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True Religion Apparel, Inc. (NASDAQ:TRLG)

Q1 2009 Earnings Call Transcript

May 5, 2009 4:30 pm ET

Executives

Laura Foster – IR, Integrated Corporate Relations

Jeff Lubell – Chairman, CEO and Chief Merchant

Pete Collins – CFO

Michael Buckley – President

Analysts

Eric Beder – Brean Murray

Karen Short – FBR Capital Management

Eric Tracy – BB&T Capital Markets

Todd Slater – Lazard Capital Markets

Ronald Bookbinder – Global Hunter Securities

Christine Chen – Needham & Co.

Operator

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the True Religion Apparel, Incorporated First Quarter 2009 Conference Call. During today’s presentation, all parties will be in a listen only mode.

Following the presentation, the conference will be opened for questions. (Operator instructions) As a reminder, this conference call is being recorded today, Tuesday, May 5th, 2009.

I would now like to turn the conference over to our host, Ms. Laura Foster of Integrated Corporate Relations. Please go ahead, ma’am.

Laura Foster

Good afternoon, everyone and thank you for joining us today to discuss True Religion Apparel’s first quarter 2009 financial results. On the call today are Jeff Lubell, True Religion’s Chairman, Chief Executive Officer, and Chief Merchant; Michael Buckley, the company’s President; and Pete Collins, the company’s Chief Financial Officer.

By now, everyone should have access to the first quarter 2009 earnings release which went out today at approximately 4 PM Eastern time. If you have not received the release, it is available on the Investor Relations portion of True Religion’s website at www.truerelgionbrandjeans.com by clicking on the Investor Relations tab.

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 expected future financial results and business opportunities.

The company’s actual future results may be very different from our current expectations. We encourage you to read the 2008 10-K, the upcoming Q1 2009 10-Q 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 said, it is my pleasure to turn the call over to Jeff Lubell. Jeff?

Jeff Lubell

Thank you, Laura, and good afternoon everyone. Thank you for joining us today as we discuss our first quarter 2009 results. We greatly appreciate your continued interest in the True Religion brand. We’re pleased with our solid start in 2009, which marks a continuation of the positive brand momentum we experienced in 2008.

Net sales for the first quarter increased 19.1% to $63.6 million from $53.4 million in the first quarter of 2008. Gross margin for the quarter expanded 380 basis points to 60.9% from 57.1% in the prior year period. Operating income increased 15% to $13.1 million from $11.4 million in the first quarter of 2008. And net income grew 9.8% year-over-year to $7.6 million or $0.32 per share from $6.9 million or $0.29 per share in the prior year quarter.

We increased our cash balance in the first quarter by $19.3 million to $76.5 million and we continued to hold no debt. Importantly, we remain optimistic about the remainder of 2009, despite the challenging retail environment. We are reiterating our 2009 guidance of net sales of $290 million to $297 million and earnings per share of $1.73 to $1.81.

Pete will elaborate on our first quarter financial performance in a moment. Michael will then provide an update on our operating performance by segments, before we open up the call to take your questions.

Despite the challenged economic and retail environment, we remain true to our strategy of delivering a constant flow of new and innovative jeans, sportswear and licensed product, reaching more consumers to our branded retail stores and wholesale partners, expanding the presence of the True Religion brand worldwide.

As you’ve heard me say in the past, it’s all about the product. And at the core of our performance is our ability to deliver high quality, well fitting, trendsetting jeans, sportswear and licensed product that resonates well with consumers.

During the first quarter, we showcased our 2009 summer and fall collections at the Project Show in Las Vegas and ENK Coterie Show in New York City. The response was overwhelmingly positive. We look forward to making our expanded product assortment more accessible to consumers through our wholesale retail partners including major department stores and specialty boutiques, as well as to our home branded retail stores.

Consistent with this goal, we continue with the expansion of our consumer direct segment growing our total store count to 49 stores at March 31, 2009 and to 51 stores as of today. The expansion of our consumer direct segment is a key component of our growth strategy. Our own stores allow us to connect with consumers directly in an environment that highlights the essence of the True Religion brand.

In addition, in our stores, we can maintain our full price integrity by offering consumers a full range of jeans, sportswear and licensed product that is not replicated elsewhere. Of course, we are mindful of the challenged economy, but we will not let it deter us from our strategy, we have a powerful brand and we are committed to supporting the growth of our brand with our own retail stores and our wholesale partners.

In addition to expanding our point of distribution in the United States, we continue to build our presence in the international marketplace. We experienced strong demand for True Religion brand in Japan and in key North American and European markets. As international consumers responded favorably to our expanded collection of jeans and sportswear, despite the challenging macro environment, we are confident in our business plan and we believe we are resourced to deliver by following our operating strategy.

