TRUE RELIGION APPAREL INC FORM 8-K (Current report filing) Filed 02/06/13 for the Period Ending 02/06/13 Address 2263 EAST VERNON AVENUE VERNON, CA, 90058 Telephone 323.266.3072 CIK 0001160858 SIC Code 2300 - Apparel and Other Finished Products of Fabrics and Similar Material Industry Apparel & Accessories Retailers Sector Consumer Cyclicals Fiscal Year 12/13 http://www.edgar-online.com Copyright 2018, EDGAR Online, a division of Donnelley Financial Solutions. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, a division of Donnelley Financial Solutions, Terms of Use.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of Earliest Event Reported): February 6, 2013 TRUE RELIGION APPAREL, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 000-51483 98-0352633 (State or Other Jurisdiction (Commission (IRS Employer of Incorporation) File Number) Identification No.) 2263 East Vernon Avenue Vernon, California 90058 (Address of Principal Executive Offices, Zip Code) (323) 266-3072 (Registrant s Telephone Number, Including Area Code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 2.02 Results of Operation and Financial Condition. On February 6, 2013, True Religion Apparel, Inc. announced by press release its financial results for the quarter and year ended December 31, 2012. A copy of the press release is attached hereto as Exhibit 99.1. Item 9.01 Financial Statements and Exhibits. 99.1 Press Release, dated February 6, 2013, of True Religion Apparel, Inc. 99.2 True Religion Apparel, Inc. Fourth Quarter and Full Year Management Commentary dated December 31, 2012 2
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. February 6, 2013 TRUE RELIGION APPAREL, INC. By: /s/ Peter F. Collins Name: Peter F. Collins Title: Chief Financial Officer 3
INDEX TO EXHIBITS 99.1 Press Release, dated February 6, 2013, of True Religion Apparel, Inc. 99.2 True Religion Apparel, Inc. Fourth Quarter and Full Year Management Commentary dated December 31, 2012 4
Exhibit 99.1 True Religion Apparel Announces Fourth Quarter and Full Year 2012 Financial Results and Introduces Full Year 2013 Guidance Q4 2012 net sales increased 14.8% to $137.0 million Q4 2012 U.S. Consumer Direct net sales increased 11.8%; same-store sales increased 1.5% Q4 2012 U.S. Wholesale net sales increased 14.1% Q4 2012 Effective tax rate was 45.7% compared to 38.4% in the prior year s fourth quarter, impacting the year-over-year diluted EPS comparison by $0.07 Q4 2012 GAAP diluted earnings per share were $0.53 versus $0.57 in Q4 2011 Q4 2012 Adjusted diluted earnings per share were $0.55, which excludes $0.02 per diluted share for costs associated with the Company s review of strategic alternatives VERNON, California February 6, 2013 True Religion Apparel, Inc. (Nasdaq: TRLG) today announced financial results for the quarter and year ended December 31, 2012. Fourth Quarter 2012 Financial Results Total net sales increased to $137.0 million, or 14.8%, compared with the same period in 2011. Net sales for the Company s U.S. Consumer Direct segment, which includes the Company s branded stores and e-commerce business, increased 11.8% to $86.4 million compared with the same period in 2011, and accounted for 63.1% of the Company s total net sales for the quarter. Fourth quarter same-store sales for the 107 stores open at least 12 full months and e-commerce increased 1.5% compared to the same period in 2011. The Company operated a total of 122 branded stores in the United States as of December 31, 2012, compared to 109 as of December 31, 2011. Net sales for the Company s U.S. Wholesale segment increased 14.1% to $25.5 million compared to the prior year quarter driven by growth in the Specialty Store and Off-Price channels. 1
