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True Religion Apparel Inc. (NASDAQ:TRLG)

Q4 2012 Results Earnings Call

February 6, 2013 4:30 PM ET

Executives

Jean Fontana - ICR, IR

Jeff Lubell - Chairman, CEO and Chief Merchant,

Lynne Koplin - President

Pete Collins - Chief Financial Officer

Analysts

Scott Krasik - BB&T Capital

Jeff Van Sinderen - B. Riley

Edward Yruma - KeyBanc Capital Markets

Ronald Bookbinder - The Benchmark Company

Danielle McCoy - Brean Capital

Janine Stichter - Telsey Advisory Group

Operator

Greetings. And welcome to the True Religion Apparel Incorporated 2012 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jean Fontana of ICR. Thank you, Ms. Fontana. You may begin.

Jean Fontana

Thank you. Good afternoon, everyone. And thank you for joining us today to discuss True Religion Apparel’s fourth quarter and full year 2012 financial results. By now, everyone should have access to the earnings release. If you have not received the release, it is available on the Investor Relations portion of True Religion’s website at www.truereligionbrandjeans.com by clicking on the Investor Relations tab.

We’ve also posted on the site the detailed management commentary on our segment results for the fourth quarter and full year 2012. This call is being webcast and a replay will be available and archived on the company’s website.

Please note that all the information discussed on the call today is covered under the Safe Harbor provision of the Private Securities Litigation Reform Act. We caution listeners that during this call, True Religion management will be providing financial guidance and making other forward-looking statements regarding future financial results and business opportunities.

We encourage you to read the 2011 10-K, the upcoming 2012 10-K and other reports that we file periodically with the SEC. These documents contain a discussion of the risks facing our business, including factors that could cause these forward-looking statements to not come true. The company does not currently intend to update these forward-looking statements except as required by law.

With that, it is my pleasure to turn the call over to True Religion Apparel’s Chairman, Chief Executive Officer and Chief Merchant, Jeff Lubell.

Jeff Lubell

Thank you, Jean, and good afternoon, everybody. Thank you for joining us today as we discuss our financial results for the fourth quarter and full year 2012. Joining me on the call today are Lynne Koplin, our President; and Pete Collins, our Chief Financial Officer.

Overall, we are pleased to have ended the year on a positive note. During 2012 we continue to grow our men’s business, took steps to evolve our women’s business, expanded our U.S. retail store base and grew our international business.

From a financial perspective in 2012, total sales grew 11% to $467 million, ahead of our original guidance for $450 million to $460 million. We generated adjusted diluted EPS of $1.84.

During the fourth quarter we generated positive same-store sales in our U.S. Consumer Direct segment with an increase in our full-price stores, comp and strong growth in our E-commerce business.

In our full-price stores we are more diligent in managing our inventory to keep stores looking fresh and we also enhance our focus on conversion. In addition, we increased the amount of design for outlet merchandise available for our outlet stores, which we believe will enable us to capture improve profitability in this channel.

Finally in our International business we saw sales growth driven by EMEA and the Americas. I’m also very pleased that we successfully made progress during the year towards each of our key goals.

Our first goal was to continue momentum in our men’s business and during 2012 our men’s business continued to generate strong growth both in our retail stores and in the Wholesale channel.

Secondly, we plan to work to evolve our women’s merchandise assortment. We have begun to make changes to our infrastructure and to enhance our sourcing capabilities, while bringing in additional talent to help us strengthen our women’s offering.

Our plan was to grow our U.S. retail store base by 13 stores, where we opened 14 new stores during 2012. Finally, we wanted to build upon our international growth efforts. During the year we opened 14 new international stores. We also moved forward with operational initiatives in our International business that we believe will enable us to capitalize on the significant growth opportunity in our currents market and to expand into new markets.

Looking ahead to 2013, we will continue to build on these initiatives to drive further growth. Let me provide some more detail on how we will get there.

In the men’s business we will continue the strong momentum that has been building by focusing on product innovation to create new styles that reflect changing trends. We will also continue to expand our non-denim offering to attract new customers and broaden appeal. On the women side, we are focused on reestablishing True Religion as a go to brand for women.

As such we will develop an updated, well edited core basic offering while also consistently featuring fashion forward concepts. We will build an enhance sportswear offering that presents both fashion and quality in order to heightened our brand appeal.

In both the men’s and women’s businesses, we will work increase coordination between the merchandising and planning functions across channels, improve speed to markets with enhanced sourcing network and strive for better execution from the design phase to delivery.

In our U.S. Consumer Direct segment, we are focused on continuing to grow the U.S. retail base with 14 new store openings plan for 2013. Remember that our new stores continued to be productive with strong four wall contributions.