Specifically, we believe in the use of third-party manufacturers. Here in the USA for our women’s and men’s jeans production provides us with speed to market that is invaluable in today’s environment, whereas other brands are shifting productions to lower-cost foreign locations. We believe maybe USA is a key advantage to consumers, maybe USA stands for quality and performance. Two characteristics consumers have come to expect from the True Religion brand.

To US wholesalers, maybe USA means shorter orders to receipt cycle times. US wholesale customers value this as it helps them better manage their inventory in the changing environment. In addition, shorter cycle times of the True Religion is a benefit of not having the whole excess inventory but rather quickly meeting the on-demand needs of our wholesale, retail partners thus minimizing our own risk.

In summary, we are very pleased with our strong start into 2009 and our positive momentum has continued into the second quarter. While our success starts and stops with the product, we think it is important to note that the True Religion brand is still a young brand with significant growth opportunities ahead of us, both domestically and internationally.

That concludes my comments for today. I would like now to turn the call over Pete Collins, to discuss our first quarter results in more detail. Pete?

Pete Collins

Thanks Jeff, and good afternoon, everyone. I will start with a detailed discussion of our first quarter financial results, followed by updates to our full-year 2009 guidance.

Net sales for the first quarter increased 19.1% to $63.6 million compared to $53.4 million in the first quarter of 2008. Growth within our consumer direct and international businesses was partially offset by a decline in our US wholesale business. Gross profit grew 27% to $38.7 million or 60.9% of net sales from $30.5 million or 57.1% of net sales in the first quarter of 2008.

Our gross margin benefitted from the ongoing segment mix shifts towards our higher margin consumer direct business and the increase in our international segment’s gross margin. This was partially offset by the planned decline in our outlet stores gross margin.

Selling, general and administrative expenses for the quarter increased 34.1% to $25.7 million or 40.3% of net sales from $19.1 million or 35.8% of net sales in the prior year period. The year-over-year growth in SG&A expenses was driven by the increased investment in infrastructure to support the company’s growth plan including the expansion of our consumer direct and international businesses.

The increase in SG&A expenses was partially offset by a decrease in share-based compensation of $1.2 million due to an unanticipated delay in the first quarter 2009 performance based restricted stock award.

In the first quarter of 2008, our annual performance based restricted stock awards were made in the first half of January, which resulted in more than two months of compensation expense being recorded in the first quarter of 2008. However, in the first quarter of 2009, the performance based restricted stock awards were made in late February which resulted in approximately one month of compensation expensing recorded in the first quarter of 2009.

Operating income for the first quarter increased 15.0% to $13.1 million or 20.5% of net sales compared to $11.4 million or 21.2% of net sales in the prior year period. The year-over-year reduction in operating margin was primarily driven by the decrease in our consumer direct segment’s operating margins.

Turning now to our segment information, within our US wholesale segment, sales for the first quarter decreased 11.0% to $28.9 million versus $32.5 million in the prior year period. The decrease in the US wholesale segment’s net sales is due to a decline in sales boutiques and majors partially offset by an increase in sales to outside customers. Michael will expand on these trends in his comments.

International sales in the first quarter increased 26.0% to $11.2 million from $8.9 million in the prior year period. The year-over-year increase is primarily due to increased sales of Japan as well as increased sales to our European and North American distributors.

Consumer direct net sales which include our branded retail stores and e-commerce site increased 95.8% during the first quarter to $23.1 million from $11.8 million in the prior year period. The growth in our consumer direct segment is attributable to the expansion of our retail stores which totaled 49 at the end of the first quarter of 2009 compared to 18 retail stores at the end of the first quarter of 2008. Our total square footage at the end of the first quarter was 88,700 square feet compared to 31,900 total square feet at the end of the first quarter of 2008.

First quarter net sales also included $419,000 of licensing revenue, which is included in our other segment. Operating income by segment is as follows. Within our US wholesale business, our operating income decreased 24% to $6.9 million or 23.7% of sales from $9.0 million or 27.8% of sales in the prior year period. Our US wholesale segment results accounts for the company’s design, production, and operations accounting teams, the added resources to these teams in the past year to support our overall growth, which contributed to the decline in operating margin on a year-over-year basis.

We did see a reduction in variable cost such as sales commissions and bad debt expense and a slight improvement in our US wholesale gross margin, thanks to better forecasting and sourcing improvement.

Our international operating income increased 29% to $5.2 million or 45.9% of sales from $4.0 million or 44.7% of sales in the prior year period. Our international operating margin benefitted from an increase of direct sales in select Asian markets which carry a higher gross margin than the sales through distributors. This was partially offset by $600,000 increase in comps associated with our Japanese subsidiary which was not in operation in the first quarter of last year.

