 %       69.8 %   (2.5 )%
U.S. Wholesale              52.0         50.0      2.0
International               53.8         61.9     (8.1 )
Core Services              100.0        100.0      0.0
Total gross margin          61.8 %       64.3 %   (2.5 )%

Overall gross profit increased 6.7% to $72.0 million in the second quarter of 2013, driven primarily by the overall sales increase. Overall gross margin declined 250 basis points to 61.8% primarily due to the 250 basis point decrease in the U.S. Consumer Direct's gross margin.

U.S. Consumer Direct gross margin decreased to 67.3% in the second quarter of 2013 from 69.8% in the same quarter in 2012, primarily due to increased markdowns in our Outlet stores in order to sell through slow-moving merchandise styles, including denim pants.

U.S. Wholesale gross margin increased to 52.0% in the second quarter of 2013 from 50.0% in the same quarter in 2012, primarily due to the improved mix of 'designed for' merchandise sold to the Off-Price channel. We also experienced improved margins in our other U.S. Wholesale channels due to higher margins in men's denim due to the elimination of lower margin products from our offering.

International gross margin decreased to 53.8% in the second quarter of 2013 from 61.9% in the same quarter in 2012 primarily driven by lower wholesale gross margins due to discounting to clear slow-moving merchandise.


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Selling, General and Administrative Expenses



The following table presents the components of selling, general & administrative
expenses ("SG&A") by segment (dollar amounts in thousands):



                                     Three Months Ended,
                                          June 30,                     Change
                                     2013           2012         Amount          %
U.S. Consumer Direct              $    27,859    $   23,831    $    4,028         16.9 %
U.S. Wholesale                          1,299         1,445          (146 )      (10.1 )
International                          10,521         9,250         1,271         13.7
Core Services                          16,844        16,326           518          3.2
Total selling, general and
administrative expenses           $    56,523    $   50,852    $    5,671         11.2 %

The following table summarizes SG&A as a percentage of net sales ("SG&A rate") by segment:

                         Three Months Ended,
                              June 30,           Change
                         2013          2012        %
U.S. Consumer Direct        39.0 %        37.0 %    2.0 %
U.S. Wholesale               5.3           6.4     (1.1 )
International               51.4          52.2     (0.8 )
Core Services                 NM            NM       NM
Total SG&A rate             48.5 %        48.5 %   (0.4 )%

U.S. Consumer Direct SG&A increased $4.0 million, from $23.8 million in the second quarter of 2012 to $27.9 million in the second quarter of 2013. The SG&A expense of the stores opened over the past year caused $3.2 million of this increase. As a percentage of net sales, U.S. Consumer Direct SG&A increased from 37.0% in the second quarter of 2012 to 39.0% in the second quarter of 2013, primarily due to increased payroll costs to process slow-moving merchandise transfers.

U.S. Wholesale SG&A decreased $0.1 million, from $1.4 million in the second quarter of 2012 to $1.3 million in the second quarter of 2013. This segment's SG&A rate decreased from 6.4% in the second quarter of 2012 to 5.3% in the same period of 2013 driven by the 9.4% increase in this segment's net sales.

International SG&A increased $1.3 million, from $9.3 million in the second quarter of 2012 to $10.5 million in the second quarter of 2013, due to our planned expansion, including an increase in the number of branded retail stores from 23 stores at June 30, 2012 to 33 stores at June 30, 2013. We attribute approximately $1.7 million to costs associated with our expanded store count. These increases were partially offset by $0.6 million reductions in SG&A due to lower payroll overhead and professional fees during the three months ended June 30, 2013 compared to the same period in 2012.

Core Services SG&A remained flat compared to last year. Included in the SG&A expenses for the three months ended June 30, 2013 were strategic alternatives review costs of $3.3 million. Excluding the costs associated with the strategic alternatives review, the Core Services SG&A rate decreased 400 basis points due to higher sales and a reduction in performance-based compensation expense.

Operating Income



The following table presents operating income (loss) by segment (dollar amounts
in thousands):



                           Three Months Ended,
                                June 30,                Change
                            2013          2012      Amount      %
U.S. Consumer Direct     $    20,232    $ 21,075   $   (843 )  (4.0 )%
U.S. Wholesale                11,445       9,759      1,686    17.3
International                    499       1,715     (1,216 ) (70.9 )
Core Services                (16,708 )   (15,920 )     (789 )  (5.0 )
Total operating income   $    15,468    $ 16,629   $ (1,161 )  (7.0 )%


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The following table summarizes operating income (loss) as a percentage of net sales ("operating margin") by segment:

                                  Three Months Ended,
                                       June 30,           Change
                                  2013          2012        %
U.S. Consumer Direct                 28.3 %        32.7 %   (4.4 )%
U.S. Wholesale                       46.7          43.5      3.2
International                         2.4           9.7     (7.3 )
Core Services                          NM            NM       NM
Total operating income margin        13.3 %        15.9 %   (2.6 )%

Operating income totaled $15.5 million, down 7.0% compared to the second quarter of last year. Operating margin was 13.3% in the second quarter of 2013 compared to 15.9% in the second quarter of 2012. The operating income decrease is primarily attributable to increases in SG&A driven by strategic alternatives review costs in the Core Services segment. Excluding the strategic alternatives review costs, our operating margin increased from 15.9% in the second quarter of 2012 to 16.1% in the second quarter of 2013.