In addition, we plan to employ greater localization and increase depth of inventory and popular sizes, particularly in the strong selling styles. Our new GMM of U.S. Consumer Direct who we brought on-board this past October is still heading this important effort for us.

Finally, in our International business we are focused on establishing a regional management team to support distributors and coordinate our brand building efforts to direct future investments.

In addition, we see an opportunity to source and manufacture some products locally in order to reduce cost, enhance products appeal for the regional tastes. We believe that this will also advance our competitive positioning in these markets.

In summary, we believe we are taking the right steps to enhance our competitive position and drive improved sales and profitability, as well as long-term shareholder value.

With that as background, I’d like to turn the call over to Pete to review the fourth quarter in more detail and discuss our outlook for 2013. Pete?

Pete Collins

Thanks, Jeff, and good afternoon, everyone. I’m going to start off by building upon Jeff’s comments and providing details on the fourth quarter and full year. Then I’ll discuss our outlook for 2013. As a reminder, we have posted a detailed financial commentary of our segment results for the fourth quarter and full year in the Investor Relations section of our website.

Overall, our net sale increased by 14.8% to $137 million in the fourth quarter, with solid growth across each of our segments, U.S. Consumer Direct, U.S. Wholesale and International.

In Consumer Direct, same-store sales in our retail stores and E-commerce business were up 1.5% for the quarter, representing a sequential improvement from the third quarter. U.S. Wholesale growth was led by continued strength in our men’s business. And in the International segment, we gain further traction in most market as we continue to implement our strategic initiatives to drive sales growth.

The overall gross margin expanded by 20 basis points to 64.3%, aided by higher gross margin in both the U.S. Consumer Direct and U.S. Wholesale segments. Our overall operating income for the quarter was $25.4 million or 18.5% of net sales, compared to $24.7 million or 20.7% of net sales in the fourth quarter of 2011.

Our fourth quarter 2012 operating income included $900,000 in costs associated with the review of strategic alternatives. This review is for 2012 Q4 operating margin by 70 basis points and after-tax effect reduce our net income by approximately $500,000 and our diluted EPS by $0.02.

Our fourth quarter 2012 effective tax rate was 45.7% well above the prior rate of 38.4%. When compared to the 2011 Q4 effective tax rate, the increase income tax expense reduced our diluted earnings per share by $0.07.

Net income attributable to Religion Apparel Inc. was $13.5 million or $0.53 per diluted share the fourth quarter of 2012. This compares to $14.5 million or 57% -- $0.57 per diluted share for the fourth quarter of 2011.

When the impact of 2000 -- of the 2012 review of strategic alternatives costs and higher tax rate are added back to our 2012 fourth quarter EPS, the adjusted EPS is $0.62, which is a $0.05 or 9% increase over the fourth quarter of 2011.

Now I will turn to our segment operating results. Our U.S. Consumer Direct segment’s fourth quarter 2012 net sales increased 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. As I mentioned earlier our same-store sales increased 1.5% in the fourth quarter, including a slight increase in our full-price stores, offset by a similar modest decrease in our outlet stores.

The same-store sale gain in our full-price stores was attributable to performance of our men’s business as we continue to garner strong brand loyalty among our male consumers. This was partially offset by continued weakness in the women’s business. In Q4, we did increase the women’s merchandise assortment of embellished denim bottoms and we were overall pleased with the performance.

In our outlet stores, a decrease in traffic was partially offset by higher convergent as we saw good reception to our design for outlet merchandise. In addition, we saw nice sales increase in our E-commerce channel driven by favorable consumer responses to a new promotional strategy and increase in basic core and basic fashion merchandise assortments.

The U.S. Consumer Direct segment’s gross margin increased by 40 basis points to 69.5%, we were much more strategic in our approach to managing some of the merchandising in the quarter. We will carry this strategy forward.

The new approach included taking markdowns in the full-price stores in response to a highly promotional environment which allowed slow moving merchandise to be turn more quickly and at better margin than we were achieving when transferring that merchandise to outlet stores.

The full-price retail store promotion also drove traffic and conversion on both sale and full-price merchandise. Ultimately, by taking actions earlier we were able achieve a higher overall merchandise margin rate and also in the quarter cleaner then we otherwise would have. This also enabled us to present more emphasis on design for outlet merchandise in the outlet store channel.

The U.S. Consumer Direct segment SG&A rate increased 200 basis points to 35.8% in the fourth quarter, primarily as a result of the addition of merchandise planning and buying resources, and field management resources to support the expansion of this business, as well as an increase in our advertising spend.

As a result of these factors, the segment’s operating income rose $1.8 million. The segment’s overall operating margin was 39.2%, which is a 10 basis point decrease from the same period last year.

