10-Q 1 a12-19900_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly report period ended September 30, 2012

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                         to

 

Commission File Number: 000-51483

 

TRUE RELIGION APPAREL, INC.

(Exact name of registrant specified in its charter)

 

DELAWARE

 

98-0352633

(State or other jurisdiction of
 incorporation or organization)

 

(IRS Employer Identification No.)

 

2263 East Vernon Avenue, Vernon, CA 90058

(Address of Principal Executive Offices)

 

(323) 266-3072

Issuer’s telephone number, including area code

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

As of October 31, 2012, 25,786,496 shares of common stock were outstanding.

 

 

 



Table of Contents

 

TRUE RELIGION APPAREL, INC.

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

 

ITEM 1.

Financial Statements (unaudited)

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011

1

 

 

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2012 and 2011

2

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011

3

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011

4

 

 

Notes to Condensed Consolidated Financial Statements

5

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

 

ITEM 3.

Quantitative and Qualitative Disclosure about Market Risk

23

 

ITEM 4.

Controls and Procedures

23

PART II — OTHER INFORMATION

 

 

ITEM 1.

Legal Proceedings

24

 

ITEM 1A.

Risk Factors

24

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

 

ITEM 3.

Default Upon Senior Securities

24

 

ITEM 4.

Mine Safety Disclosures

24

 

ITEM 5.

Other Information

24

 

ITEM 6.

Exhibits

25

SIGNATURES

26

 

 

EXHIBIT 31.1

 

EXHIBIT 31.2

 

EXHIBIT 32.1

 

EXHIBIT 32.2

 

 

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Table of Contents

 

PART I — Financial Information

 

Item 1.                    Financial Statements (Unaudited)

 

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value amounts)

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

51,395

 

$

200,366

 

Short-term investments

 

117,308

 

 

Accounts receivable, net of allowances

 

36,156

 

23,959

 

Inventories

 

64,076

 

53,320

 

Deferred income tax assets

 

6,066

 

7,027

 

Prepaid income taxes

 

6,901

 

3,879

 

Prepaid expenses and other current assets

 

11,944

 

12,137

 

Total current assets

 

293,846

 

300,688

 

Property and equipment, net

 

62,579

 

53,698

 

Long-term investments

 

31,721

 

 

Deferred income tax assets

 

866

 

1,271

 

Other assets

 

5,263

 

4,496

 

TOTAL ASSETS

 

$

394,275

 

$

360,153

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

30,936

 

$

22,872

 

Accrued salaries, wages and benefits

 

11,130

 

11,506

 

Income taxes payable

 

262

 

6,538

 

Total current liabilities

 

42,328

 

40,916

 

Long-term deferred rent

 

17,125

 

13,986

 

Long-term deferred income tax liabilities

 

3,698

 

2,224

 

Long-term income tax payable

 

898

 

604

 

Total long-term liabilities

 

21,721

 

16,814

 

Total liabilities

 

64,049

 

57,730

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

2,972

 

2,635

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $0.0001 par value, 20,000 shares authorized, no shares issued and outstanding

 

 

 

Common stock, $0.0001 par value, 80,000 shares authorized, 25,780 and 25,492 issued and outstanding, respectively

 

3

 

3

 

Additional paid-in capital

 

86,960

 

77,950

 

Retained earnings

 

238,775

 

221,122

 

Accumulated other comprehensive income, net

 

1,516

 

713

 

Total stockholders’ equity

 

327,254

 

299,788

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

394,275

 

$

360,153

 

 

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

 

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

Nine months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net sales

 

$

118,549

 

$

108,364

 

$

330,243

 

$

300,389

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

43,526

 

38,174

 

118,838

 

105,086

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

75,023

 

70,190

 

211,405

 

195,303

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

56,161

 

50,264

 

158,679

 

145,351

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

18,862

 

19,926

 

52,726

 

49,952

 

 

 

 

 

 

 

 

 

 

 

Other (income) expense, net

 

(415

)

250

 

(78

)

(231

)

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

19,277

 

19,676

 

52,804

 

50,183

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

6,928

 

7,374

 

19,904

 

19,070

 

 

 

 

 

 

 

 

 

 

 

Net income

 

12,349

 

12,302

 

32,900

 

31,113

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to redeemable noncontrolling interest

 

5

 

217

 

366

 

612

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to True Religion Apparel, Inc.

 

$

12,344

 

$

12,085

 

$

32,534

 

$

30,501

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to True Religion Apparel, Inc.:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.49

 

$

0.48

 

$

1.30

 

$

1.23

 

Diluted

 

$

0.49

 

$

0.48

 

$

1.29

 

$

1.22

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

25,176

 

24,927

 

25,103

 

24,831

 

Diluted

 

25,311

 

24,999

 

25,304

 

25,002

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share

 

$

0.20

 

$

 

$

0.40

 

$

 

 

The accompanying notes are an integral part of these financial statements.

 

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TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

 

 

Three Months Ended

 

Nine months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income

 

$

12,349

 

$

12,302

 

$

32,900

 

$

31,113

 

Cumulative translation adjustment

 

862

 

(488

)

725

 

(70

)

Unrealized gains on investments:

 

 

 

 

 

 

 

 

 

Unrealized gains arising during the year

 

49

 

 

49

 

 

Comprehensive income

 

13,260

 

11,814

 

33,674

 

31,043

 

Comprehensive income attributable to redeemable noncontrolling interest

 

(70

)

(73

)

(337

)

(639

)

Comprehensive income attributable to True Religion Apparel, Inc.

 

$

13,190

 

$

11,741

 

$

33,337

 

$

30,404

 

 

The accompanying notes are an integral part of these financial statements.

 

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TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

 

 

Nine months Ended September 30,

 

 

 

2012

 

2011

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

32,900

 

$

31,113

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

9,873

 

9,351

 

Provision for bad debts

 

714

 

857

 

Stock-based compensation

 

8,604

 

8,516

 

Tax benefit from stock-based compensation

 

405

 

761

 

Excess tax benefit from stock-based compensation

 

(511

)

(1,219

)

Deferred income taxes

 

2,836

 

2,177

 

Other, net

 

301

 

75

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(12,966

)

204

 

Inventories

 

(10,706

)

(12,255

)

Prepaid expenses and other current assets

 

742

 

(674

)

Other assets

 

(791

)

(442

)

Accounts payable and accrued expenses

 

6,664

 

8,745

 

Accrued salaries, wages and benefits

 

(389

)

(218

)

Prepaid income taxes and income taxes payable

 

(9,002

)

(747

)

Long-term deferred rent

 

3,069

 

2,420

 

Net cash provided by operating activities

 

31,743

 

48,664

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of investments

 

(167,282

)

 

Proceeds from maturities or sales of investments

 

18,028

 

 

Purchases of property and equipment

 

(17,389

)

(15,622

)

Expenditures to establish trademarks

 

(7

)

(30

)

Other assets

 

(242

)

 

Net cash used in investing activities

 

(166,892

)

(15,652

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Statutory tax withholding payment for stock-based compensation

 

(4,558

)

(5,450

)

Cash dividends paid

 

(10,076

)

 

Excess tax benefit from stock-based compensation

 

511

 

1,219

 

Net cash used in financing activities

 

(14,123

)

(4,231

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

301

 

(415

)

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(148,971

)

28,366

 

Cash and cash equivalents, beginning of period

 

200,366

 

153,792

 

Cash and cash equivalents, end of period

 

$

51,395

 

$

182,158

 

 

The accompanying notes are an integral part of these financial statements.

 

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TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — Description of the Business

 

True Religion Apparel, Inc. and subsidiaries (referred to in the Quarterly Report on Form 10-Q as “the Company,” “our,” or “we”) designs, markets, sells and distributes 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 segments on six continents, including North America, Europe, Asia, Australia, Africa and South America.