Operating income within our consumer direct segment increased 48% to $7.0 million or 30.4% of sales from $4.7 million or 40.2% of sales in the prior year period. The year-over-year decline in our consumer direct operating margin was due to the combination of a decline in store sales productivity and the planned decrease in our outlet stores gross margin. The consumer direct segment’s operating margin was generally in line with our annual guidance.

Our effective tax rate for the first quarter of 2009 was 41.7% which exceeded our previously anticipated effective tax rate of 36.9%. The greater than anticipated tax rate is due to the revision of state income tax apportionment factors for our 2004 through 2008 income tax expense. The cumulative impact of this resulted in approximately $540,000 of incremental taxes in the first quarter of 2009. We expect an effective tax rate of 37.7% for the remaining 2009 quarters with an effective tax rate of 38.5% for the full year of 2009.

Net income for the 2009 first quarter was $7.6 million or a $0.32 per diluted share based on weighted average shares outstanding of 24.0 million shares compared to net income of $6.9 million or $0.29 per diluted share based on weighted average shares outstanding of 24.1 million shares in the first quarter of 2008.

Our first quarter 2009 weighted average share counts does not reflect the first quarter of 2009 performance based restricted stock awards. We will recognize these awards in our outstanding share counts when the earnings based targets are achieved. We continue to expect a weighted average share count of 24.6 million shares for the full-year 2009.

As it relates to the three primary components of our business, 55% of our net sales came from women’s merchandise, 41% from men, and 4% from kids. We are pleased that our men’s business expanded from 36% sales contribution in the prior year period. So the first quarter 70% of the sales in our retail storage were jeans and 30% were sportswear. This compares to 80% jeans and 20% sportswear in the prior year period as our sportswear continues to gain traction in our retail stores.

In the first quarter of 2009, the average selling price for women’s jeans in our full price stores was $262 and for men’s jeans it was $287, compared to the prior year period, the average selling price for jeans increased $21 in women’s and $18 in men’s demonstrating we believe that consumers are willing to pay a premium for products that is unique in the marketplace.

Turning to our balance sheet, we are pleased with our overall financial position which continues to strengthen. We ended the first quarter with $76.5 million in cash and cash equivalent representing a $19.3 million increase from $57.2 million at December 31, 2008. The increase in our cash balance was driven by the cash flow from operations generated in the first quarter.

For the first quarter of 2009, we generated cash flow from operations of $23.0 million compared to $19.4 million in the prior year period. Our consumer direct segment converts net sales into cash quicker than the wholesale business. As such, our cash balance benefitted from the year-over-year growth of our consumer direct business which made up 36.2% of our net sales in the first quarter of 2009 compared to 22.0% in the same quarter last year.

Accounts receivable for the quarter decreased by $10.7 million from December 31, 2008 due to our continued conservative posture with our credit sales and the net sequential decline in quarterly wholesale sales. We believe our accounts receivable aging is in a stable position.

Inventory at the end of the first quarter increased by $2.3 million in line with the growth required to merchandise our new branded retail stores. We are satisfied with the content of our inventory which we believe provides the flexibility to manage the growth of our consumer direct and wholesale businesses.

Operating cash flow was used to fund the expansion of our retail stores and for other financing activities with a net increase invested in the US Treasury only Mutual Funds. Important to note, at the beginning in the second quarter of 2008, we took a more conservative stance with respect to our cash investment and when combined with declining interest rate yields resulted in a $400,000 decline in interest income on a year-over-year basis. I’m pleased to say that we carry no debt, but we continue to fund our growth from internally generated cash reserves and current operations.

With that, let me now turn to our financial guidance for 2009. We are reiterating our full-year guidance as follows. We continue to expect net sales for fiscal 2009 to be in the range of $290 million to $297 million, representing a net sales increase of 7% to 10% compared to 2008 net sales of $270.0 million.

Our first quarter year-over-year net sales growth exceeded our anticipated full-year growth rate because of our off price wholesale sales increase. Yet we continue to expect a mid single-digit decline in sales of this channel for the full year. In the third quarter of 2008, we experienced a surge in sales to the outside channel which we don’t expect to repeat in the 2009 third quarter.

With respect to our stock-based compensation expense, we’ve revised one aspect of our accounting method in 2009 which will result in this cost exceeding the prior year amount by approximately $600,000 in each of the next three quarters. This additional expense will offset the first quarter stock compensation expense decrease of $1.2 million resulting in incremental 2009 stock-based compensation expense as compared to 2008 and to our 2009 plan of $600,000 in total.