U.S. Wholesale segment’s net sales increased by 14.1% to $25.5 million, this sales increase was attributable to growth in the Specialty Store and Off-Price channels, partially offset by decrease in women sales to majors.

The Specialty Store channel has now achieved 11th consecutive quarters of year-over-year net sales growth. This quarter sales increase was primarily driven by continued momentum in our men’s business.

U.S. Wholesale segment’s gross margin expanded by 140 basis points, driven by increase sales in higher margin Specialty Store channel, as well as [cosmic] shift towards men’s merchandise.

SG&A dollars were essentially flat versus last year’s fourth quarter, while we gain 120 basis point of SG&A leverage due to solid sales gain.

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 27.8% to $24.2 million, primarily driven by retail store expansion and slightly offset by a decrease in Wholesale sales.

We are pleased with the performance in the EMEA and Americas regions, while sales in the APAC region continued to decline, primarily due to the brand repositioning in Korea. We opened two branded retail stores in Canada during the fourth quarter of 2012 and we operated 30 International stores as of December 31, 2012, compared to 16 stores at the end of 2011.

I’ll cover more business development in our international segment following my financial remarks. International segments gross margin declined by 90 basis point primarily due to increased promotional activity, our revised pricing strategy in the U.K. and sales mix shift to the lower margin outlet channel in U.K. The international SG&A expenses increased 43.7% due to the operating cost associated with the additional 14 branded retail stores.

Turning to our core services segment, SG&A expenses increased by $2.4 million, partially due to the approximately $900,000 in COGS associated with the review of strategic alternatives. The dollar increase in core expenses was also a result of increased professional fees and higher advertising costs. Excluding the costs related to the review of strategic alternatives, core services SG&A was 12.4% of total net sales in the fourth quarter of 2012, down from 13.0% of total net sales in the prior-year period.

Taking a look at our full-year results, for the full year 2012, we achieved an increase in total net sales of 11.3%, driven by 15% increase in sales in our U.S. Wholesale segment and a 12% increase in U.S. Consumer Direct segment volume. U.S same-store sales increased 2.7%. Gross margin contracted by 70 basis points and we delivered an operating margin of 16.7%.

Net income was $46.0 million or $1.82 per diluted share as compared to $45.0 million or $1.80 per diluted share in the prior year. Excluding the costs associated with the review of strategic alternative I mentioned earlier and $1.2 million in separation costs related to the resignation of our former executive in 2011, adjusted net income was $46.6 million or $1.84 per diluted share in 2012 compared to $45.7 million or $1.83 per diluted share in 2011.

Turning to our balance sheet, we ended the year with cash, cash equivalents and investments of $217.7 million compared to $200.4 million in cash and cash equivalents at the end of last year. This year, we initiated a quarterly cash dividend that returned $20.2 million in cash to our shareholders. By adding the increase in our cash and investments to our 2012 dividend amount, we generated $37.5 million in cash flow in 2012.

Inventory at the end of year was $65.7 million, an increase of 23.1% from a year ago. The largest component of this inventory increase was associated with the new stores.

Before I provide our guidance for 2013, I want to highlight some of the business developments in our international segment. Our strategy is to focus on key markets including Germany, U.K., Canada and Korea.

Jeff and our V.P. of International, Giuliano Sartori, have collaborated with designers, product developers and full-package denim producers in Italy to create core basic True Religion brand jeans for our international consumers. The product is proceeding on track towards merchandise arriving in our U.K. and German retail stores in the third quarter of 2013.

In Canada, we opened eight doors in 2012 bringing our store count to 11 stores. These stores’ four-wall margin was the best of the international regions but their conversion was well below the U.S. performance. This tells us we have an opportunity to adjust our merchandising plan to connect better with consumers in Canada.

Also we know that our merchandise replenishment for Canada is lower than U.S. So we’re evaluating changes that should help us with be properly stocked in our Canadian stores.

In Korea, we opened our first shop-in-shop in the Lotte Department Store in Changwon. To support this in future shop-in-shop, we arranged for third-party logistics and point-of-sale system support in Korea. In Hong Kong, we entered a joint venture with local wholesale customer to increase our retail presence in this key fashion market from much of Asia.

With that, I’d like to move on to our initial financial guidance for the full year 2013. Net sales for fiscal 2013 are expected to be in the range of $509 billion to $513 million representing an 8% to 9% increase compared to the 2012 net sales of $467.3 million. Net sales in the U.S. Consumer Direct segment are forecasted to grow in the high-single digit range 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 flat to up in the low-single digit range. Net sales in the U.S. wholesale segment are expected to increase slightly as compared to 2012. We expect sales to the off-price channel to be flat to 2012.