 

We operate in four primary business segments: U.S. Consumer Direct, U.S. Wholesale, International, and Core Services. We sell directly to consumers in the United States through full-price stores, outlet stores and through our retail internet site located at www.truereligionbrandjeans.com. As of September 30, 2012, we operated 85 full price stores and 34 outlet stores in the U.S.  Our U.S. Wholesale sales are made to leading nationwide premium department stores, specialty retailers and boutiques, and off-price retailers. Our International sales are made through a variety of channels, including subsidiaries and a joint venture that operate retail stores and sell to wholesale customers who operate retail stores; distributors who warehouse products at their expense and then ship to, and collect payment from, their customers; and directly to wholesale customers who operate retail stores. As of September 30, 2012, our International segment operated 18 full price stores and ten outlet stores.  In addition, we selectively license to third parties the right to use our various trademarks in connection with the manufacture and sale of designated products in specified geographical areas for specified periods. This licensing business is included in our Core Services segment.  Our corporate operations, which include the design, production, marketing, distribution, credit, customer service, information technology, accounting, executive, legal, and human resources departments, are also included in the Core Services segment.

 

NOTE 2 — Summary of Significant Accounting Policies

 

Basis of Consolidation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of True Religion Apparel, Inc., its subsidiaries, and its majority-owned subsidiary, True Religion Brand Jeans Germany GmbH (“TRBJ Germany”), which operates according to a joint venture agreement with its noncontrolling interest holder. All intercompany accounts and transactions have been eliminated in consolidation.

 

In the ordinary course of business, we make sales to customers affiliated with the noncontrolling interest holder of TRBJ Germany (“Related Parties”).  Net sales to Related Parties, which is included in net sales in the accompanying condensed consolidated statements of income, were $0.6 million and $1.8 million for the three and nine months ended September 30, 2012, respectively, and were $0.5 million and $2.5 million for the three and nine months ended September 30, 2011.  As of September 30, 2012 and 2011, our accounts receivable from Related Parties was $4.2 million and $4.1 million, respectively.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of True Religion Apparel, Inc. have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X for interim financial information issued by the Securities and Exchange Commission (“SEC”). Accordingly, as permitted under applicable rules and regulations, they do not include all of the information and notes required by GAAP for annual financial statements.  The accompanying condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC. The same accounting policies are followed for preparing quarterly and annual financial information. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included.  The results of operations for the three and nine months ended September 30, 2012, are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.

 

Concentration of Credit Risks

 

As of September 30, 2012 and December 31, 2011, the accounts receivable due from one customer was 15% and 10%, respectively, of our total accounts receivable, net of allowances.

 

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Table of Contents

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and notes thereto. Actual results could differ materially from those estimates.

 

Significant estimates inherent in the preparation of the accompanying condensed consolidated financial statements include reserves for customer returns, chargebacks, allowances for bad debts, inventory valuation, contingencies, valuation of long-lived assets, fixed asset useful lives, income taxes and other tax contingencies, and the valuation of stock-based compensation and related forfeiture rates.

 

Gift Cards

 

We sell gift cards with no expiration dates to customers.  We recognize revenue associated with our gift cards upon redemption of the gift card.  In addition, we may recognize revenue from gift cards in the future when we determine that the likelihood of the gift card being redeemed is remote and that we have no legal obligation to remit the unredeemed gift card to relevant jurisdictions.  We will utilize historical redemption patterns to consider the likelihood of gift card redemption.  During the three and nine months ended September 30, 2012 and 2011, no revenue was recognized related to gift card breakage.

 

NOTE 3 — Cash Equivalents and Investments

 

As of September 30, 2012 and December 31, 2011, we held $40.7 million and $175.1 million, respectively, of cash equivalents, which consist of an investment in a money market fund that invests only in U.S. Treasury securities.  These investments are measured at fair value using quoted prices in active markets (Level 1 input).

 

Our Investments consist of fixed maturity U.S. Treasury securities, which are classified as available-for-sale securities and are reported at fair value.  The fair values for these investments were obtained from third-party broker statements, which are primarily derived from observable market-based inputs or unobservable inputs that are corroborated by market data (Level 2 input).  Management has established guidelines and practices to limit the amount of credit risk. We assess whether unrealized losses are other-than-temporary. As of September 30, 2012, none of our investments were in an unrealized loss position.

 

Investments consist of the following (amounts in thousands):

 

 

 

September 30, 2012

 

 

 

Amortized
Cost

 

Unrealized
Gain

 

Unrealized
Loss

 

Fair
value

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

148,980

 

$

49

 

 

$

149,029

 

 

The contractual maturities were as follows (amounts in thousands):

 

 

 

September 30,
2012

 

December 31, 2011

 

Due within one year

 

$

117,308

 

$

 

Due within two years

 

31,721

 

 

Total

 

$

149,029

 

$

 

 

Net investment income, which is included in other (income) expense, net, in the accompanying condensed consolidated statements of income, was $0.1 million for the three months and nine months ended September 30, 2012, respectively.  The realized loss on the sale of an investment during the three months ended September 30, 2012 was less than $0.1 million.

 

During the three months ended September 30, 2012, management re-evaluated its previous conclusion that investments in U.S. Treasury securities should be classified as held-to-maturity as a result of an opportunity to sell a U.S. Treasury security in our portfolio for another U.S. Treasury that would provide a greater yield.  Our investment policy objectives are to: maintain sufficient liquidity to meet financial obligations, ensure safety of principal and earn a market rate of return.  Management concluded that the requirements to maintain a held-to-maturity classification would potentially impact our ability to earn a market rate of return.  As a result, we reclassified all of our investments that were previously classified as held-to-maturity to available-for-sale.  The carrying value and fair value of the investments transferred from held-to-maturity to available-for-sale was $149.1 million at the date of transfer.

 

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NOTE 4 — Accounts Receivable

 

We recorded the following allowances against our wholesale accounts receivable (amounts in thousands):

 

 

 

As of
September 30,

 

As of
December 31,

 

 

 

2012

 

2011

 

Reserve for returns

 

$

834

 

$

807

 

Reserve for chargebacks and markdown allowances

 

202

 

316

 

Reserve for bad debt

 

1,025

 

860

 

Total

 

$

2,061

 

$

1,983

 

 

In addition to the above reserves, we recorded an allowance for trade discounts of less than $0.1 million as of September 30, 2012 and December 31, 2011.

 

NOTE 5 — Inventories

 

Inventories consisted of the following (amounts in thousands):

 

 

 

As of
September 30,

 

As of
December 31,

 

 

 

2012

 

2011

 

Raw materials

 

$

665

 

$

604

 

Work-in-progress

 

3,691

 

2,395

 

Finished goods

 

59,720

 

50,321

 

Total

 

$

64,076

 

$

53,320

 

 

NOTE 6 — Property and Equipment, net

 

Property and equipment consisted of the following (amounts in thousands):

 

 

 

As of
September 30,

 

As of
December 31,

 

 

 

2012

 

2011

 

Computer systems and equipment

 

$

13,749

 

$

15,357

 

Furniture and fixtures

 

13,322

 

9,498

 

Leasehold improvements

 

62,081

 

55,141

 

Machinery and equipment

 

5,116

 

4,412

 

Trade show booths

 

1,318

 

1,356

 

Construction in progress

 

2,424

 

1,896

 

 

 

98,010

 

87,660

 

Less: accumulated depreciation

 

35,431

 

33,962

 

Property and equipment, net

 

$

62,579

 

$

53,698

 

 

Construction in progress as of September 30, 2012 and December 31, 2011 primarily represents the capital expenditures for retail stores that have not opened, or information technology projects that have not been completed, as of the balance sheet date.  When the stores are opened or the information technology projects are completed, these balances will be transferred to the appropriate property and equipment category and depreciated according to their useful life.