We have also revised our 2009 effective tax assumption to reflect the state tax apportionment revision and to consider the impact of the tax free investment yield decrease. These three changes will bring our effective tax rate to 38.5% for 2009 as compared to our original budget of 36.9%. The aggregate impact of these two incremental expenses is anticipated to reduce our full-year EPS by approximately $0.06 per share.

We do see favorable trends that are stated to offset the impact of these incremental expenses. We expect their licensing revenue will exceed our original plan as we have two new license agreements and certain of our existing licensees are exceeding their net sales minimums. Also our wholesale sales order trends have improved in the past few months. Michael will provide more insight into this in his comments.

While it is still early in the year, we are optimistic that the earnings from these favorable trends will offset the impact as the increase in the effective tax rate and the stock-based compensation accounting method change. Therefore, we continue to expect that the company’s 2009 earnings per share will be between $1.73 and $1.81 per share with an encouraging outlook, thanks to the improved sales order trends.

And with that, I would like to turn the call over to Michael, to take you through a review of operations. Michael?

Michael Buckley

Thanks, Pete and good afternoon, everyone. We’re pleased with our first quarter results which highlights the benefits of our multi-segment distribution model. In the first quarter, we delivered year-over-year sales growth of 19.1%, approximately 46% of the business coming from US wholesale, 18% from international and 36% from our consumer direct business. This compares to the sales contribution of 61% from US wholesale, 17% from international, and 22% from consumer direct in the prior year period.

Turning to our US wholesale business, sales through the majors declined 12.6% in the first quarter of 2009 as compared to the prior year period. We’ve feared the decrease in reorders from the majors compared to the prior year period as we believe these customers exited 2008 with greater caution and overall mandate to reduce inventory positions in response to the challenging retail environment.

We’re taking steps to move orders more quickly to the major sales force and to restore the end season replenishment business. Our local contract manufacturing base is an advantage to us in this business climate.

Consistent with our original guidance, we continue to expect a mid single-digit decline in sales through majors in the full-year 2009 as compared to 2008. It continues to be a top seller among denim brands at major department stores, while the overall environment remains uncertain, premium denim and a particular fashion denim is performing well.

Validating this, NPP recently reported a year-over-year sales of jeans priced over $100 and sold in department and natural chain floors increased an estimated 2.3% in December 2008 through February 2009. As expected, sales through boutiques declined sharply in the first quarter of 2009. As we saw in 2008, many specialty boutiques remain constrained by past season and slow moving merchandise that we they were unable to convert to cash.

While we have considered providing credit terms to some of our more established boutique customers, we expect net cash flow to remain challenging for these customers. Additionally, some small boutiques are going out of business. Therefore, we expect sales within this sale to continue to decline on a year-over-year basis. Did not experience an increase in our bad debt expense or account write-offs confirming that we continue to maintain a conservative credit policy.

Turning to the off price channel, as Pete mentioned in this comment, sales for the off price channel increased over the prior year, yet we are down sequentially from the fourth quarter of 2008. The year-over-year increase in the first quarter of 2009 reflects the demands for True Religion brand jeans in this channel particularly within our preferred off price retailers which includes Nordstrom Rack and Saks Off 5th.

While we continue to utilize the off price channel to manage past season and merchandise and keep inventory level clean, in the first quarter, we reduced the number of our off price accounts that we would sell into. We believe this action is consistent with maintaining the integrity of the True Religion brand and protecting our full price distribution.

Consistent with our original guidance, we continue to expect our 2009 sales in this channel to be down in the mid-single digits compared to 2008 and expect sales to this channel to remain consistent quarter-to-quarter in 2009. This reflects our decision to reduce the number of off price accounts in which Religion will be distributed as well as our continued production and forecasting improvement.

With respect to the wholesale business for the second quarter of 2009, our wholesale sales order book which includes US and international orders was up 1% as of March 31st, 2009 as compared to March 31st, 2008. As for the sales outlook for the remainder of 2009, we’re just now starting to see sales order for the fall 2009 season and we’re pleased to report that March marked an inflection point in our sales bookings, because our order book improving in March and April over the prior year period.

In fact, March and April represented two of the largest wholesale order months in our history. We believe majors have stabilized their inventory position and are now allocating dollars towards merchandise that is selling through well. True Religion continues to be one of these brands which is reflected in our order book. In addition, we continue to experience strong demand for our merchandise in the international marketplace and which is also reflected in our order book. Our international brand momentum continued into the first quarter as consumers responded favorably to our latest style.

In spite of the strength of the US dollar versus key foreign currencies, we experienced strong growth in key Asian, European and North American markets. Our Japanese business performed ahead of planned in the first quarter led by increased penetration of True Religion brand jeans and existing wholesale accounts. We continued to operate two outlet stores in Japan, which we transitioned into up on a dissolution of our prior distributor agreement in the summer of 2008. In addition, we are actively seeking store locations in Japan.