The international segment net sales are forecasted to increase by approximately 20% as compared to 2012 due to the full-year impact of stores opened in 2012 in the expanded wholesale and retail presence in Canada and Hong Kong. We expect to open five to eight international stores in 2013.

Diluted earnings per share is expected to be between $1.89 and $1.95 per share. Our 2013 earnings per share guidance reflects fully diluted average shares outstanding of 25.6 million shares. The expected 2013 effective tax rate is 38.8%. Those are the guidance that excludes comp associated with the review of strategic alternatives that we are conducting.

For the first quarter of 2013, sales are expected to be in the range of $113 million to $114 million. Net sales in the U.S. Consumer Direct segment are forecasted to grow in the mid-single digit range compared to the first quarter of 2012 primarily driven by new store growth.

Same-store sales are expected to be slightly negative to flat in the first quarter. This follows a 13.3% same-store sales increase in the first quarter of 2012. Net sales in the U.S. Wholesale segment are expected to increase slightly as compared to the first quarter of 2012.

We expect sales of the off-price channel to be flat to 2012. The international segments net sales forecasted to increase by approximately 10%, which is below our growth expectations for the full year.

As you know, our first quarter is typically the lowest volume quarter of the year. So given the investments in new stores and key resources over the past nine months, we expect to see some SG&A deleveraging in the first quarter while we should see leverage in the back half of the year.

Diluted earnings per share in the first quarter is expected to be between $0.33 and $0.35 per share. Our first quarter of 2013 earnings per share guidance reflects fully diluted average shares outstanding of 25.6 million shares. The expected 2013 effective tax rate is 38.8%.

Now, I’d like to turn the call back to Jeff for some additional remarks before we open the line up for questions. Jeff.

Jeff Lubell

Thank you, Pete. I would like to briefly comment on our ongoing review of strategic alternatives. In October, we announced that True Religion’s Board of Directors formed a special committee of non-management directors to explore and evaluate potential strategic alternatives available to the company.

So the view by the special committee is continuing. No decision has been made to engage in the transaction or transactions and there can be no assurance that any transaction will occur or if undertaken, the terms of timing thereof. As you can appreciate, we will not be commenting on this process until the board takes some action or otherwise determines disclosure as appropriate or required.

With that, we’ll open up the calls for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Thank you. Our first question comes from line of Scott Krasik with BB&T Capital. Please proceed with your question.

Scott Krasik - BB&T Capital

Thanks. Hi everybody.

Jeff Lubell

Hey, Scott. How is it going?

Scott Krasik - BB&T Capital

Okay. I guess, you have a lot of moving parts now in the margin in the various segments. You are now adopting a little bit more of promotional stands at retail but it doesn’t seem to be impacting the gross margins and then wholesale.

I think you’ve anniversaried this increase in off price. So do you expect the gross margins now to increase in each segment, maybe talk about the moving parts a little bit more closely?

Pete Collins

Well, as we look out in the ‘13, the budget is mostly just reflecting mix changes, Scott. So we still got the ongoing arrangement where our retail sales are going to deliver better gross margins than our wholesale sales.

We do expect that the international business, we will see -- overall growth faster than the rest of the company in 2013. And those sales are going to be coming from retail. So there should be some retail margin, gross margin, expansion coming from that.

But in the U.S. wholesale segment, the guidance is that we are basically going to be just up slightly with flat sales to the off price. So that’s not expected to change that segment’s margin, gross margin in 2013 and then in retail, the combination of both price stores in outlet and Ecom. We felt that the approach we took in the fourth quarter works very well. As you saw, we’re able to extend our margins, some of that was because we had a higher mix of DSO in the outlet stores.

We also had a better IMU on that DFO merchandise. So I think the factors that we saw there and we feel good about but that being said, we’re unexpecting significant margin extension in that segment.

Scott Krasik - BB&T Capital

And then, what sort of visibility do you have into driving the comps. I assume your commentary about negative comps in Q1 is just because of a top comparison. But how do you feel about the merchandise assortments now respectively, both men and women in your stores.

Jeff Lubell

Well, a lot of the key initiatives that we’ve been driving for the last two or three quarters. And we’re -- kind of on the horizon and we feel very good about the core fashion merchandise assortment will be here for the beginning of the third quarter. And then we’ve got the influences of our new women’s designer, her first collection is going to be holiday, which is fourth quarter of 2013.

So a lot of the -- the real upside in the year is tied to those merchandise changes that I just mentioned that are really geared more towards the back half of the year but as you know that the business is lot more back half-oriented anyway, just from a seasonality perspective.