Net sales for the International segment totaled $24.2 million, a 27.8% increase as compared to the prior year quarter. The segment s increase was driven by an 85.2% increase in international retail sales as a result of an increase in store count from 16 at December 31, 2011 to 30 at December 31, 2012. The Company opened two international stores in the fourth quarter of 2012. Gross profit increased 15.1% to $88.1 million, driven primarily by overall sales growth. The gross margin rate increased 20 basis points to 64.3%, aided by gross margin expansion in the U.S. Wholesale and U.S. Consumer Direct segments. Selling, general and administrative ( SG&A ) expenses increased 20.9% to $62.7 million from $51.9 million in the prior year quarter, and as a percentage of net sales increased to 45.8% from 43.4% in the same quarter a year ago. The dollar increase in SG&A expenses was driven by the costs associated with operating 13 additional U.S. stores and 14 additional international stores in 2012 as compared to the same period in 2011. Excluding $0.9 million of incremental costs associated with the review of strategic alternatives, the SG&A expenses would have been 45.1% of net sales for the fourth quarter of 2012. Operating income totaled $25.4 million, up 3.0% from the fourth quarter of last year. Operating margin was 18.5% in the fourth quarter of 2012 versus 20.7% in the fourth quarter of 2011. The costs associated with the review of strategic alternatives reduced the quarter s operating margin by 70 basis points. The effective tax rate for the quarter was 45.7% as compared to 38.4% in the fourth quarter of 2011. The fourth quarter 2012 effective tax rate increased primarily because the Company chose not to transfer certain international assets and functions as this would have added complexity to our supply chain. That transfer would have allowed the Company to utilize tax loss carryforwards, which have now been offset by valuation allowances. Net income attributable to True Religion Apparel, Inc. decreased to $13.5 million, or $0.53 per diluted share based on weighted average shares outstanding of 25.6 million, as compared to $14.5 million, or $0.57 per diluted share based on weighted average shares outstanding of 25.3 million in 2011. Excluding the costs associated with the review of strategic alternatives described above, adjusted net income attributable to True Religion Apparel, Inc. was $14.0 million, or $0.55 per diluted share for the fourth quarter of 2012. Management Comments We finished the fourth quarter with double digit sales increases in our three key segments. And, we expanded our gross margin in our domestic consumer direct and wholesale segments. These two segments combined for 82% of our net sales this quarter, stated Jeffrey Lubell, Chairman, 2
Chief Executive Officer and Chief Merchant of True Religion Apparel, Inc. As we start 2013, our plan is to enhance our men s merchandise offering with sportswear innovation and re-establish the True Religion Brand Jeans women s collection with updated, well-edited core basic denim bottoms and fashion-forward concepts. Year Ended 2012 Financial Results Total net sales for the year ended December 31, 2012 increased to $467.3 million, an 11.3% increase as compared to the year ended December 31, 2011. Net sales for the Company s U.S. Consumer Direct segment increased 12.0% to $281.6 million, and same-store sales for the year ended 2012 increased 2.7%. Net sales for the Company s U.S. Wholesale segment totaled $99.2 million, a 15.0% increase as compared to the prior year, driven by increases in sales to the Off-Price and Specialty Store channels, which was partially offset by a decrease in sales to Major accounts. Net sales for the Company s International segment for the year increased to $83.8 million, or 6.1% as compared to the year ended December 31, 2011. Gross profit increased 10.2% to $299.5 million, and gross margin decreased by 70 basis points to 64.1% as compared to the year ended December 31, 2011. SG&A expense increased 12.3% to $221.4 million from $197.2 million in the prior year, and as a percentage of net sales increased to 47.4% from 47.0% in the prior year. The increase primarily reflects the opening and operating of 28 new branded stores in 2012. Included in SG&A for the year ended December 31, 2012 were costs associated with the review of strategic alternatives of $1.0 million. Included in SG&A for the year ended December 31, 2011 were net separation costs of $1.2 million associated with the resignation of a former