As we move forward with our international expansion plans in North America, Europe and Asia, we seek to collaborate with local market experts that focus on premium brands to determine the best growth strategy to employ for the brands whether it would be through a direct investment, joint venture, franchise relationship or distributor relationship.

Turning now to our US consumer direct business, the increase in consumer direct net sales was due to the increase in the number of stores we operated in the first quarter of 2009 versus 2008. Our first quarter 2009 store base consisted of 49 stores, 38 full price and 11 outlets.

As Pete mentioned, we experienced a decline in store sales productivity during the quarter primarily due to weakening traffic trends. We believe the overall decline in traffic is primarily a function of the challenging economic and consumer environment. Importantly, the traffic reduction was partially offset by improved conversion rates at the vast majority of our stores, led by a continuous stream of fresh merchandise as well as initial position returns from our store training, selling and client telling efforts.

For example, within our 15 store comp base, our conversion rates improved almost a 4 percentage points year-over-year and we expect to see continued improvement over the reminder of 2009 and into 2010. As a result, our comp store base as a whole delivered sales results in line with our 2009 plan.

For the first quarter of 2009, gross margins in the consumer direct segment were 74.1% compared to 78.1% in the prior year and the decline in gross margin was due to a slight increase in the percentage of consumer direct sales from our outlets as well as the merchandised mixed shifts within the outlet as they now have fewer higher margin irregulars in their assortment. Within our full price stores, gross margins were in line with the first quarter of 2008.

Our operating margin was impacted by lower productivity due to sales pressure caused by the retail environment as 2009 new stores are overall performing in line with our plan. And we continue to budget new stores to deliver annual full well operating margins of at least 30%. We believe our overall consumer direct business remains healthy and our consumer direct expansion plans remain on track. Importantly, we believe, the current retail environment has created a unique opportunities for us to leverage our solid financial position to increase our brand awareness and grow our market share.

Due to our solid balance sheet and retail store performance, we are able to secure retail locations in some of the best performing centers in the country. Our ability to secure great locations at attractive rate positions True Religion to benefit at the economy and consumer spending rebound in the longer term. We have seen the asking rents on some future stores decline by 30% or more over the past six months.

In April, we opened two full price stores and we are on plan to open an additional 16 stores in the balance of 2009 to a total of 67 stores at year-end 2009. We expect to open five additional new stores in the second quarter, seven stores in the third quarter, and four stores in the fourth quarter.

We’re excited about the prospects of our slate of 2009 stores, many of which are set to open in top producing A centers. This reinforcement I believe have great retail opportunities of the increase in today’s economic environment. Our source has been a key component of True Religion’s evolution to a multi-segment distribution model.

Over the past two years, our store base has grown from seven stores to 49. To support this growth, we have made strategic investment into our consumer direct businesses infrastructure. In the past two years, we have added of Director of Stores, a team of District Managers, a Director of Store Construction, and a Director of Planning and Allocation to oversee development and operations of our consumer direct business.

Recently we began investing in expanding our sales, client telling and product training for our retail stores. This team holds significant retail expertise and is only getting more proficient and efficient in driving our retail expansion strategy.

Turning to our licensing business, we continue to view licensing opportunities as the key component to establish True Religion as a global brand. We ended the quarter with four license categories, headwear, footwear, swimwear and fragrance. In addition, we recently announced two new licensing agreements eyewear and leg wear. We’re looking forward to developing and introducing the merchandise from these new categories for the market later this year.

As our highest margin segment, licensing represents an opportunity to not only build global awareness of the True Religion brand with minimal infrastructure investments, but also drive growth in sales and profitability. We expect growth in current categories as well as the additional new categories to contribute to sales growth within this category ultimately reaching our long-term sales contribution goal of 5%.

That concludes our remarks. Operator, we would now like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) And our first question comes from the line of Eric Beder with Brean Murray. Go ahead, please.

Eric Beder – Brean Murray

Good afternoon, guys. Congratulations on a great quarter.

Michael Buckley

Hi, Eric.

Pete Collins

Thanks.

Jeff Lubell

Thank you, Eric.

Eric Beder – Brean Murray

Could you talk a little bit about international, where do you think it can go? I mean I know you are having a lot of success in Japan, where do you think that Europe eventually can be in terms of kind of rankings of areas and regions for you?

Michael Buckley

Well I think we’ve said in the near term, we feel that the opportunity in Asia is probably bigger than the opportunity in Europe. So I mean that’s immediately we want to continue to make additional investments within the Asian market, start to look at franchise retail, joint venture retail, our own operations. And I think once we get solidified there, then we want to move on Europe and possibly follow the same path.