 

Depreciation expense, which is included as a component of selling, general and administrative expenses in the accompanying condensed consolidated statements of income, was $9.9 million and $9.4 million for the nine months ended September 30, 2012 and 2011, respectively.

 

NOTE 7—Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consisted of the following (amounts in thousands):

 

 

 

As of
September 30,

 

As of
December 31,

 

 

 

2012

 

2011

 

Accounts payable

 

$

17,184

 

$

6,761

 

Accrued expenses

 

5,550

 

7,597

 

Accrued sales and use taxes

 

2,003

 

2,582

 

Accrued percentage rent

 

1,474

 

1,785

 

Other

 

4,725

 

4,147

 

Accounts payable and accrued expenses

 

$

30,936

 

$

22,872

 

 

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NOTE 8 — Stock-based Compensation

 

The following table summarizes our stock-based compensation expense, which is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income (amounts in thousands):

 

 

 

Three Months Ended

 

Nine months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Stock-based compensation expense, before income tax benefit

 

$

2,357

 

$

1,765

 

$

8,604

 

$

8,516

 

Income tax benefit

 

882

 

679

 

3,220

 

3,275

 

Stock-based compensation expense, after income tax benefit

 

$

1,475

 

$

1,086

 

$

5,384

 

$

5,241

 

 

Restricted Stock Awards

 

Restricted shares awarded under the 2009 Incentive Plans entitle the shareholder to all the rights of common stock ownership except that the shares may not be sold, transferred, pledged, exchanged or otherwise disposed of during the restriction period nor are dividends paid until the restriction period ends.  Upon termination, dividends accrued on non-vested shares will be forfeited. The restriction period is determined by the Compensation Committee of the Board of Directors and may not exceed 10 years. Restricted stock awards have generally been granted with vesting periods of up to three years. Subject to employment agreements entered into with senior executives, all unvested restricted shares are forfeited if the recipient of the restricted stock award no longer provides services, as defined, to us.

 

Non-vested performance-based awards

 

During the nine months ended September 30, 2012 and 2011, we awarded performance-based restricted stock to executive officers that vest over a period of two years, which is a service condition.  Upon achieving the performance condition, the non-vested performance awards partially vest on the first anniversary of the grant date and the remainder on the second anniversary of the grant date for a combined service period of two years.  In order for these performance awards to vest, the Company’s annual adjusted earnings before interest and income tax expenses (“Adjusted EBIT”) must exceed a minimum amount; depending upon the Company’s actual annual Adjusted EBIT, additional restricted stock may be earned, up to a maximum amount.

 

The following table summarizes our performance-based restricted stock activities for the nine months ended September 30, 2012:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average Grant

 

Remaining

 

Intrinsic

 

 

 

 

 

Date Fair

 

Contractual

 

Value

 

 

 

Shares

 

Value

 

Life (Years)

 

($000’s)

 

Prior year awards:

 

 

 

 

 

 

 

 

 

Non-vested, beginning of year

 

391,174

 

$

23.98

 

 

 

 

 

Vested

 

(281,896

)

$

24.41

 

 

 

 

 

Service forfeited

 

 

$

 

 

 

 

 

Non-vested prior year awards, end of period

 

109,278

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Awards granted in 2012, at maximum:

 

353,215

 

$

26.04

 

 

 

 

 

Performance forfeited

 

 

$

 

 

 

 

 

Service forfeited

 

 

$

 

 

 

 

 

Non-vested current year awards, end of period

 

353,215

 

 

 

 

 

 

 

Total non-vested, end of period

 

462,493

 

$

25.31

 

0.8

 

$

9,865

 

 

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Table of Contents

 

The estimated fair value of the performance-based stock awarded is based on the price of our common stock at the date of grant and an assumed forfeiture rate of 1.5% as of September 30, 2012; this forfeiture rate assumption is based on historical experience adjusted for unusual, large forfeitures.  The fair value of the performance-based stock awarded in the nine months ended September 30, 2012 and 2011 was $9.2 million and $11.6 million, respectively.  The total fair value of performance-based stock vested during the nine months ended September 30, 2012 and 2011 was $6.9 million and $7.9 million, respectively.  As of September 30, 2012, the total unamortized stock-based compensation expense related to the performance-based stock was $4.5 million, which is expected to be recognized over a weighted average period of 0.8 years.

 

Non-vested service-based awards

 

During the nine months ended September 30, 2012 and 2011, we awarded restricted stock to employees and directors that vest over a period of up to three years.

 

The following table summarizes our non-vested service-based restricted stock activities for the nine months ended September 30, 2012:

 

 

 

Shares

 

Weighted
Average

Grant Date
Fair

Value

 

Weighted
Average

Remaining
Contractual
Life

(Years)

 

Intrinsic
Value
($000’s)

 

Non-vested, beginning of year

 

170,062

 

$

23.35

 

 

 

 

 

Granted

 

119,625

 

$

26.20

 

 

 

 

 

Vested

 

(135,502

)

$

24.01

 

 

 

 

 

Forfeited

 

(15,346

)

$

27.41

 

 

 

 

 

Non-vested, end of period

 

138,839

 

$

24.71

 

1.4

 

$

2,961

 

 

The estimated fair value of the non-vested, service-based stock awarded is based on the price of our common stock at the date of grant and an assumed forfeiture rate of 7.9% as of September 30, 2012; this forfeiture rate assumption is based on historical experience adjusted for unusual, large forfeitures.  The fair value of service-based stock awarded in the nine months ended September 30, 2012 and 2011 was $3.1 million and $3.4 million, respectively.  The total fair value of service-based stock vested during the nine months ended September 30, 2012 and 2011 was $3.3 million and $3.7 million, respectively.  As of September 30, 2012, the total unamortized stock-based compensation expense related to the non-vested, service-based stock was $2.4 million which is expected to be recognized over a weighted average period of 1.4 years.

 

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Table of Contents

 

Minimum Statutory Income Taxes on Restricted Awards

 

We have a practice of withholding common shares, upon an employee’s or director’s request, to satisfy employee and director minimum statutory income tax withholdings for restricted shares when they vest. During the nine months ended September 30, 2012 and 2011, we withheld 169,730 and 228,109 shares for a total value of $4.6 million and $5.5 million, respectively. These amounts are considered a financing activity and recorded as statutory tax withholding payment for stock-based compensation in the accompanying condensed consolidated statements of cash flows.

 

NOTE 9 — Commitments and Contingencies

 

Leases

 

We lease our headquarters facilities and retail store locations under operating lease agreements expiring on various dates through January 2024.  Some of these leases require us to make periodic payments for property taxes, utilities and common area operating expenses.  Certain leases include lease incentives, rent abatements and fixed rent escalations, for which the effects are being recorded and amortized over the initial lease term on a straight-line basis. We have options to renew certain leases under various terms as specified within each lease agreement. We have no capitalized lease obligations.

 

As of September 30, 2012, we had 171 long-term lease agreements, which consisted of 126 retail stores in the U.S., 31 international retail stores, two distribution and administrative facilities in Vernon, California, two showrooms in the U.S., and administrative offices and/or showrooms in Japan, South Korea, Hong Kong, Germany, Italy, the U.K. and Switzerland. Our leased properties aggregate 688,000 square feet of space, which consists of 374,000 square feet for our distribution and administrative functions, 300,000 square feet of retail space and 14,000 square feet of showroom space.  Our lease agreements for 140 of the retail stores leases require payment of a percentage of sales, ranging from 4% to 18%, if our net sales at the retail store exceed a defined threshold.