executive. Operating income increased 4.7% to $78.1 million, or 16.7% of net sales, versus $74.6 million or 17.8% of net sales in the prior year. Net income attributable to True Religion Apparel, Inc. was $46.0 million, or $1.82 per diluted share based on weighted average shares outstanding of 25.3 million, as compared to $45.0 million, or $1.80 per diluted share based on weighted average shares outstanding of 25.0 million in the prior year. Excluding the costs associated with the review of strategic alternatives and separation costs described above, 2012 adjusted net income attributable to True Religion Apparel, Inc. was $46.6 million, or $1.84 per diluted share, compared to $45.7 million, or $1.83 per diluted share in 2011. Balance Sheet and Liquidity As of December 31, 2012, the Company had $76.8 million of cash and cash equivalents and $140.8 million of short and long-term investments, which combined equals $217.6 million. As 3
of December 31, 2011, the Company had $200.4 million of cash and cash equivalents. The Company paid its regular fourth quarter dividend, aggregating $5.2 million, on December 27, 2012, which impacted cash balances at December 31, 2012. The Company ended the year with no long-term borrowings. The inventory balance as of December 31, 2012 was $65.7 million, a 23.1% increase from December 31, 2011. This increase is primarily the result of an expanded retail store count from 125 retail stores at December 31, 2011 to 152 retail stores at December 31, 2012. Net cash provided by operating activities was $64.1 million in 2012 compared to $71.8 million in 2011. This decrease in net cash provided by operating activities is primarily due to the increase in U.S. Wholesale sales in the fourth quarter of 2012 as compared to in the four quarter of 2011, which caused receivables to grow and cash receipts to be delayed in 2012 compared to 2011. The timing of payments from International wholesale customers also impacted the growth in receivables. Store Openings During the 2012 fourth quarter, True Religion Apparel opened three stores in the U.S. and two stores in Canada. As of December 31, 2012, the Company operated 122 stores in the U.S. and 30 international stores. Review of Strategic Alternatives In October, 2012, the Company announced that the 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. The review by the Special Committee is continuing. 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. First Quarter and Full-Year 2013 Guidance For the full year ended December 31, 2013 the Company expects: Net sales to be between $509 million and $513 million Diluted EPS to be between $1.89 and $1.95 The Company s 2013 net sales guidance is based on the following assumptions: Net sales within the Company s U.S. Consumer Direct segment are forecasted to grow approximately 8% to 9% compared to 2012. This growth assumes 14 new retail stores in 2013 and the full year impact of the 14 stores opened in 2012. Same store sales are expected to be in the range of flat to up in the low single digits. Net sales in the Company s U.S. Wholesale segment are expected to increase slightly compared to 2012. Off-Price channel sales are expected to be flat compared to 2012. 4
The International segment s net sales are forecasted to grow approximately 20% as compared to 2012 primarily due to the full year impact of 14 stores opened in 2012 and five to eight new stores in 2013. The Company s 2013 EPS guidance reflects fully diluted weighted average shares outstanding of approximately 25.6 million and an effective tax rate of 38.8%. For the first quarter of 2013 the Company expects: Net sales to be in the range of $113 million to $114 million Diluted EPS to be between $0.33 and $0.35 The Company s first quarter net sales guidance is based on the following assumptions: Net sales in the U.S. Consumer Direct segment are forecasted to grow in the mid single digit range compared to the first quarter 2012 primarily driven by new store growth. Same store sales are expected to range between slightly negative and flat in the first quarter. Net sales in the U.S. Wholesale segment are expected