So as we look in the first half of the year, as we mention, we do have a toughest comp from an NOI perspective in Q1 and then we see a lot of the sales coming from those two particular areas in the back half of the year.

Scott Krasik - BB&T Capital

And then justly, Jeff, made in the USA not mean as much in Europe as we thought it did?

Jeff Lubell

NOI. I still think it’s very important for our men’s and women’s jeans. The denim, the sportswear shows about I think 34% approximately and sportswear now are non-denim. I’m still making here in Los Angeles most of my denim for both men’s and women’s and I don’t see any reason to change that right at a second.

Lynne Koplin

I think what’s going to happen, Scott, generally on the EMEA and actually within Germany alone, Germany will still continue pretty wholeheartedly with a lot of U.S. produced denim. They have very long and well-established business. And it’s very important for them to actually offer both.

I think where we felt the locally produced product within Italy is really going to benefit us since other parts of the EMEA throughout Europe that the quality is comparable to what we’re producing here but yet we’re able to offer at prices that’s more competitive over there than what we will able to retail our products over there.

So it gives us a bit of a lag-up in terms of margin and competitiveness. And I think it’s really going to work effectively for us. And it’s the same brand sensibility that we have here.

Scott Krasik - BB&T Capital

Okay. Thanks, Lynne. I’ll jump back in queue.

Operator

Thank you. Our next question comes from the line of Jeff Van Sinderen with B. Riley Please proceed with your questions.

Jeff Van Sinderen - B. Riley

Good afternoon and great work during what was sort of a tumultuous holiday season.

Jeff Lubell

Thanks Jeff.

Jeff Van Sinderen - B. Riley

Maybe you can talk a little bit more about the comparisons. I know you just touched on first half comp comparisons. But as you sort of look at your business overall versus 2012, what do you feel are the biggest challenges and opportunities that you face this year and maybe you can talk about that from a high level and then drill down on some categories? I know you mentioned that new designers that will little start to kick in women’s for Q4 and also does the -- what seems to be sort of a resurgence in vintage styles washes? Do you think that helps you for 2013?

Lynne Koplin

I think there is a resurgence just generally in indigo denim. I think that what we are seeing, both on the wholesale and already in our retail stores is the customers definitely coming back to needing a pair of just great jeans and our core products are doing incredibly well.

I mean, obviously our challenge has been really being sensitive to what the competitive pricing strategy has needed to be, particularly when you get into the area of vintage washes, that’s been challenging because they are expensive to do domestically. But we’ve really worked hard as a company to price our products and source our products in a way that really offer the customer something compelling in indigo denim and silhouettes that really are much more relevant today for, ongoing into Q1 and Q2.

So you are seeing a return to denim generally away from all the color and novelty that we saw last year that was just not terribly productive I think in the industry in general. I mean it was a good fashion item, it was a good distraction and we actually did some nice non-denim business. But generally speaking, I think the return to indigo is really going to benefit us quite substantially for next year.

Jeff Van Sinderen - B. Riley

Great to hear. And then also, I know you mentioned what you’re looking for this year for Off-price channel concentration or flow. In Q4, did you mentioned whether you had more or less product point to the Off-price channel versus last year and then also maybe you can just touch on the quality of your inventory? I know it’s obviously up because you’ve got more stores and so forth, maybe just touch on the quality of inventory versus last year

Jeff Lubell

Yeah. We commented in the U.S. Wholesale segments sales, Jeff, that the biggest driver of the year-over-year increase was specialty stores. And then following that we did have an increase in sales into the Off-price channel and then rounding that segment out the majors was down but you had a very good overall growth in that segment.

So we have used the Off-price channel to clear excess merchandise. We thought that some of the styles that weren’t working well at full price were not -- the conflict with full price business if we shifted it over to the off-price accounts and so we continue to do that into the fourth quarter.

As far as the content of the inventory goes, in our retail stores we are actually running a little bit leaner this year than we were at the end of -- coming at the end of 2012. But we still see opportunities for improvement there. One of the things that we are trying to do is reduce the amount of merchandise that’s transferred from our full price stores over to our outlet stores, so that we can offer more of that DFO merchandise in our outlet store. So, I think we’ve made some progress there but it’s on a year-over-year basis, but it’s also an area of focus that we are continuing to work on.

Jeff Van Sinderen - B. Riley

Okay. And then, I know you mentioned some of the promotional programs that you did that seem to work really well in Q4. And I’m just wondering, how we should think about your overall promotional levels for 2013? Obviously you will start to anniversary that in Q4, but how should we think about it for the rest of the year?

Lynne Koplin

We are really going on to a calendar that is very comparable to the wholesale market. Basically, we were almost kind of a European market if you will. We’ll have two seasonal occurrences, one for spring summer in midyear, one at obviously Black Friday, which is a key promotional timeframe for a short period of time, which we will build high-margin products to be able to represent the brand appropriately and have the right items.