 

Rent expense was $27.3 million and $22.3 million for the nine months ended September 30, 2012 and 2011, respectively. These amounts include contingent rental expense of $2.9 million and $2.4 million for the nine months ended September 30, 2012 and 2011, respectively.

 

Future minimum lease payments under these operating leases as of September 30, 2012 are summarized as follows (amounts in thousands):

 

Year Ending December 31,

 

 

 

2012 (remainder of year)

 

$

7,305

 

2013

 

30,501

 

2014

 

30,619

 

2015

 

30,440

 

2016

 

29,988

 

Thereafter

 

103,047

 

Total minimum lease payments

 

$

231,900

 

 

Legal Proceedings

 

From time to time, we are involved in various legal proceedings arising in the ordinary course of business. We believe the recorded reserves in our condensed consolidated balance sheet as of September 30, 2012 are adequate in light of the probable and estimable liabilities.  As of the date of this report, we do not believe there are any currently identified claims, proceedings or litigation, either alone or in the aggregate, that will have a material impact on our future results of operations, financial position or cash flows.  Since these matters are subject to inherent uncertainties, our view of them may change in the future.

 

Income Taxes

 

In connection with an examination of our federal income tax return filed for the tax year ended December 31, 2009, the Internal Revenue Service (“IRS”) has disallowed the domestic production activities deduction.  During the nine months ended September 30, 2012, the IRS issued an assessment for $1.4 million in tax and a $0.3 million penalty.

 

We have completed our income tax provision for 2010, 2011 and 2012 using the same position that the IRS has challenged in its 2009 federal income tax return.  The cumulative income tax benefit for deductions included for those periods is $4.6 million.

 

We filed a formal protest with the Office of Appeals Division within the IRS, and we intend to vigorously defend our position.  In the event of an unfavorable outcome at the Office of Appeals, we will strongly consider litigating the matter in U.S. Tax Court.  The unpaid assessment will continue to accrue interest at the statutory rate until resolved.  Although the outcome remains uncertain, management believes a taxpayer favorable resolution will be obtained and therefore the full tax benefit for the deduction has been recognized.

 

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Table of Contents

 

NOTE 10 —Redeemable Noncontrolling Interest

 

We calculated the fair value of the redeemable noncontrolling interest by discounting the estimated future cash flows of our majority-owned subsidiary, TRBJ Germany, and determined that the fair value of the noncontrolling interest was lower than the carrying value as of September 30, 2012.  As no previous increases have been recorded, the noncontrolling interest approximated the greater of the fair market value or the carrying value as of September 30, 2012 and December 31, 2011.  The fair value calculation of the redeemable noncontrolling interest was based on unobservable inputs reflecting management’s own assumptions (Level 3 input).

 

The following table presents a reconciliation of the redeemable noncontrolling interest (amounts in thousands):

 

 

 

Nine months Ended

 

 

 

September 30,

 

 

 

2012

 

2011

 

Redeemable noncontrolling interest, beginning of year

 

$

2,635

 

$

1,925

 

Net income attributable to redeemable noncontrolling interest

 

366

 

612

 

Foreign currency translation adjustment

 

(29

)

27

 

Redeemable noncontrolling interest, end of period

 

$

2,972

 

$

2,564

 

 

NOTE 11 — Earnings Per Share

 

The following is a reconciliation of the shares used to compute basic and diluted earnings per share attributable to True Religion Apparel, Inc. (in thousands, except per share information):

 

 

 

Three Months Ended

 

Nine months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income attributable to True Religion Apparel, Inc.

 

$

12,344

 

$

12,085

 

$

32,534

 

$

30,501

 

 

 

 

 

 

 

 

 

 

 

Basic shares

 

25,176

 

24,927

 

25,103

 

24,831

 

Dilutive effect of unvested restricted stock

 

135

 

72

 

201

 

171

 

Diluted shares

 

$

25,311

 

$

24,999

 

$

25,304

 

$

25,002

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to True Religion Apparel, Inc. — basic

 

$

0.49

 

$

0.48

 

$

1.30

 

$

1.23

 

Earnings per share attributable to True Religion Apparel, Inc. — diluted

 

$

0.49

 

$

0.48

 

$

1.29

 

$

1.22

 

 

For the three and nine months ended September 30, 2012, 353,215 and 240,652 weighted shares, respectively, of restricted stock awards which are subject to performance conditions that have not been achieved were excluded from the calculation of dilutive shares. For the three and nine months ended September 30, 2011, 392,059 and 266,658 weighted shares, respectively, of restricted stock awards which are subject to performance conditions that have not been achieved were excluded from the calculation of dilutive shares.

 

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Table of Contents

 

NOTE 12 — Segment Information

 

Summarized financial information concerning our reportable segments is shown in the following table (amounts in thousands):

 

 

 

Three Months Ended

 

Nine months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net sales:

 

 

 

 

 

 

 

 

 

U.S. Consumer Direct

 

$

65,325

 

$

61,817

 

$

195,144

 

$

174,025

 

U.S. Wholesale

 

29,809

 

22,020

 

73,670

 

63,888

 

International

 

22,748

 

23,461

 

59,604

 

60,021

 

Core Services

 

667

 

1,066

 

1,825

 

2,455

 

 

 

$

118,549

 

$

108,364

 

$

330,243

 

$

300,389

 

 

 

 

 

 

 

 

 

 

 

Gross Profit:

 

 

 

 

 

 

 

 

 

U.S. Consumer Direct

 

$

46,313

 

$

43,490

 

$

137,268

 

$

124,929

 

U.S. Wholesale

 

14,962

 

11,388

 

37,598

 

33,510

 

International

 

13,081

 

14,246

 

34,714

 

34,409

 

Core Services

 

667

 

1,066

 

1,825

 

2,455

 

 

 

$

75,023

 

$

70,190

 

$

211,405

 

$

195,303

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

 

 

U.S. Consumer Direct

 

$

21,230

 

$

20,989

 

$

64,630

 

$

61,189

 

U.S. Wholesale

 

13,251

 

9,752

 

32,903

 

27,700

 

International

 

1,744

 

6,801

 

5,961

 

13,165

 

Core Services

 

(17,363

)

(17,616

)

(50,768

)

(52,102

)

 

 

$

18,862

 

$

19,926

 

$

52,726

 

$

49,952

 

 

 

 

Nine months Ended

 

 

 

September 30,

 

 

 

2012

 

2011

 

Capital expenditures:

 

 

 

 

 

U.S. Consumer Direct

 

$

8,755

 

$

10,181

 

U.S. Wholesale

 

38

 

485

 

International

 

7,338

 

3,518

 

Core Services

 

2,060

 

1,438

 

 

 

$

18,191

 

$

15,622

 

 

 

 

September 30,
2012

 

December 31,
2011

 

Total assets:

 

 

 

 

 

U.S. Consumer Direct

 

$

77,323

 

$

78,089

 

U.S. Wholesale

 

40,861

 

41,700

 

International

 

58,668

 

26,182

 

Core Services

 

217,423

 

214,182

 

 

 

$

394,275

 

$

360,153

 

 

NOTE 13 — Stockholders’ Equity

 

In April 2012, our Board of Directors approved a stock repurchase program granting us the authority to repurchase up to $30,000,000 of our common stock.  Under the stock repurchase program, we will repurchase shares in the open market from time to time, depending on market conditions.  The primary objective of the stock repurchase program is to offset the share dilution attributable to stock based compensation beginning in 2012.  We may suspend or discontinue the repurchase program at any time.  We have not purchased any shares of our common stock since the stock repurchase program was approved and had $30,000,000 in remaining share repurchase capacity as of September 30, 2012.  The actual number and timing of future share repurchases, if any, will be subject to market and economic conditions and applicable Securities and Exchange Commission rules.

 

During the nine months ended September 30, 2012, we paid $10.1 million in cash dividends to holders of our common stock.