to increase slightly as compared to the first quarter of 2012. Off-Price channel sales are expected to be flat compared to 2012. The International segment s net sales are forecasted to increase by approximately 10%. The Company s first quarter 2013 EPS guidance reflects fully diluted weighted average shares outstanding of approximately 25.6 million and an effective tax rate of 38.8%. Investor Conference Call True Religion Apparel management will host a conference call to discuss the financial results and answer questions today at 4:30 p.m. ET. The conference call will be available to all interested parties through a live webcast at www.truereligionbrandjeans.com and www.earnings.com. Please visit one of these Web sites at least 15 minutes prior to the start of the call to register and download any necessary software. For those unable to listen to the live broadcast, the call will be archived and available online at both sites. A telephone replay of the call will be available for approximately one month following the conclusion of the call by dialing (877) 870-5176 (domestic) or (858) 384-5517 (international) and entering conference identification: 407926. Please note participants must enter the conference identification number in order to access the replay. Management Commentary A detailed financial commentary from the Company s management will be posted on the Company s website, www.truereligionbrandjeans.com, in the Investor Relations section. About True Religion Apparel, Inc. True Religion Apparel, Inc. is a growing, design-based jeans and jeans-related sportswear brand. The Company designs, manufactures and markets True Religion Apparel products, including its premium True Religion Brand Jeans. Its expanding product line, which includes highquality, distinctive styling and fit in denim, sportswear, and licensed products, may be found in the 5
Company s branded retail and outlet stores as well as contemporary department stores and boutiques in 50 countries on six continents. As of December 31, 2012, the Company owned and operated 122 branded retail and outlet stores in the United States and 30 international stores. For more information, please visit www.truereligionbrandjeans.com. 6
Q4 2012 Segment Results (Dollar amounts in thousands) (unaudited) Three Months Ended December 31, Year Ended December 31, % % Increase/ Increase/ 2012 2011 (Decrease) 2012 2011 (Decrease) Net Sales: U.S. Consumer Direct $ 86,439 $ 77,309 11.8 % $ 281,583 $ 251,334 12.0 % U.S. Wholesale 25,545 22,380 14.1 % 99,215 86,268 15.0 % International 24,220 18,953 27.8 % 83,824 78,974 6.1 % Core Services 838 767 9.3 % 2,663 3,222 (17.3)% Total net sales $ 137,042 $ 119,409 14.8 % $ 467,285 $ 419,798 11.3 % Three Months Ended December 31, Year Ended December 31, 2012 2011 2012 2011 Gross Gross Gross Gross Amount Margin Amount Margin Amount Margin Amount Margin Gross Profit: U.S. Consumer Direct $ 60,060 69.5 % $ 53,412 69.1 % $ 197,328 70.1 % $ 178,341 71.0 % U.S. Wholesale 12,854 50.3 % 10,935 48.9 % 50,452 50.9 % 44,445 51.5 % International 14,366 59.3 % 11,412 60.2 % 49,080 58.6 % 45,821 58.0 % Core Services 838 100.0 % 767 100.0 % 2,663 100.0 % 3,222 100.0 % Total gross profit $ 88,118 64.3 % $ 76,526 64.1 % $ 299,523 64.1 % $ 271,829 64.8 % Three Months Ended December 31, Year Ended December 31, 2012 2011 2012 2011 Operating Operating Operating Operating Amount Margin Amount Margin Amount Margin Amount Margin Operating Income: U.S. Consumer Direct $ 29,096 33.7 % $ 27,264 35.3 % $ 93,726 33.3 % $ 88,453 35.2 % U.S. Wholesale 11,430 44.7 % 9,416 42.1 % 44,333 44.7 % 37,116 43.0 % International 1,934 8.0 % 2,762 14.6 % 7,895 9.4 % 15,927 20.2 % Core Services (17,069) NM (14,783) NM (67,837) NM (66,885) NM Total operating income $ 25,391 18.5 % $ 24,659 20.7 % $ 78,117 16.7 % $ 74,611 17.8 % This press release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Among these forward looking statements are our 2013 Guidance, forecasted store openings for 2013, statements regarding our ongoing strategic review and expected operating and financial performance and the other statements contained in this press release addressing our plans, expectations, future financial condition and results of operations. 