And then that post Christmas promotional timeframe, which is really obviously very effective online. E-commerce coupled with what we have in our stores, which was about a week long promotions as our business becomes more seasonal and we really do offer seasonal product like shorts in the summer and outerwear in the winter. We do need to clear those items out of the stores at the appropriate timeframes, so we can transition into the new products as quickly as possible.

Jeff Van Sinderen - B. Riley

Okay. Got it. Great. Thanks very much and good luck.

Jeff Lubell

Thanks, Jeff.

Operator

Thank you. Our next question comes from the line of Edward Yruma with KeyBanc Capital Markets. Please proceed with your question.

Edward Yruma - KeyBanc Capital Markets

Hi. Thanks for taking my questions. Just first on the AUR trends, I know you did provide a little bit of color on the fact that you promoted early and heavily. As you think AUR as a general construct, how should we be thinking about it going forward in light of some of the changes you’ve highlighted in your promotional strategy?

Pete Collins

This is Pete. I wouldn’t look at it so much look in relation to the promotional strategy. I’d look at it more from the perspective of the merchandise offering kind of the assortment we are going to be presenting. So, I mentioned in one of the response that I just gave that were focused on that core merchandise being in the stores in the third quarter. That will represent probably the biggest component of the merchandise assortment within the store.

It will be making up around 40% of the merchandise, the denim merchandise that’s on the floor. It’s going to be priced basically between $172 and $218 and that’s well below where our historic AURs have been. So we think there is a significant opportunity for incremental business in that range. So it’s not so much a -- AUR issue for us that the margins going to be there. It is really just the opportunity for those incremental sales coming from that expanded portion of the merchandise offering.

Edward Yruma - KeyBanc Capital Markets

So is the AUR in the fourth quarter indicative of the types of numbers or the types of declines we should see through the year as you shift more towards this more basic strategy or homogenous strategy?

Pete Collins

Honestly, I haven’t modeled out what the -- necessarily AUR can look like. But if you shift from about 15% to less than 20% of your merchandised being in that core category to 40% you will see a reduction in the AUR. But we are anticipating that it will drive top line sales for us.

Edward Yruma - KeyBanc Capital Markets

Got it. I think you indicated that you would be flat roughly year-to-year in the Off-price channel. I know that you indicated -- on past calls you tried to move some slow moving merchandise through off-price. So, I guess if being flat, does that constitute an increase in made for Off-price channel or are you assuming that the level that you need to keep clearing will remain consistent year-to-year?

Lynne Koplin

I would say it’s going to remain consistent year-to-year. I mean, I think what we -- when we have any kind of issue with something that we bought too much of it and we have to mark it down and there is kind of an absorption rate of getting rid of the problem whether it was the fashion trend that didn’t work or whatever. I think we’re trying to be very, very controlled with our inventories going in and realistic projections that what we think we can sell through, particularly on a fashion item.

I think that’s the other thing that the core is going to do, is really kind of keep our excess to a minimum because it just has a lot more longevity at retail. And our goal is obviously not to promote indigo and classic styling. It really is to kind of clear fashion, which is a smaller percentage of our business and if we keep inventories under control I don’t think you’ll see an increase in the operational wholesale business unless it’s something that we just really need to clear and get rid off.

Edward Yruma - KeyBanc Capital Markets

Got it. And my final question. I was wondering if you could go a little light as to, I think you incurred about $900,000 in incremental costs associated with the strategic review. Should expect kind of ongoing expenses until the review is complete? Was this kind of a one-shot until the Board makes it decision or kind of how to think about both the composition and kind of any incremental cost you may incur? Thanks?

Jeff Lubell

The comment that I would make on that is this COGS will continue, while the process is continuing. And then as far as the status of the process just remarks our ability how we can share about that So, I really can’t comment any further on the process.

Edward Yruma - KeyBanc Capital Markets

Great. Thanks so much.

Operator

Thank you. Our next question comes from the line of Ronald Bookbinder with The Benchmark Company. Please proceed with your question.

Ronald Bookbinder - The Benchmark Company

Good afternoon and nice job with all the headwinds out there. You had a nice end to the year.

Jeff Lubell

Thanks, Ron.

Ronald Bookbinder - The Benchmark Company

You talked in Q3 about Sandy, how much of an impact did Sandy end up having on comps and impacting your wholesale customers?

Lynne Koplin

It really wasn’t -- it’s hard to say in terms of the wholesale customers. We’ve had a good fourth quarter with our wholesale customers. So at the time, it seem like it could be a little bit scary because we have so much concentration of product in that part of the country. But I think we did okay.

