Press Release:
VERNON, Calif.–(BUSINESS WIRE)– True Religion Apparel, Inc. (Nasdaq:TRLG – News) today announced financial results for the three and nine months ended September 30, 2010.
Third Quarter 2010 Financial Results
Total net sales increased 12.5% to $92.8 million.
Net sales for the Company’s U.S. Consumer Direct segment, which includes the Company’s branded retail stores and e-commerce site, increased 42.0% to $46.3 million and accounted for 49.9% of the Company’s total net sales for the quarter. Third quarter same-store sales for the 63 stores open at least 12 months increased 9.0%. The Company operated 89 branded stores as of September 30, 2010, compared to 66 as of September 30, 2009.
Net sales for the Company’s U.S. Wholesale segment totaled $26.9 million, a 15.6% decrease as compared to the prior year period. This segment’s sales have been impacted by the overall slowdown in sales of women’s premium denim in the major department store channel. Consistent with the Company’s strategy to maintain its premium position, sales to the off-price channel were also decreased in the quarter. The specialty channel increased sales for the second consecutive quarter as the Company’s product continued to resonate with the denim tastemakers that shop in this channel.
Net sales for the Company’s International segment increased 8.7% to $18.0 million. Growth in the International segment was muted by the Company’s decision to terminate some non-exclusive distributors in preparation to take a more direct role in positioning its brand in international markets.
Net sales included $1.5 million of licensing revenue as compared to $1.3 million in the same period last year.
Gross profit was 62.1% of net sales as compared to 64.7% of net sales, in the third quarter of 2009. The decrease in gross margin was the result of the sell-through of higher cost merchandise acquired by the Company’s new German joint venture when it started operations, increased sales from the Company’s outlet stores and lower initial markup on women’s jeans in response to competitor and market pricing.
Selling, general and administrative (“SG&A”) expense, as a percentage of net sales, increased to 42.2% from 37.1% in the same period a year ago. The majority of the year-over-year growth in SG&A expenses was driven by the costs associated with operating 23 additional stores in the U.S. in the third quarter of 2010 as compared to the same period in 2009. In addition, International SG&A expenses increased as the Company added wholesale sales teams in Europe and Asia and opened three branded retail stores in the past year.
Operating income as a percentage of net sales was 19.8% of net sales in third quarter 2010 versus 27.6% in third quarter 2009. Operating margins were primarily impacted by the U.S. Wholesale sales decrease, the gross margin decrease and further investments in international businesses.
The effective tax rate for the quarter was 36.1% as compared to 38.2% in the third quarter of 2009.
Net income decreased to $11.8 million, or $0.48 per diluted share based on weighted average shares outstanding of 24.8 million, as compared to $14.1 million, or $0.58 per diluted share based on weighted average shares outstanding of 24.2 million in the 2009 third quarter.
Management Comments
“Third quarter results were a reflection of the changing mix of our business model. U.S. Consumer Direct, our largest segment, performed very well, generating a 9% same-store sales increase which was an acceleration from the second quarter increase.
“Sales in our U.S. Wholesale segment declined, driven by our strategic reduction of sales to the off-price channel and the ongoing weakness of the women’s premium denim category in the Major department stores. We remain focused on working with our Major department store accounts to reinvigorate this category.
“In addition, we are very pleased with our second consecutive quarter of growth in the Specialty channel, the preferred channel of denim tastemakers,” stated Jeffrey Lubell, Chairman, Chief Executive Officer and Chief Merchant of True Religion Apparel, Inc.
“In our International segment, our newly opened stores in Tokyo, London and Cologne were well received, and the retail sell-through of our products continues to be positive. This quarter’s International results also reflect our decision to terminate some distributors as we accelerate our plans to take certain markets direct. Direct control of key markets is essential for us to effectively protect and grow our brand in the long term.
“Overall, we did not make the progress that we had expected to in the quarter. However, we continue to focus on executing our growth plans for our U.S. Consumer Direct and International business segments while investing in infrastructure and personnel to drive our future growth and profitability. I remain very confident in our business strategy and management team.”
Year-to-date 2010 Financial Results
Total net sales increased 15.9% to $252.8 million in the nine months ended September 30, 2010. Net sales for the Company’s U.S. Consumer Direct segment increased 50.9% to $126.6 million, and same-store sales increased 10.8%.
Net sales for the Company’s U.S. Wholesale segment totaled $76.7 million, a 16.2% decrease as compared to the prior year period, and net sales for the Company’s International segment increased 14.3% year-over-year to $45.6 million. Net sales included $3.9 million of licensing revenue as compared to $2.8 million in the same period last year.
Operating income decreased 18.6% to $43.7 million as compared to the prior year period, primarily due to the $4.4 million separation costs incurred in the second quarter of 2010, the sales decrease in the U.S. Wholesale segment, and additional spending to support International wholesale and direct to consumer business growth. Operating income was 17.3% of net sales in the first nine months of 2010 versus 24.6% in the prior year period. The 2010 year to date operating margin excluding the separation costs is 19.0%.
Net income decreased to $27.7 million, or $1.12 per diluted share based on weighted average shares outstanding of 24.8 million, as compared to $32.7 million, or $1.35 per diluted share based on weighted average shares outstanding of 24.1 million in the prior year period. Net income excluding the separation costs would have been $30.5 million or $1.23 per diluted share for the first nine months of 2010.
Balance Sheet and Liquidity
As of September 30, 2010, the Company had $127.7 million of cash and cash equivalents as compared to $105.5 million as of December 31, 2009. The Company ended the quarter with no long-term borrowings. As compared to September 30, 2009, inventory increased by $13.7 million to $51.6 million, a 36.3% increase; the additional inventory supports the Company’s 23 branded retail stores opened since September 30, 2009, which increased total retail space by 36%, the opening of three international stores and the wholesale business operated by the new joint venture based in Germany. Retail inventory per square foot increased 7% from September 30, 2009 to September 30, 2010, which is below the rate that same store sales increased.
Net cash provided by operating activities for the first nine months of 2010 was $37.1 million compared to $45.0 million in the prior year. This decrease in net cash provided by operating activities is related to the additional investment in inventory described above.
Store Openings
During the 2010 third quarter, True Religion Apparel opened eight stores in the U.S., bringing its total U.S. store count at September 30, 2010, to 89 stores, compared to 66 stores at September 30, 2009. The Company also operated four stores in Japan, one in the U.K. and one in Germany as of September 30, 2010. Subsequent to the close of the third quarter, the Company opened two additional stores in the U.S. and one store in Toronto, Canada. The Company anticipates opening three additional retail stores in the U.S. over the remainder of the fourth quarter, 2010.
Guidance
The Company is updating its guidance for the fiscal year ended December 31, 2010, as follows:
Net sales are expected to be in the range of $355 million to $360 million
EPS is expected to be in the range of $1.73 to $1.78
The Company’s 2010 EPS guidance reflects fully diluted weighted average shares outstanding of approximately 25.1 million and an effective tax rate of 37.3%.
Investor Conference Call and Management Commentary
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 the Web site 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: 359176. Please note participants must enter the conference identification number in order to access the replay.
A detailed, financial commentary from the Company’s Management will be posted in writing on the Company’s website, www.truereligionbrandjeans.com, in the Investor Relations section.