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 press release may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Actual future results may vary materially. Factors that may cause our plans, expectations, future financial condition and results to change are described in our Annual Report on Form 10-K, Reports on Form 10-Q and our other filings with the SEC, and include: the current downturn in the global economy and in particular, the decline in consumer spending generally and in the apparel industry more specifically; the Company s ability to predict fashion trends; the Company s ability to continue to maintain its brand image and reputation; competition from companies with significantly greater resources than ours; and the Company s ability to continue and manage its expansion plans. 7
TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, expect per share data) Three Months Ended Year Ended December 31, December 31, 2012 2011 2012 2011 Net sales $ 137,042 $ 119,409 $ 467,285 $ 419,798 Cost of sales 48,924 42,883 167,762 147,969 Gross profit 88,118 76,526 299,523 271,829 Selling, general and administrative expenses 62,727 51,867 221,406 197,218 Operating income 25,391 24,659 78,117 74,611 Other expense (income), net (16) 868 (94) 637 Income before provision for income taxes 25,407 23,791 78,211 73,974 Provision for income taxes 11,609 9,127 31,513 28,197 Net income 13,798 14,664 46,698 45,777 Less: Net income attributable to redeemable noncontrolling interest 317 198 683 810 Net income attributable to True Religion Apparel, Inc. $ 13,481 $ 14,466 $ 46,015 $ 44,967 Earnings per share attributable to True Religion Apparel, Inc.: Basic $ 0.54 $ 0.58 $ 1.83 $ 1.81 Diluted $ 0.53 $ 0.57 $ 1.82 $ 1.80 Weighted average shares outstanding: Basic 25,179 24,930 25,122 24,856 Diluted 25,585 25,308 25,328 25,026 8
TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except par value amounts) December 31, December 31, 2012 2011 ASSETS Current Assets: Cash and cash equivalents $ 76,831 $ 200,366 Short-term investments 109,317 Accounts receivable, net of allowances 31,647 23,959 Inventories 65,655 53,320 Deferred income tax assets 7,293 7,027 Prepaid income taxes 5,359 3,879 Prepaid expenses and other current assets 10,123 12,137 Total current assets 306,225 300,688 Property and equipment, net 61,565 53,698 Long-term investments 31,517 Deferred income tax assets 1,383 1,271 Other assets 5,026 4,496 TOTAL ASSETS $ 405,716 $ 360,153 LIABILITIES AND STOCKHOLDERS EQUITY Current Liabilities: Accounts payable and accrued expenses $ 30,868 $ 22,872 Accrued salaries, wages and benefits 11,383 11,506 Income taxes payable 5,060 6,538 Total current liabilities 47,311 40,916 Long-Term Liabilities: Long-term deferred rent 17,517 13,986 Long-term deferred income tax liabilities 3,662 2,224 Long-term income taxes payable 916 604 Total long-term liabilities 22,095 16,814 Total liabilities 69,406 57,730 Redeemable noncontrolling interest 3,375 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, 25,723 and 25,492 issued and outstanding, respectively 3 3 Additional paid-in capital 89,287 77,950 Retained earnings 241,985 221,122 Accumulated other comprehensive income, net 1,660 713 Total stockholders equity 332,935 299,788 TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 405,716 $ 360,153 9
TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December 31, 2012 2011 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 46,698 $ 45,777 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13,373 12,750 Provision for bad debts 677 1,209 Stock-based compensation 10,990 10,736 Tax benefit from stock-based compensation 347 746 Excess tax benefit from stock-based compensation (454) (1,196) Deferred income taxes 1,058 1,396 Impairment of property and equipment 1,173 1,353 Other, net 556 86 Changes in operating assets and liabilities: Accounts receivable (8,205) 2,600 Inventories (12,265) (11,723) Prepaid expenses and other current assets 2,511 (1,884) Other assets (291) (311) Accounts payable