Eric Beder – Brean Murray

Okay. And we’ve also heard about kind of split between basic and fashion, are you seeing the same thing that other players are seeing at the fashion jeans, if it differentiates, there is really no resistance to higher pricing this year?

Pete Collins

Yes Eric, this is Pete. In my remarks I talked about the growth in the average selling price of jeans in our own stores, and flipping here quickly to the slate, it was up – for women’s, our average jeans were selling at $262 and for men it was $287 in the first quarter of this year and that’s up $21 for women over last year $18 for men.

So yes I mean that’s the strategy or that’s the observations we’ve made really over the last year which is that because of the focus we have on trendsetting, innovative products, we’re able to command a premium in the market that consumer that’s buying our jeans really want something that’s fresh and that’s what Jeff and the team are delivering for them.

Eric Beder – Brean Murray

Right and one question. I know you have (inaudible) with the tops, how is the response to some of the newer tops in front of the better place (inaudible).

Jeff Lubell

Eric, you’re breaking up. Can you –

Eric Beder – Brean Murray

I’m sorry, in terms of tops, how are you seeing in terms of the demand for some of the newer tops that you’ll roll it fall that can have better fit and sizing to them?

Jeff Lubell

We reported also in this call that our sportswear was up in this quarter to 30% over the same period last year which was at 20% in sportswear. So we are getting some good traction in our retail stores, in our own stores especially on the T-shirts, the shirts, and the knitwear and some of the other categories we’re doing in the sportswear area.

Eric Beder – Brean Murray

Great. Congratulations on a great quarter.

Jeff Lubell

Thanks Eric.

Operator

Thank you. And our next question comes from the line of Karen Short with FBR Capital Management. Go ahead, please.

Karen Short – FBR Capital Management

Hi guys. Congratulations.

Jeff Lubell

Hi, Karen. How are you?

Karen Short – FBR Capital Management

Good. Just wanted to start with a housekeeping, can you Pete, you went over some of that restricted stock stuff fairly quickly, could you just go over that again, I caught it was $600,000 more each quarter?

Pete Collins

Yes, so we were short – our actual expense in Q1 was down versus last year by $1.2 million, but then we’re going to have an extra approximately $600,000 a quarter for quarters two, three and four. So for the year, it will be a net increase of $600,000 versus last year versus our planned.

Karen Short – FBR Capital Management

Got it, okay. Okay and then I guess on the last call, you’ve kind of given some comments on the cadence of earnings throughout the year each quarter and like same thing with sales. Do you have any color on that?

Pete Collins

The only update we’ve given on that to those remarks we made last call was just the observation about the sequential, the timing of our off price wholesale sales. On a year-over-year basis, we were up this quarter, but we had a surge in the third quarter of last year, which we’re not going to be repeating, we don’t expect to repeat. So that the year-over-year increase we had this quarter is really going to kind of slip around in the third quarter and really that’s the only thing that’s changed Karen from that previous comments we made. The other thing that remember about the off price sales is that they were down Q4 ’08 to Q1 ’09.

Karen Short – FBR Capital Management

Okay. And then maybe, I don’t know, it’s been a lot of things changing in the, I guess the industry in general in terms of consolidation and in the denim market in general. Can you maybe talk about a little bit of what you’re seeing and what you’re seeing from some of the tertiary brands with your – your major customers?

Michael Buckley

Well I think overall the fashion resource that’s clearly seems to be leaving the market versus the basis resources. We’re seeing is that we continue to gain market share really taking it away from some of the other brands that are often the basics out there.

Karen Short – FBR Capital Management

Okay. What end so in general are you – what about the trends for the price points that are kind of in that 150 level, because (inaudible) seemed to have indicate this, things were not started great at (inaudible)

Michael Buckley

Well, I mean, we talked about the majors and we sort of hear the same thing that the basics are little more challenging regardless of the price points.

Karen Short – FBR Capital Management

Okay. Okay, thanks.

Michael Buckley

Okay.

Operator

Thank you. And our next question comes from the line of Eric Tracy with BB&T Capital Markets.

Eric Tracy – BB&T Capital Markets

Good afternoon, guys. Great quarter.

Michael Buckley

Thanks Eric.

Eric Tracy – BB&T Capital Markets

Maybe we can follow up a little bit on the wholesale just in terms of the guidance. I think I have got this right in terms of expected majors to be down mid-single digits, off price to be down mid-single digits, should we assume the total wholesale sales supposed to down 17% to 19% or something changed on the boutique level?

Pete Collins

So the overall guidance for the year is unchanged in US wholesale, so that – you remember we gave you their components on the last call and there is no change to those expectations for the year.

Eric Tracy – BB&T Capital Markets

Okay. And then just in terms of pricing, you mentioned on the company-owned retail and wholesale, are those kind of pricing dynamics holding the royalty in terms of both the men’s and women’s I think you said being up.