Ronald Bookbinder - The Benchmark Company

And you had commented that specifics had impacted about 30% of your stores, how much of an impact did that have on comps?

Jeff Lubell

The comp trends for the quarter, Ron, was really weighted more towards the December timeframe anyway. So, I think that kind of the profit, at least what we saw was October, November were the two softest months and December was the best month. So it was hard to isolate, obviously we could figure out what the impact was for the stores that were closed for a day or two or similar month I think up to four, five days.

But beyond that there just wasn’t a lot of traffic in the shopping back end in that period of time, whether it was related to you macro factors or just people being focused on other things, the election or whatever. By the time we got to Black Friday, I think things are coming back to really more typical pattern and we are very pleased with the results we delivered in the month of December.

Ronald Bookbinder - The Benchmark Company

And the new Italian made product, how much cheaper is that going to be offered in the international markets of one that sort of headwinds that you’ve had one international markets if that your product is very expensive? What will be the difference either percentage wise or dollar equipment wise from the (inaudible)?

Lynne Koplin

Yeah. Its dollar equivalent of kind of our opening price points here. So as Pete had just quoted where we were really starting a core product offering at 172 to 218, it really is comparable to that but with the margins that we offer here. So comparable to what we would retail for here.

Ronald Bookbinder - The Benchmark Company

And the dollar equipment bedded at retails in Europe now for?

Lynne Koplin

It will probably be about 25% higher than that.

Ronald Bookbinder - The Benchmark Company

Okay. Great. And the specialty stores continued to do very well. I think you stated 11 straight quarters of increases. When do you think that’s going to translate to the majors?

Lynne Koplin

I think on the men side it actually has translated into majors. I think that in the women, I think what we are planning on doing right now with what we see happening, starting with late Q3 and Q4 is a rebuild in the women’s business. And I think by probably first quarter of 2014 is when you will start to see some positive comps on the women wholesale side and the majors.

It’s a rebuilding process and its very grassroots and it’s starting with the small door count testing, building inventories so that we can really get some traction and good sell throughs and then prove our value again with the brand.

Ronald Bookbinder - The Benchmark Company

And lastly the share repurchases, have you’ll repurchased any shares since the announcement of that plan?

Jeff Lubell

No, Ron. We’ve done the dividend as I mentioned the $20 million return to shareholders that way. But especially once the strategic review started, we haven’t been in a position where we were able to do any type of share repurchase.

Ronald Bookbinder - The Benchmark Company

Okay. Great and thank you very much and good luck going forward.

Jeff Lubell

Thanks, Ron.

Lynne Koplin

Thanks, Ron.

Operator

Our next question comes from line of Danielle McCoy with Brean Capital. Please proceed with your questions.

Danielle McCoy - Brean Capital

Hi, guys. Congrats on a great quarter.

Jeff Lubell

Thank you.

Danielle McCoy - Brean Capital

So, I mean a lot of my questions have been answered already. But can you just tell us what’s the split between mens and women’s is currently?

Lynne Koplin

In retail basically, men is roughly 56% and women is running around 36%.

Danielle McCoy - Brean Capital

Okay. And at wholesale?

Jeff Lubell

It’s about 62%-38%.

Danielle McCoy - Brean Capital

Okay. And then just on the European outlooks, I don’t know if miss that queue. Just give us a little bit of an update?

Jeff Lubell

As far as how they have performed?

Danielle McCoy - Brean Capital

Yeah.

Jeff Lubell

We had, what I would say with sort of some positives, we had some sales increases on the same-store basis and some other stores were down. The once that performed the best were in the U.K. We’ve changed the pricing strategy there, so we would be more competitive with some of the other premium denim brands, especially the European denim brands and then we did some of the same type of promotions in those stores as we did here in the U.S. So their performance was nicely up as a group in the fourth quarter.

So the other thing that we’ve done in that market as we’ve brought on some buying -- buyer for that market based in London. So we’re expecting to be able to continue to evolve and tailor our merchandise offering for those consumers.

Danielle McCoy - Brean Capital

All right. Great. Thanks, guys. Good luck.

Jeff Lubell

Thank you.

Operator

Thank you. Our next question comes from the line of Susan Anderson with Citi. Pleased proceed with your question. Ms. Anderson, your line is live. Please proceed with your question. Susan Anderson, perhaps your line is unmute. Ma’am, your line is live for conference.

Jeff Lubell

Operator, let’s go to the next participants.

Operator

Certainly. Our next question comes from the line of Janine Stichter with Telsey Advisory Group. Pleased proceed with your question.

Janine Stichter - Telsey Advisory Group

Hi. Congrats on a good quarter.