and accrued expenses 7,315 6,959 Accrued salaries, wages and benefits (147) 2,010 Prepaid income taxes and income taxes payable (2,704) (1,444) Long-term deferred rent 3,463 2,704 Net cash provided by operating activities 64,095 71,768 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments (214,309) Proceeds from maturities or sales of investments 73,047 Purchases of property and equipment (21,994) (20,676) Other, net (512) (93) Net cash used in investing activities (163,768) (20,769) CASH FLOWS FROM FINANCING ACTIVITIES: Statutory tax withholding payment for stock-based compensation (4,569) (5,479) Cash dividends paid (20,151) Excess tax benefit from stock-based compensation 454 1,196 Net cash used in financing activities (24,266) (4,283) Effect of exchange rate changes in cash 404 (142 ) Net (decrease) increase in cash and cash equivalents (123,535 ) 46,574 Cash and cash equivalents, beginning of period 200,366 153,792 Cash and cash equivalents, end of period $ 76,831 $ 200,366 10
TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES RECONCILIATION OF GAAP TO ADJUSTED RESULTS (Amounts in thousands, except earnings per share data) (Unaudited) Quarter Ended December 31, 2012 Net income Selling, general attributable to & administrative Operating True Religion Diluted earnings Expenses income Apparel, Inc. per share (c) As reported (GAAP) $ 62,727 $ 25,391 $ 13,481 $ 0.53 Strategic review (a) (871) 871 543 0.02 As adjusted (d) $ 61,856 $ 26,262 $ 14,024 $ 0.55 Year Ended December 31, 2012 Net income Selling, general attributable to & administrative Operating True Religion Diluted earnings Expenses income Apparel, Inc. per share (c) As reported (GAAP) $ 221,406 $ 78,117 $ 46,015 $ 1.82 Strategic review (a) (988) 988 616 0.02 As adjusted (d) $ 220,418 $ 79,105 $ 46,631 $ 1.84 Year Ended December 31, 2011 Net income Selling, general attributable to & administrative Operating True Religion Diluted earnings Expenses income Apparel, Inc. per share (c) As reported (GAAP) $ 197,218 $ 74,611 $ 44,967 $ 1.80 Separation costs (b) (1,237) 1,237 766 0.03 As adjusted (d) $ 195,981 $ 73,374 $ 45,733 $ 1.83 (a) Strategic review costs represent those incremental professional fees and Special Committee fees that are directly attributable to our review of strategic alternatives. (b) Separation costs associated with the resignation of a former executive ($2.9 million in separation costs offset by $1.7 million of accrued bonus and share-based compensation). (c) Based on diluted weighted shares outstanding of 25.6 million and 25.3 million in Q4 2012 and Q4 2011, respectively, and 25.3 million and 25.0 million in 2012 and 2011, respectively. (d) Management uses adjusted net income, and its components, among other factors, to measure the performance of the overall Company. Further, we believe that investors understanding of our performance is enhanced by disclosing these measures. Adjusted net income and its components and adjusted diluted EPS measures are not, and should not be viewed as, substitutes for U.S. generally accepted accounting principles (GAAP) net income and its components and diluted EPS. 11
SOURCE: True Religion Apparel, Inc. Contact : True Religion Apparel, Inc. Pete Collins, Chief Financial Officer (323) 266-3072 Investor Relations Joe Teklits/Jean Fontana ICR, Inc. (646) 277-1214 12
Exhibit 99.2 For a discussion of our consolidated results on the fourth quarter of 2012, please see our earnings release issued on February 6, 2012. Below please find additional information regarding our fourth quarter and full year results by business segment. Fourth Quarter Segment Overview Our U.S. Consumer Direct segment s fourth quarter 2012 net sales increased over the same period last year by 11.8% to $86.4 million primarily due to the increase in the number of retail stores operated this year versus last year. During the quarter, we opened three branded retail stores, bringing the total to 122 stores at quarter end compared to 109 stores at the end of 2011. Our same-store sales increased 1.5% in the fourth quarter, which was highlighted by strong growth in the E-commerce business. In