Pete Collins

Yes I think in general, I think we are getting a little bit of feedbacks that the majors are tending to settle into more of the 240-ish price points that maybe they’re not seeing as much traffic with the super keys that we are up closer to 319. But in general it’s still – with still retailing well even into the wholesalers for our wholesale customers it is a more innovative differentiated product.

Eric Tracy – BB&T Capital Markets

Okay, okay thanks. And on the consumer direct, I think you guys broke out last quarter kind of comps for stores opened a year versus some of the new stores, did I miss on that on this one?

Pete Collins

So we said last time was we gave input on how we felt the – we kind of segregated our stores into three categories. In fact that how we saw them performing this year and as we were trying to explain a 60% to 65% overall increase in that channel. So whether we gave actual comps, it was just kind of giving some direction on how we saw that the stores performing in ’09.

Eric Tracy – BB&T Capital Markets

Okay. And then maybe just you mentioned the new store productivities declining, is it possible to get a quantification of that?

Pete Collins

Well in general Eric, the – we kind of broke the stores into three categories. We said here is – we got the stores that were opened in the end of ’07, those are our most matured stores, although frankly they’re not very matured at all. But they actually performed a little bit better than what we had expected in the first quarter as far as on a run rate for the full year.

The stores reopened last year, we had a total of 27 stores we opened last year. They were just slightly behind plan in the quarter as it relates to the full year plan. And then the ’09 stores, Michael talked about this, that they opened up overall on plan which was like to see and it validates our comments that we think that the ’09 stores were a overall a very good group of stores.

So for the full year, you kind of blend those three components together, we still believe that we are on plan to achieve our full year outlook coming out of the first quarter in consumer direct.

Eric Tracy – BB&T Capital Markets

Okay and then let me just lastly on Europe, it sounds like you guys have some pretty good visibility in growth, they’re recognizing that Asia is that near term kind of largest piece. But turning to the year it also sounds like things performing well there relative to what the macro seems to be deteriorating kind of further. Any – is it new distribution, is it kind of certain country specific opportunities that’s going on there?

Michael Buckley

Well, I mean, I think overall, we’re still a very young brand and quite frankly, we’re working off with a very small base. So I mean it’s ultimately Germany and the markets surrounding Germany as well as in the UK that’s really driving the business in Europe.

Eric Tracy – BB&T Capital Markets

Okay, okay, great. Thanks guys. And best of luck.

Michael Buckley

Thank you, Eric.

Operator

Thank you. And our next question comes from the line of Todd Slater with Lazard Capital Markets. Go ahead, please.

Todd Slater – Lazard Capital Markets

Thanks very much and congratulations.

Michael Buckley

Thanks Todd.

Todd Slater – Lazard Capital Markets

Great to see the improvement in the US wholesale order book which was up compared to down last quarter. Also the 380 basis point improvement or so in the gross margin I was hoping to sort of explore that going forward since that sort of pin of hitting the numbers this year and sort of if you could just talk about that sustainability with respect to your decrease, it sounds like decrease in shipments to the off price channels, I was hoping to flush that out, because I’ve seen last product hitting Marshals and TJ Max and I'm wondering what your plan is with those guys? Secondly, the mix in sportswear as it increases does that have any impact on the margins? And then obviously the increased mix of your own store as I assume is a gross margin driver. And then if you could just remind us you said, you mentioned your strategy in the outlet stores to plan down the operating margin, if you could talk about that a little bit?

Pete Collins

All right, it’s a quite a mouthful there Todd. So let’s start with the US wholesale business. So the margin there got a little bit year-over-year and it’s primarily driven by improvements that we are making on the sourcing side, the teams done a better job of forecasting out what our needs are going to be. If you remember a ago, we were having some unanticipated demands for products and we had to air some fabric in, we’ve avoided that to the most part in the first quarter this year and we think that trend that we are on now is going to continue. So that’s helped us.

We – as it relates to the overall mix, I think the next point you had was related to the sportswear. We target the same gross margin on our merchandise whether it’s jeans or sportswear, so the mix really isn’t intended to impact our gross margins. The mix is a merchandise that is.

As it relates to the overall mix of the business, our – as we’re expanding our retail stores and I think we talked about how in the quarter, a year ago, 23% of our sales came from our own stores this year with 36%, so that piece of the sales mix increases we are expecting that our gross margins and our operating margins will be improved as the gross margins and operating margins for our retail stores, that consumer direct segment has historically been larger than the company’s consolidated result.