 

In October 2012, our Board of Directors approved a quarterly cash dividend to our stockholders of $0.20 per share.  The quarterly dividend will be paid on November 29, 2012 to all stockholders of record as of November 15, 2012.  Future dividends will be subject to Board approval.

 

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Table of Contents

 

NOTE 14 — Supplemental Disclosure of Cash Flow Information

 

During the nine months ended September 30, 2012 and 2011, we paid income taxes of $18.0 million and $19.4 million, respectively.

 

As of September 30, 2012, and 2011, we had recorded the purchase of $1.6 million and $0.9 million, respectively, of property and equipment for which the vendors had not yet been paid.  These amounts have been excluded from “Purchases of property and equipment” and “Accounts payable and accrued expenses” in the accompanying condensed consolidated statements of cash flows.

 

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Table of Contents

 

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, 2011 filed on February 29, 2012 (the “2011 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.

 

The forward-looking information set forth in this Quarterly Report on Form 10-Q is as of November 5, 2012, and we undertake no duty to update this information.  Shareholders and prospective investors can find information filed with the SEC after August 1, 2012 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. As of September 30, 2012, we had 119 retail stores in the United States compared to 109 as of December 31, 2011, and 105 as of September 30, 2011.  As of September 30, 2012 we had 28 international stores compared to 16 as of December 31, 2011 and 13 as of September 30, 2011.

 

After receiving indications of interest from third parties regarding a potential transaction with the Company, our Board of Directors has formed a Special Committee comprised of its non-management directors to explore and evaluate potential strategic alternatives available to the Company, including a possible sale, in order to maximize shareholder value.  No decision has been made to engage in a transaction or transactions, and there can be no assurance that any transaction or any other strategic alternative will occur or, if undertaken, the terms or timing thereof.  The Special Committee has not set a definitive timetable for completion of the strategic review process.

 

Third Quarter 2012 Compared to Third Quarter 2011

 

The following table summarizes results of operations for the three months ended September 30, 2012 and 2011 (dollar amounts in thousands, except per share data):

 

 

 

Three Months Ended September 30,

 

 

 

2012

 

2011

 

Change

 

 

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

Net sales

 

$

118,549

 

100.0

%

$

108,364

 

100.0

%

$

10,185

 

9.4

%

Gross profit

 

75,023

 

63.3

%

70,190

 

64.8

%

4,833

 

6.9

%

Selling, general and administrative expenses

 

56,161

 

47.4

%

50,264

 

46.4

%

5,897

 

11.7

%

Operating income

 

18,862

 

15.9

%

19,926

 

18.4

%

(1,064

)

(5.3

)%

Other (income) expense, net

 

(415

)

(0.4

)%

250

 

0.2

%

(665

)

NM

 

Provision for income taxes

 

6,928

 

5.8

%

7,374

 

6.8

%

(446

)

(6.0

)%

Net income attributable to True Religion Apparel, Inc.

 

$

12,344

 

10.4

%

$

12,085

 

11.2

%

$

259

 

2.1

%

Net income per share attributable to True Religion Apparel, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.49

 

 

 

$

0.48

 

 

 

$

0.01

 

2.1

%

Diluted

 

$

0.49

 

 

 

$

0.48

 

 

 

$

0.01

 

2.1

%

 

14



Table of Contents

 

Net Sales

 

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

 

 

 

Three Months Ended,
September 30,

 

Change

 

 

 

2012

 

2011

 

Amount

 

%

 

U.S. Consumer Direct

 

$

65,325

 

$

61,817

 

$

3,508

 

5.7

%

U.S. Wholesale

 

29,809

 

22,020

 

7,789

 

35.4

 

International

 

22,748

 

23,461

 

(713

)

(3.0

)

Core Services

 

667

 

1,066

 

(399

)

(37.4

)

Total net sales

 

$

118,549

 

$

108,364

 

$

10,185

 

9.4

%

 

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

 

 

 

Three Months Ended,
September 30,

 

 

 

2012

 

2011

 

U.S. Consumer Direct

 

55.1

%

57.0

%

U.S. Wholesale

 

25.1

 

20.3

 

International

 

19.2

 

21.7

 

Core Services

 

0.6

 

1.0

 

Total net sales

 

100.0

%

100.0

%

 

The increase in the U.S. Consumer Direct segment’s net sales (which includes our retail stores and e-commerce site) of 5.7% resulted from the expansion of our retail store count.  Same store sales decreased 4.7% in the third quarter of 2012 as compared to the third quarter of 2011.  Factors contributing to the same store sales decline include decreases in traffic in our stores and prolonged summer weather.  Also, our sales of denim merchandise slowed in the quarter, but sales trends for non-denim pants and men’s tee shirts were favorable.  During the remainder of 2012, we expect to open three retail stores in the United States.

 

U.S. Wholesale net sales increased 35.4% to $29.8 million primarily due to an increase in sales to the Off-Price and Specialty channels, which was partially offset by a decrease in sales to Majors.  This is the third consecutive year-over-year quarterly sales increase for this segment.  We increased the amount of slow-moving merchandise sold to the Off-Price channel in order to put more ‘designed for’ merchandise in our consumer direct outlet stores. The ‘designed for’ merchandise typically yields higher sell-through rates and better gross margins in our outlet stores as compared to the performance of discounted slow-moving merchandise.

 

International net sales declined by 3.0% to $22.7 million primarily due to a slowdown in wholesale sales in Korea and Germany.  Partially offsetting this decrease is a 115% increase in our international retail sales due to an increase in our retail store count from 13 operated as of September 30, 2011 to 28 as of September 30, 2012.  During the remainder of 2012, we expect to open two international retail stores.

 

Core Services net sales is comprised of royalties due under licensing arrangements.  Core Services net sales decreased 37.4% to $0.7 million due primarily to the non-renewal of a licensing agreement.  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.

 

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Table of Contents

 

Gross Profit

 

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

 

 

 

Three Months Ended,
September 30,

 

Change

 

 

 

2012

 

2011

 

Amount

 

%

 

U.S. Consumer Direct

 

$

46,313

 

$

43,490

 

$

2,823

 

6.5

%

U.S. Wholesale

 

14,962

 

11,388

 

3,574

 

31.4

 

International

 

13,081

 

14,246

 

(1,165

)

(8.2

)

Core Services

 

667

 

1,066

 

(399

)

(37.4

)

Total gross profit

 

$

75,023

 

$

70,190

 

$

4,833

 

6.9

%

 

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

 

 

 

Three Months Ended,
September 30,

 

Change

 

 

 

2012

 

2011

 

%

 

U.S. Consumer Direct

 

70.9

%

70.4

%

0.5

%

U.S. Wholesale

 

50.2

 

51.7

 

(1.5

)

International

 

57.5

 

60.7

 

(3.2

)

Core Services

 

100.0

 

100.0

 

0.0

 

Total gross margin

 

63.3

%

64.8

%

(1.5

)%

 

Overall gross profit increased 6.9% to $75.0 million in the third quarter of 2012, driven primarily by the overall sales increase.  The gross margin decreased 150 basis points to 63.3% primarily due to an increased sales mix of discontinued merchandise.

 

The U.S. Consumer Direct gross margin increased to 70.9% in the third quarter of 2012 from 70.4% in the same quarter in 2011 primarily due to improvement in the outlet stores’ gross margin.

 

The U.S. Wholesale gross margin decreased by 150 basis points, to 50.2%, in the third quarter primarily due to the increased sales of slow-moving merchandise to the Off-Price channel.

 

The International gross margin decreased to 57.5% in the third quarter of 2012 from 60.7% in the same quarter in 2011 primarily driven by lower wholesale gross margins due to discounting to clear slow-moving merchandise. Additionally, we reduced retail prices in Canada to more closely align our Canada retail prices with the U.S. retail prices.