the fourth quarter, same store sales of men s merchandise increased 8.4%, while same store sales of women s merchandise decreased 6.5%. The segment s weighted average retail square footage for the fourth quarter of 2012 was 233,000 square feet compared to 205,000 square feet for the fourth quarter of 2011. At December 31, 2012, the total retail square footage was 234,000 square feet. A recap of the stores opened from October 1, 2012 to December 31, 2012 is attached to this commentary. Other key metrics in the U.S. Consumer Direct segment include average selling price (ASP) of jeans in the full price stores. The ASP of jeans decreased to $223 in the fourth quarter of 2012 from $260 in the fourth quarter of 2011, primarily due to an increase in our holiday promotions. Sportswear sales made up 34.8% 1 TRLG Q4 and Full Year Management Commentary 2012
of the U.S. Consumer Direct net sales in the fourth quarter 2012, compared to 31.9% in the fourth quarter of 2011. The U.S. Consumer Direct segment s gross margin increased by 40 basis points versus the prior-year period to 69.5%, primarily due to an improved markdown strategy and a sales mix shift toward higher-margin DFO merchandise. The U.S. Consumer Direct segment s SG&A rate increased 200 bps in the fourth quarter of 2012 versus the prior year quarter as a result of increases in merchandise planning and buying resources to improve product allocation, field management to support growth, and advertising to promote holiday initiatives. The U.S. Consumer Direct segment s fourth quarter 2012 operating income increased by 6.7% to $29.1 million. The segment s operating margin decreased to 33.7% in the fourth quarter of 2012 from 35.3% in the fourth quarter of 2011. The segment s four-wall operating margin was 39.2% in the fourth quarter 2012 versus 39.3% in the fourth quarter 2011. Our U.S. Wholesale segment s net sales increased by 14.1% to $25.5 million. This is the fourth consecutive year-over-year increase in this segment s quarterly net sales. This segment s sales growth was attributable to increased sales of men s merchandise in the Specialty Store and Off-Price channels. The Specialty Stores channel has achieved eleven consecutive quarters of year-over-year quarterly net sales growth. The U.S. Wholesale segment s gross margin increased by 140 basis points, driven by a sales mix shift to the higher margin Specialty Store channel and a gross 2
margin increase in this channel. SG&A dollars were flat to last year s fourth quarter, which led to 120 basis point of SG&A leverage. Operating margin for this segment rose 260 basis points to 44.7% in the fourth quarter of 2012 as compared to the same period last year. In our International segment, net sales increased by 27.8% to $24.2 million due to the growth of our retail business. We experienced an 85.2% increase in retail net sales, driven by 14 new International retail stores since the end of the fourth quarter of 2011. We opened two International branded retail stores during the fourth quarter of 2012 and we operated 30 stores as of December 31, 2012, compared to 16 stores at the end of 2011. The segment s wholesale sales decreased 5.3% primarily due to lower sales in Korea, which was partially offset by wholesale sales growth in our EMEA and Americas regions. The International gross margin declined 90 basis points, primarily due to increased promotional activity, our revised pricing strategy in the U.K., and a sales mix shift to the lower-margin outlet channel in the U.K. The International SG&A expense increased 43.7% due to the operating costs associated with the additional 14 branded retail stores, which was also the primary driver of the segment s SG&A rate increase of 570 basis points. The International segment s operating income decreased by 30.0% to $1.9 million, and its operating margin decreased to 8.0% from 14.6%. The segment s retail stores had a four-wall operating margin of 14.2% in the fourth quarter of 2012. 3