The U.S. Consumer Direct operating margin decreased from 32.7% in the second quarter of 2012 to 28.3% in the second quarter of 2013, due to the reduced gross margins and increased payroll costs to process slow-moving merchandise transfers.

The U.S. Wholesale operating margin increased from 43.5% in the second quarter of 2012 to 46.7% in the second quarter of 2013 driven by this segment's improved gross margin and net sales increase.

The International operating margin decreased from 9.7% in the second quarter of 2012 to 2.4% in the second quarter of 2013 primarily due to lower than expected gross margin driven by sales discounts to sell-off slow-moving merchandise.

Other Expense (Income), net

Net other expense (income) was $0.1 million in the second quarter of 2013 compared to $1.2 million in the second quarter of 2012. Since the first quarter of 2012 we reduced our intercompany payable balances by contributing capital into our subsidiaries; this reduced our exposure to foreign exchange gains and losses.

Provision for Income Taxes

The effective tax rate for the second quarter of 2013 was 45.9% compared to 36.3% for the second quarter of 2012. The 2013 effective tax rate increase over 2012 is primarily due to the increased ratio in 2013 of losses in foreign jurisdictions where valuation allowances have been established to our overall pre-tax income; our 2013 higher SG&A costs, notably those associated with the review of strategic alternatives, contributed to this unfavorable ratio.

Net Income attributable to True Religion Apparel, Inc. and Earnings Per Diluted Share

Net income attributable to True Religion Apparel, Inc. was $8.4 million, or $0.33 per diluted share, for the second quarter of 2013 compared to $9.8 million, or $0.39 per diluted share, for the second quarter of 2012.


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Year-to-Date 2013 Compared to Year-to-Date 2012



The following table summarizes results of operations for the six months ended
June 30, 2013 and 2012 (dollar amounts in thousands, except per share data):



                                        Six Months Ended June 30,
                            2013                   2012                  Change
                     Amount        %        Amount        %        Amount        %
Net sales           $ 237,358      100.0 % $ 211,694      100.0 % $  25,664       12.1 %
Gross profit          145,676       61.4 %   136,382       64.4 %     9,294        6.8 %
Selling, general
and
administrative
expenses              127,138       53.6 %   102,518       48.4 %    24,620       24.0 %
Operating income       18,538        7.8 %    33,864       16.0 %   (15,326 )    (45.3 )%
Other expense
(income), net             121        0.1 %       337        0.2 %      (216 )       NM
Provision for
income taxes            9,608        4.0 %    12,976        6.1 %    (3,368 )    (26.0 )%
Net income
attributable to
True Religion
Apparel, Inc.       $   8,879        3.7 % $  20,190        9.5 % $ (11,311 )    (56.0 )%
Net income per
share
attributable to
True Religion
Apparel, Inc.:
Basic               $    0.35              $    0.81              $   (0.46 )    (56.8 )%
Diluted             $    0.35              $    0.80              $   (0.45 )    (56.3 )%

Net Sales



The following table summarizes net sales by segment (dollar amounts in
thousands):



                         Six Months Ended,
                             June 30,               Change
                         2013        2012       Amount      %
U.S. Consumer Direct   $ 144,761   $ 129,819   $ 14,942    11.5 %
U.S. Wholesale            50,061      43,861      6,200    14.1
International             41,832      36,856      4,976    13.5
Core Services                704       1,158       (454 ) (39.2 )
Total net sales        $ 237,358   $ 211,694   $ 25,664    12.1 %

The following table summarizes the percentage of total net sales by segment:

Six Months Ended,

                             June 30,
                         2013        2012
U.S. Consumer Direct       61.0 %      61.3 %
U.S. Wholesale             21.1        20.7
International              17.6        17.4
Core Services               0.3         0.6
Total net sales           100.0 %     100.0 %

U.S. Consumer Direct segment's net sales (which includes our retail stores and e-commerce site) increased 11.5% to $144.8 million from the expansion of our retail store count. Same store sales decreased 0.2% in the first six months of 2013 as compared to the same period of 2012. Fewer shoppers visited our Regular Price and Outlet stores in the first six months of 2013 compared to 2012, but a higher percentage of shoppers bought merchandise this year. The Regular Price sales were impacted by a lower average unit retail price due to a shift from higher-priced denim to lower-priced sportswear merchandise. In addition to the mix shift from denim to sportswear, our Outlet stores were also impacted by higher markdowns taken on excess merchandise.

U.S. Wholesale net sales increased 14.1% to $50.1 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 the Majors channel. Sales to Majors declined as the number of doors offering our women's merchandise declined while the number of doors offering men's product remained consistent.

International net sales increased by 13.5% to $41.8 million primarily due to a 43% increase in our international retail sales due to an increase in our retail store count from 23 operated as of June 30, 2012 to 33 as of June 30, 2013. The higher retail sales contributed an additional $6.5 million in sales, which was offset by a decline in wholesale sales, including a $2.7 million decrease in Korea as we continue to reposition our brand in that market.


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Core Services net sales is comprised of royalties due under licensing arrangements. Core Services net sales decreased 39.2% to $0.7 million due primarily to the non-renewal of a licensing agreement and reduced sales by other licensees.

Gross Profit



The following table summarizes gross profit by segment (dollar amounts in
thousands):



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