Jeff Lubell

Thanks Janine.

Janine Stitcher - Telsey Advisors

I just wondering if you could talk little bit about the sportswear and had nice increase in penetration versus last year, and are there any specific categories you are seeing traction in and then just kind of where you expect that to go as a percent of sales next year?

Lynne Koplin

We categorize non-denim bottoms in sportswear as well, so I think, what you are seeing in the men side is the continuation of very healthy quarterly business, also cargo business just continues to be very good for us, where we did see some increases were in T-shirt’s particular, I think the third quarter and actually going into fourth quarter were still quite warm, so we continued a very strong T-shirt business.

And honestly, woven shirts were great, we were a little bullish on flannel, it was still in the poplin category, lighter weight we are now and then we also did very, very well, we had about 100% increase in outerwear.

Janine Stitcher - Telsey Advisors

Okay. And then, sorry, if I missed it, but did you breakout the comp in terms of full-price stores versus outlets?

Pete Collins

No. There is some color on that in the management commentary that we posted online Janine.

Janine Stitcher - Telsey Advisors

Okay.

Pete Collins

And what it basically says is that the full-price stores had a slight increase, the outlet stores had a similar slight decrease that was primarily linked to a reduction in traffic that we saw in the outlet stores and then our E-commerce business was up very -- in a very nice manner year-over-year basis. So, the combination of those three is what delivered the 1.5% same-store increase that we had to the fourth quarter.

Janine Stitcher - Telsey Advisors

Okay. Great. Thank you.

Jeff Lubell

All right.

Operator

Thank you. Our next question is follow up from Scott Krasik with BB&T Capital. Please proceed with your question.

Scott Krasik - BB&T Capital

Thanks. Pete, what are your expectations for profitability in Internationals segment and how should we think about continued SG&A growth outside of just the stores?

Pete Collins

Well, Scott, the driver of the SG&A growth in International is stores. So there is not a significant amount of overhead that’s being added into this segment, it’s really to take a, recognize that we already opened 14 stores in 2012, so you’ve got to annualize those stores and then you have got a handful of stores that are being planned for 2013.

There is some development associated with this Italian sportswear line that’s going to be based out of our European headquarters in Lugano, Switzerland. So the -- from a profitability perspective, we are expecting that the international business will grow its operating profit in 2013, in relation to 2012, especially, with that -- that segment sale should be the largest increase on a year-over-year basis out of the three segments.

Scott Krasik - BB&T Capital

And okay. So the SG&A, specifically then, should grow at a fraction of what it grew last year on the dollar basis?

Pete Collins

Correct. I mean, we should the able to leverage the SG&A. By the time we get to the end of the year, we should be leveraging the SG&A international. One thing about all those new stores is that from a contribution prospective, the first quarter is not a great retail quarter outside the U.S. It represents the smaller portion of the annual sales than what we see in the U.S. So we’re really expecting to see more leverage from the stores. We will be able to leverage that SG&A by the time we get to the second half of the year.

Scott Krasik - BB&T Capital

Okay. And then sir, just an update how those Korea stand, any other countries we should be specifically focused on and then where do you expect to open the five to eight stores internationally?

Jeff Lubell

Well, Korea, we kind of feel like we’ve done the cleanup that we needed to. We were very disciplined when we sold to from a wholesale perspective in 2012 and we’re laying the foundation for going direct with a shop and shops primarily in Korea in 2013.

So we’re expecting -- basically the sales will be similar on the year-over-year basis There is nothing going to be as much profitability because we’re shifting from wholesale to retail through the shop and shop. But we’re doing it in a right way, we’ve got the right partners, we’ve got a team there that is responsible for this and so we feel like we’re heading in right direction in Korea.

As far as where the five-day new stores are going to be, there is going to be two or three in Canada and one of the comments I made was that we’re entered in the joint venture and Hong Kong is with the form of wholesale account. They’ve got one store there now that is going to be added to the business and now that we’ve got the joint venture in place, that’s -- that just was finalized early this quarter. And then it will be maybe two or three stores open in Hong Kong this year and then maybe a store or two in Europe.

Scott Krasik - BB&T Capital

Okay. And then any country that we should be concerned about that could pop up as an issue in ‘13?

Lynne Koplin

No, I think we finally got it under control.

Scott Krasik - BB&T Capital

Great. Thank you.

Operator

Thank you. We have no further questions at this time. I’d like to turn the floor back over to Jeff Lubell for closing comments.

Jeff Lubell

Okay. Thank you again for your time today. We greatly appreciate your continued interest in True Religion apparel. As always, if you have any follow-up questions, please do not hesitate to contact Pete Collins or ICR.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your line at this time and thank you for your participation.

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