2012 Segment Overview U.S. Consumer Direct net sales in 2012 increased 12.0% to $281.6 million due to the expansion of our retail store count and a 2.7% same store sales increase. The U.S. Consumer Direct gross margin decreased to 70.1% in 2012 from 71.0% in 2011. During most of 2012, we experienced a sales mix shift toward our lower-margin outlet stores and we took increased markdowns in our outlet stores in order to sell-through slower-moving women s merchandise. U.S. Consumer Direct SG&A increased $13.7 million primarily due to costs associated with the increase in store count. Also contributing to the increase were merchandise planning and buying resources to support this segment s sales growth. As a percentage of U.S. Consumer Direct net sales, SG&A increased by 100 bps to 36.8% primarily due to these planned increases in back office support. Operating income within the U.S. Consumer Direct segment increased by 6.0% to $93.7 million. The U.S. Consumer Direct segment s operating margin decreased to 33.3% in 2012 from 35.2% in 2011 due to the reduced gross margin and the higher SG&A rate described above. The segment s 4-wall operating margin was 38.9% in 2012 versus 39.3% in 2011. U.S. Wholesale net sales for 2012 increased by 15.0% to $99.2 million, primarily due to an increase in sales to the Off-Price and Specialty Store channels, which was partially offset by a decrease in sales to Majors. 4
Gross margin decreased by 60 basis points to 50.9% in 2012 primarily due to an increase in sales to the Off-Price channel, which earns a lower gross margin. Also contributing to the decrease was a sales mix shift within the Off-Price channel towards increased sales of slow-moving merchandise, which earns a lower gross margin than DFO merchandise. SG&A expenses decreased by $1.2 million to $6.1 million primarily due to a decrease in bad debt expense. In 2011 we wrote off a $0.7 million receivable from a former customer as a result of their bankruptcy filing. The decrease in SG&A costs combined with the segment s increase in sales contributed to the U.S. Wholesale SG&A rate decreasing from 8.5% in 2011 to 6.2% in 2012. The U.S. Wholesale segment s operating income increased by 19.4% to $44.3 million, and its operating margin increased from 43.0% in 2011 to 44.7% in 2012 driven by the segment s growth in sales. International net sales increased by 6.1% to $83.8 million primarily due to a 104.3% increase in retail sales as we have steadily increased our international store count since the beginning of 2012. Gross margin increased by 60 basis points to 58.6% in 2012 due to the sales mix shift towards our international retail business, which earns a higher gross margin than our wholesale business. The segment s SG&A increased to $41.2 million from $29.9 million primarily due to our retail store count increase from 16 stores at December 31, 2011 to 30 stores at December 31, 2012. As a percentage of net sales, SG&A was 49.1% in 5
2012 versus 37.9% in 2011. This SG&A rate increase was driven by the wholesale sales decrease and the sales mix shift to the direct retail business, which has a higher SG&A rate than the wholesale business. The International segment s operating income decreased by 50.4% to $7.9 million, and its operating margin decreased to 9.4% from 20.2% primarily due to wholesale sales slowdowns in Korea, Canada, and Germany. 6
True Religion Brand Jeans - Retail stores opened from October 1, 2012 through December 31, 2012 Store Count Store Location City State Opening Date Square Footage Store Type US Stores 1 Walt Whitman Mall Huntington Station NY 10/18/2012 1,499 Retail 2 Destiny USA Syracuse NY 10/18/2012 2,500 Outlet 3 Livermore Valley Livermore CA 11/8/2012 2,500 Outlet City Country International Stores 1 Toronto Eaton Centre Toronto Canada 11/22/2012 1,530 Retail 2 Montreal Eaton Centre Montreal Canada 12/6/2012 3,797 Retail True Religion Brand Jeans - Total Retail Stores As of Opened during Closed during As of Relocated during Store Count December 31, 2011 2012 2012 December 31, 2012 2012 US Stores Regular Price 79 8 1 86 0 Outlet 30 6 0 36 1 US Store Total 109 14 1 122 1 International Stores Regular Price 10 10 0 20 0 Outlet 6 4 0 10 0 International Store Total 16 14 0 30 0 Total US and International Stores 125 28 1 152 1 7