 

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,
September 30,

 

Change

 

 

 

2012

 

2011

 

Amount

 

%

 

U.S. Consumer Direct

 

$

25,083

 

$

22,501

 

$

2,582

 

11.5

%

U.S. Wholesale

 

1,711

 

1,636

 

75

 

4.6

 

International

 

11,337

 

7,445

 

3,892

 

52.3

 

Core Services

 

18,030

 

18,682

 

(652

)

(3.5

)

Total selling, general and administrative expenses

 

$

56,161

 

$

50,264

 

$

5,897

 

11.7

%

 

16



Table of Contents

 

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

 

 

 

Three Months Ended,
September 30,

 

Change

 

 

 

2012

 

2011

 

%

 

U.S. Consumer Direct

 

38.4

%

36.4

%

2.0

%

U.S. Wholesale

 

5.7

 

7.4

 

(1.7

)

International

 

49.8

 

31.7

 

18.1

 

Core Services

 

NM

 

NM

 

NM

 

Total SG&A rate

 

47.4

%

46.4

%

1.0

%

 

The U.S. Consumer Direct SG&A increased $2.6 million, from $22.5 million in the third quarter of 2011 to $25.1 million in the third quarter of 2012.  This increase is primarily related to the store expansion over the past year, from 105 stores at the end of September 2011 to 119 stores at the end of September 2012.  Also contributing to the increase is the addition of merchandise planning and buying resources to support growth in this segment.  As a percentage of net sales, U.S. Consumer Direct SG&A increased from 36.4% in the third quarter of 2011 to 38.4% in the third quarter of 2012, primarily due to increases in new store SG&A and merchandise planning and buying resources.

 

U.S. Wholesale SG&A remained relatively flat at $1.7 million in the third quarter of 2012 compared to the third quarter of 2011.  The segment’s increase in net sales on flat SG&A drove the U.S. Wholesale SG&A rate down from 7.4% in the third quarter of 2011 to 5.7% in the third quarter of 2012.

 

International SG&A increased $3.9 million, from $7.4 million in the third quarter of 2011 to $11.3 million in the third quarter of 2012, due to our planned expansion, including an increase in the number of branded retail stores from 13 stores at September 30, 2011 to 28 stores at September 30, 2012.  The increase in the SG&A rate from 31.7% in the third quarter of 2011 to 49.8% in the third quarter of 2012 is primarily attributable to the segment’s wholesale sales decline and increased operating costs associated with the additional 15 branded retail stores.

 

Core Services SG&A decreased $0.7 million, from $18.7 million in the third quarter of 2011 to $18.0 million in the third quarter of 2012.  The decrease is primarily due to net separation costs of $1.2 million associated with the resignation of a former executive that we recorded in the third quarter of 2011.  This was partially offset by the increase in bad debt expense of $0.5 million.  As a percentage of total net sales, Core Services SG&A decreased from 17.2% in the third quarter of 2011 to 15.2% in the third quarter of 2012.  The 200 basis points decrease in the Core Services SG&A rate is due to the 9.4% increase in total net sales, which produced leverage on fixed costs, coupled with the decrease in the net separation costs.

 

Operating Income

 

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

 

 

 

Three Months Ended,
September 30,

 

Change

 

 

 

2012

 

2011

 

Amount

 

%

 

U.S. Consumer Direct

 

$

21,230

 

$

20,989

 

$

241

 

1.1

%

U.S. Wholesale

 

13,251

 

9,752

 

3,499

 

35.9

 

International

 

1,744

 

6,801

 

(5,057

)

(74.4

)

Core Services

 

(17,363

)

(17,616

)

253

 

1.4

 

Total operating income

 

$

18,862

 

$

19,926

 

$

(1,064

)

(5.3

)%

 

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

 

 

 

Three Months Ended,
September 30,

 

Change

 

 

 

2012

 

2011

 

%

 

U.S. Consumer Direct

 

32.5

%

34.0

%

(1.5

)%

U.S. Wholesale

 

44.5

 

44.3

 

0.2

 

International

 

7.7

 

29.0

 

(21.3

)

Core Services

 

NM

 

NM

 

NM

 

Total operating income margin

 

15.9

%

18.4

%

(2.5

)%

 

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Table of Contents

 

Operating income totaled $18.9 million, down 5.3% from the third quarter of last year.  Operating margin was 15.9% in the third quarter of 2012 versus 18.4% in the third quarter of 2011.  The decline is primarily attributable to the reduced operating margin in the U.S. Consumer Direct and International segments.

 

The U.S. Consumer Direct operating margin decreased from 34.0% in the third quarter of 2011 to 32.5% in the third quarter of 2012 due to the decrease in same store sales and the increase in merchandise planning and buying resources.

 

The U.S. Wholesale operating margin increased from 44.3% in the third quarter of 2011 to 44.5% in the third quarter of 2012 driven by the 35.4% increase in this segment’s net sales.

 

The International operating margin decreased from 29.0% in the third quarter of 2011 to 7.7% in the third quarter of 2012 primarily due to wholesale sales decreases and the segment’s gross margin decrease.

 

Other (Income) Expense, net

 

Net other (income) expense was $(0.4) million in the third quarter of 2012 compared to $0.2 million in the third quarter of 2011.  This increase is primarily due to the foreign exchange gains on our intercompany balances with our foreign subsidiaries.

 

Provision for Income Taxes

 

The effective tax rate for the third quarter of 2012 was 35.9% compared to 37.5% for the third quarter of 2011.  The 2012 effective tax rate decrease over 2011 is linked to an increase in income apportioned to foreign jurisdictions with lower income tax rates as we continue to establish our international presence.

 

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

 

Net income attributable to True Religion Apparel, Inc. was $12.3 million, or $0.49 per diluted share, for the third quarter of 2012 compared to $12.1 million, or $0.48 per diluted share, for the third quarter of 2011.  Excluding the net separation costs associated with the resignation of a former executive, the adjusted net income attributable to True Religion Apparel, Inc. for the third quarter of 2011 was $12.9 million, or $0.51 per diluted share.

 

Year-to-Date 2012 Compared to Year-to-Date 2011

 

The following table summarizes results of operations for the nine months ended September 30, 2012 and 2011 (dollar amounts in thousands, except per share data):

 

 

 

Nine months Ended September 30,

 

 

 

2012

 

2011

 

Change

 

 

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

Net sales

 

$

330,243

 

100.0

%

$

300,389

 

100.0

%

$

29,854

 

9.9

%

Gross profit

 

211,405

 

64.0

%

195,303

 

65.0

%

16,102

 

8.2

%

Selling, general and administrative expenses

 

158,679

 

48.0

%

145,351

 

48.4

%

13,328

 

9.2

%

Operating income

 

52,726

 

16.0

%

49,952

 

16.6

%

2,774

 

5.6

%

Other income, net

 

(78

)

(0.0

)%

(231

)

(0.1

)%

(153

)

NM

 

Provision for income taxes

 

19,904

 

6.0

%

19,070

 

6.3

%

834

 

4.4

%

Net income attributable to True Religion Apparel, Inc.

 

$

32,534

 

9.9

%

$

30,501

 

10.2

%

$

2,033

 

6.7

%

Net income per share attributable to True Religion Apparel, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.30

 

 

 

$

1.23

 

 

 

$

0.07

 

5.7

%

Diluted

 

$

1.29

 

 

 

$

1.22

 

 

 

$

0.07

 

5.7

%

 

Net Sales

 

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

 

 

 

Nine months Ended
September 30,

 

Change

 

 

 

2012

 

2011

 

Amount

 

%

 

U.S. Consumer Direct

 

$

195,144

 

$

174,025

 

$

21,119

 

12.1

%

U.S. Wholesale

 

73,670

 

63,888

 

9,782

 

15.3

 

International

 

59,604

 

60,021

 

(417

)

(0.7

)

Core Services

 

1,825

 

2,455

 

(630

)

(25.7

)

Total net sales

 

$

330,243

 

$

300,389

 

$

29,854

 

9.9

%

 

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Table of Contents

 

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

 

 

 

Nine months Ended
September 30,

 

 

 

2012

 

2011

 

U.S. Consumer Direct

 

59.1

%

57.9

%

U.S. Wholesale

 

22.3

 

21.3

 

International

 

18.0

 

20.0

 

Core Services

 

0.6

 

0.8

 

Total net sales

 

100.0

%

100.0

%

 

The increase in the U.S. Consumer Direct segment’s net sales (which includes our retail stores and e-commerce site) of 12.1% resulted from the expansion of our retail store count and a 3.3% same store sales increase.  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 slowdown in the women’s denim category.

 

U.S. Wholesale net sales increased 15.3% to $73.7 million primarily due to an increase in sales to the Off-Price and Specialty channels, which was partially offset by a decrease in sales to Majors.  The Off-Price channel’s sales increase reflects our decision to clear slow-moving merchandise through this channel along with the overall growth of the number of stores operated by these customers.  The demand for men’s merchandise in the Specialty channel spurred this channel’s sales increase.

 

International net sales decreased 0.7% to $59.6 million primarily due to the wholesale sales slowdowns in Korea, Germany, and Canada.  This was offset by an increase in retail sales as we have steadily increased our international store count since the beginning of 2011.

 

Core Services net sales is comprised of royalties earned through licensing arrangements.  Core Services net sales decreased 25.7% to $1.8 million due 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):

 

 

 

Nine months Ended
September 30,

 

Change

 

 

 

2012

 

2011

 

Amount

 

%

 

U.S. Consumer Direct

 

$

137,268

 

$

124,929

 

$

12,339

 

9.9

%

U.S. Wholesale

 

37,598

 

33,510

 

4,088

 

12.2

 

International

 

34,714

 

34,409

 

305

 

0.9

 

Core Services

 

1,825

 

2,455

 

(630

)

(25.7

)

Total gross profit

 

$

211,405

 

$

195,303

 

$

16,102

 

8.2

%

 

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

 

 

 

Nine months Ended,
September 30,

 

Change

 

 

 

2012

 

2011

 

%

 

U.S. Consumer Direct

 

70.3

%

71.8

%

(1.5

)%

U.S. Wholesale

 

51.0

 

52.5

 

(1.5

)

International

 

58.2

 

57.3

 

0.9

 

Core Services

 

100.0

 

100.0

 

0.0

 

Total gross margin

 

64.0

%

65.0

%

(1.0

)%

 

Overall gross profit increased 8.2% to $211.4 million in the first nine months of 2012, driven primarily by the overall sales growth.  In the first nine months of 2012, gross margin decreased 100 basis points to 64.0% primarily due to the 150 basis point decrease in the U.S. Consumer Direct segment’s gross margin, which was partially offset by the 90 basis point increase in the International segment’s gross margin.

 

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Table of Contents

 

The U.S. Consumer Direct gross margin decreased to 70.3% in the first nine months of 2012 from 71.8% in the same period in 2011 as we experienced a sales mix shift toward our lower margin outlet stores and we took increased markdowns in our outlet stores in order to clear slower-moving women’s merchandise.

 

U.S. Wholesale gross margin decreased by 150 basis points, to 51.0%, primarily due to a sales mix shift within the Off-Price channel towards increased sales of lower margin slow-moving merchandise, which earns a lower gross margin than merchandise designed for this channel.

 

The International gross margin increased to 58.2% in the first nine months of 2012 from 57.3% in the same period in 2011 driven primarily by the sales mix shift towards our international direct retail business, which earns a higher gross margin than our international wholesale business.

 

Selling, General and Administrative Expenses

 

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

 

 

 

Nine months Ended
September 30,

 

Change

 

 

 

2012

 

2011

 

Amount

 

%

 

U.S. Consumer Direct

 

$

72,637

 

$

63,740

 

$

8,897

 

14.0

%

U.S. Wholesale

 

4,694

 

5,810

 

(1,116

)

(19.2

)

International

 

28,755

 

21,244

 

7,511

 

35.4

 

Core Services

 

52,593

 

54,557

 

(1,964

)

(3.6

)

Total selling, general and administrative expenses

 

$

158,679

 

$

145,351

 

$

13,328

 

9.2

%

 

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

 

 

 

Nine months Ended,
September 30,

 

Change

 

 

 

2012

 

2011

 

%

 

U.S. Consumer Direct

 

37.2

%

36.6

%

0.6

%

U.S. Wholesale

 

6.4

 

9.1

 

(2.7

)

International

 

48.2

 

35.4

 

12.8

 

Core Services

 

NM

 

NM

 

NM

 

Total SG&A rate

 

48.0

%

48.4

%

(0.4

)%

 

The U.S. Consumer Direct SG&A increased $8.9 million, from $63.7 million in the first nine months of 2011 to $72.6 million in the first nine months of 2012.  This increase is primarily related to the store expansion over the past year, from 105 stores at the end of September 2011 to 119 stores at the end of September 2012.  Also contributing to the increase were the increases in merchandise planning and buying resources to support the growth in this segment.  As a percentage of net sales, U.S. Consumer Direct SG&A increased from 36.6% in the first nine months of 2011 to 37.2% in the first nine months of 2012 primarily due to these planned increases in back office support.  The four-wall SG&A rate improved 90 basis points from 32.5% to 31.6%, due to the segment’s same store sales increase, which produced leverage on fixed costs.

 

U.S. Wholesale SG&A decreased $1.1 million, from $5.8 million in the first nine months of 2011 to $4.7 million in the first nine months of 2012 due to a decrease in bad debt expense.  In the second quarter of 2011, we wrote off a $0.7 million receivable from a former customer as a result of its bankruptcy filing.  The decrease in SG&A costs combined with the segment’s increase in net sales contributed to the U.S. Wholesale SG&A rate decreasing from 9.1% in the first nine months of 2011 to 6.4% in the first nine months of 2012.

 

International SG&A increased $7.5 million, from $21.2 million in the first nine months of 2011 to $28.7 million in the first nine months of 2012, due to our planned international expansion, including an increase in the number of branded retail stores from 13 stores at September 30, 2011 to 28 stores at September 30, 2012.  The 1280 basis points increase in the SG&A rate 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.

 

20



Table of Contents

 

Core Services SG&A decreased $2.0 million, from $54.6 million in the first nine months of 2011 to $52.6 million in the first nine months of 2012, primarily due to a decrease in litigation settlement expense of $1.5 million and a 2011 separation cost of $1.2 million associated with the resignation of the Company’s former president.  As a percentage of total net sales, Core Services SG&A decreased from 18.2% in the first nine months of 2011 to 15.9% in the first nine months of 2012 due to the 9.9% increase in total net sales and the decrease in litigation settlement expense and separation costs.

 

Operating Income

 

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

 

 

 

Nine months Ended
September 30,

 

Change

 

 

 

2012

 

2011

 

Amount

 

%

 

U.S. Consumer Direct

 

$

64,630

 

$

61,189

 

$

3,441

 

5.6

%

U.S. Wholesale

 

32,903

 

27,700

 

5,203

 

18.8

 

International

 

5,961

 

13,165

 

(7,204

)

(54.7

)

Core Services

 

(50,768

)

(52,102

)

1,334

 

(2.6

)

Total operating income

 

$

52,726

 

$

49,952

 

$

2,774

 

5.6

%

 

The following table summarizes operating income as a percentage of net sales (“operating margin”), by segment:

 

 

 

Nine months Ended,
September 30,

 

Change

 

 

 

2012

 

2011

 

%

 

U.S. Consumer Direct

 

33.1

%

35.2

%

(2.1

)%

U.S. Wholesale

 

44.7

 

43.4

 

1.3

 

International

 

10.0

 

21.9

 

(11.9

)

Core Services

 

NM

 

NM

 

NM

 

Total operating income margin

 

16.0

%

16.6

%

(0.6

)%

 

Operating income totaled $52.7 million, up 5.6% from the first nine months of last year.  Operating margin was 16.0% in the first nine months of 2012 versus 16.6% in the first nine months of 2011.  The operating margin for the first nine months of 2011 adjusted for the litigation settlement expense and net separation costs, which totaled $2.7 million, was 17.5% or 150 basis points better than the first nine months of 2012.  The reduced operating margin in the U.S. Consumer Direct and International segments were the primary drivers of this decrease.

 

The U.S. Consumer Direct operating margin decreased from 35.2% in the first nine months of 2011 to 33.1% in the first nine months of 2012 primarily due to the reduced gross margin.

 

U.S. Wholesale operating margin increased from 43.4% in the first nine months of 2011 to 44.7% in the first nine months of 2012 driven by the segment’s growth in net sales.

 

International operating margin decreased from 21.9% in the first nine months of 2011 to 10.0% in the first nine months of 2012 primarily due to wholesale sales slowdowns in Korea, Germany, and Canada.

 

Other Expense (Income), net

 

Net other expense (income) was not significant in the first nine months of 2012 and 2011.

 

Provision for Income Taxes

 

The effective tax rate for the first nine months of 2012 was 37.7%, compared to 38.0% for the first nine months of 2011.  The 2012 effective tax rate decrease over 2011 is linked to an increase income apportioned to foreign jurisdictions with lower income tax rates as we continue to establish our international presence.

 

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

 

Net income attributable to True Religion Apparel, Inc. was $32.5 million, or $1.29 per diluted share, for the first nine months of 2012 compared to $30.5 million, or $1.22 per diluted share, for the first nine months of 2011.  The increase in net income attributable to True Religion Apparel, Inc. resulted primarily from a 9.9% increase in total net sales.  Included in the 2011 result was a litigation settlement expense and separation costs, which reduced net income attributable to True Religion Apparel, Inc. by $1.7 million, net of tax.  Excluding the litigation settlement and the separation costs of $0.07 per share (after tax), net income attributable to True Religion Apparel, Inc. for the first nine months of 2011 was $1.29 based on weighted average shares outstanding of 25.0 million.

 

21



Table of Contents

 

Inflation

 

Historically, our operations have not been materially affected by inflation.  We cannot assure that our operations will not be affected by inflation in the future.

 

LIQUIDITY AND CAPITAL RESOURCES

 

In the first nine months of 2012, cash and cash equivalents decreased by $149.0 million from the beginning of the year primarily due to the net purchase of $149.3 million in short and long-term investments.

 

Operating Activities

 

Net cash provided by operating activities for the first nine months of 2012 was $31.7 million compared to $48.7 million in the first nine months of 2011.  This decrease in net cash provided by operating activities is primarily due to the increase in U.S. wholesale sales in in the third quarter of 2012 as compared to in the third quarter of 2011, which caused receivables to grow and cash receipts to be delayed in 2012 compared to 2011.  We also increased our use of cash for income taxes during the first nine months of 2012 primarily because we made larger than required estimated tax payment so as to avoid penalties for deficient estimated payments and due to higher than expected overpayments of tax arising from a favorable state law change that occurred in the third quarter of 2012.

 

Investing Activities

 

Net cash used in investing activities was $166.9 million in the first nine months of 2012, an increase of $151.2 million, compared to the first nine months of 2011, which is primarily linked to purchases of short and long-term investments.  In 2012, we purchased U.S Treasury securities so we would have more direct control of our investments, which were previously held in a money market fund that invested in U.S. Treasury securities.

 

Financing Activities

 

Net cash used in financing activities was $14.1 million in the first nine months of 2012, an increase of $9.9 million compared to the first nine months of 2011.  This increase is primarily due to the initiation of a cash dividend in 2012, which amounted to $10.1 million and was paid in the second and third quarters of 2012.

 

Liquidity

 

Our primary ongoing cash requirements are currently expected to be for our ongoing operations, dividends, if and when declared in the future, capital expenditures for new retail stores, our international expansion, and information technology and other infrastructure needs. Management believes that cash flows from continuing operations, on-hand cash and cash equivalents, and our investments in U.S. Treasuries will provide adequate funds for the foreseeable working capital needs and planned capital expenditures. Over the long term, we manage our cash and capital structure to strengthen our financial position, maximize shareholder returns, and maintain flexibility for future strategic initiatives. We believe our cash, cash equivalents, investments and future operating cash flows will be sufficient, for at least the next twelve months, to fund scheduled future payments and potential long-term initiatives. The availability of financing in the form of debt or equity is influenced by many factors, including our profitability, operating cash flows, debt levels, debt ratings, and market conditions, and we cannot guarantee that we would be able to obtain financing on favorable terms, if needed.

 

Capital expenditures for the remainder of 2012 are expected to approximate $5 million.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonable likely to have a current or future effect on our financial condition, changes in financial condition, net sales or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors, except our contractual obligations discussed below.

 

Contractual Obligations

 

As compared to December 31, 2011, the only material change in our contractual obligations as specified in Item 303(a)(5) of Regulation S-K as of October 31, 2012 is the execution of 31 new retail leases and two administrative office leases which have aggregate future minimum lease payments of $47.2 million.  For additional information regarding our contractual obligations as of December 31, 2011, see the Management’s Discussion and Analysis section of the 2011 Annual Report.

 

22



Table of Contents

 

Seasonality of Business

 

Due to the holiday shopping season in December, our U.S. Wholesale segment’s sales historically have been higher in the second half of the year and our U.S. Consumer Direct segment sales historically have been highest in the fourth quarter.

 

CRITICAL ACCOUNTING POLICIES

 

The preparation of our financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and net sales and expenses during the period. We base our estimates on historical experience and on other factors and assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. Our critical accounting policies and methodologies in the nine months ended September 30, 2012 are consistent with those discussed in our 2011 Annual Report.

 

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Exchange Rate Risk

 

We operate a wholesale business and four retail stores in Japan; a portion of our wholesale sales and all of our retail sales and SG&A expenses in Japan are denominated in Japanese Yen. We operate a wholesale business and five retail stores in the United Kingdom, which have sales and SG&A expenses denominated in British Pounds. We operate wholesale and retail businesses in other parts of Europe; their sales and SG&A expenses are denominated primarily in Euros with some denominated in Swiss Francs.  We operate nine retail stores in Canada, whose sales and SG&A expenses are denominated in Canadian Dollars.    Because the transactions denominated in foreign currencies are not significant to our overall business, our exposure to exchange rate fluctuations between the U.S. Dollar and these foreign currencies are not considered material as of September 30, 2012.  We received U.S. Dollars for all other merchandise sales and licensing revenue during the nine months ended September 30, 2012.  Merchandise purchases from contract manufacturers are denominated in U.S. Dollars, except for an immaterial amount which is denominated in Euros.

 

Interest Rate Risk

 

Interest income is sensitive to changes in the general level of U.S. interest rates. However, based on the nature and current level of our short-term and long-term investments, which primarily consist of U.S. Treasury securities, we do not believe we have material risk of exposure to changes in the fair value of our short-term and long-term investments as a result of changes in interest rates.

 

ITEM 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures.

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, we performed an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the design and effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act of 1934 as amended (the “Exchange Act”)). Based