And then as it relates to the operating margin in our outlet stores, what we’ve been really focusing on there was just the dynamic with the gross margin there. We don’t have as many irregular products to sell in the larger number of outlet stores we have this year versus a year ago. And so that shift in their merchandise mix it is bringing down the overall gross margin which hasn’t flowed through to the operating margin line flow for the outlet stores and for the consumer direct segment as a whole.

Just as a point of reference, the – within the outlet stores, most of the margins kind of average out to be like the 65% to 70% range, but those are regulars delivered and margins as much as 80%. So we just have a little bit of mixed shift there which is really is a function of way the businesses is shaping up.

Todd Slater – Lazard Capital Markets

Okay. And then just could you talk a little bit more about your off price strategy, because that does seem like a big change?

Michael Buckley

Well, I mean, ultimately our goal is to run a full price business and we have a dedicated focus here now to really focus the – first of all cut back the off price versus last year which is we said was going to be down mid-single digit, but it’s really focused on delivering products at Nordstrom Rack and Saks Off 5th and maybe in (inaudible) last call and we rather keep in those prestige off price accounts if you will as well as our own outlets.

Todd Slater – Lazard Capital Markets

Okay. And then one last question with regard to the guidance, the order book obviously and the margin trends look pretty strong and you’re holding your revenue and EPS guidance. So I was just wondering if you could help us reconcile that as it being – trying to be conservative in light of the environment or other factors.

Pete Collins

Well we talked in the call about a couple of areas of expenses that as we’ve gotten in the year, we now expect to increase year-over-year the tax rate and then the stock-based compensation and I commented in my remarks. So that’s together aggregated those few items, it’s about $0.06 a share. We need to see some improvement in the licensing revenue and you’re right we definitely see some early signs of the wholesale trends are improving with the orders we thought and March and April being two of the best months that we’ve ever had. So we’ve got some positive momentum at this stage, but it still early in the early and we just feel that the full-year annual guidance it’s something that we’re still shooting for them and we hope to achieve.

Todd Slater – Lazard Capital Markets

Great. That’s helpful. And best of luck on the rest of the year.

Pete Collins

Thanks.

Operator

Thank you. (Operator instructions) And our next question comes from the line of Ronald Bookbinder with Global Hunter Securities. Go ahead, please.

Ronald Bookbinder – Global Hunter Securities

Good afternoon and congratulations.

Jeff Lubell

Thank you, Ron.

Ronald Bookbinder – Global Hunter Securities

On the off price goods, was there what type of goods were they, were they primarily denim bottoms or did it have a lot of sportswear in it?

Michael Buckley

That was primarily denim bottoms and we do sell a bit of sportswear as well, but it’s probably consistent with the mix of denims and sportswear within our overall business.

Ronald Bookbinder – Global Hunter Securities

Was there any type of fabric or something like that which happened in the fall that it was a type of fabric that didn’t work or did you just have too much inventory on hand?

Michael Buckley

No I mean, I think ultimately there is a natural excess, we forecast our business and there is a certain natural excess and certain thoughts that was it going to be A styles, maybe they turn off as they not. So we would put those into the off price channel.

Ronald Bookbinder – Global Hunter Securities

Okay. And with the success that you’re having with sportswear at the company-owned retail stores, do you think it’s just such a different environment to get the sportswear – to get that accepted by the department store buyer or why do you think it hasn’t ramped in the wholesale channel?

Michael Buckley

Well I think especially with the current environment out there, they’re going to fleet to safety. And I think they’re much out to put their money into products like our jeans at work before they take a risk with unproven products like sportswear.

Ronald Bookbinder – Global Hunter Securities

So do you think you can use this year sort of training for sportswear since that when things turn around in the economic environment that you will have a better line in the department stores could really expand the True Religion bottom?

Michael Buckley

Absolutely. I mean, I think it was – even within our own retail, now we’ve got to 30% of the business. Hopefully these buyers with the amount of tours we have around the country, we will go into our stores and see what we are doing and hopefully want to buy in some of that products as well.

Ronald Bookbinder – Global Hunter Securities

And you are taking that information from your stores and trends give into the department store buyer to help them see the growth of that sportswear product?

Michael Buckley

Absolutely. I mean we even work with our reps, both our domestic reps and also international reps to tell them what our best sellers are and hopefully get them to leverage that into their wholesale customers.

Ronald Bookbinder – Global Hunter Securities

Now on the last call you talked about making an effort in company-owned store training to increase the conversion. I think you stated that 1% increase in conversion is equal to about 10% comp. You mentioned on this call that you have now seen an increase in conversion and I was wondering if you could give us some color was it due to the training, why do you think the conversion increased and are we just at the beginning that you could really rent this up throughout the next several years?

Michael Buckley

Yes, I mean, I think ultimately we mentioned on the call that we hired a Director of Stores, we hired a number of District Managers, so we’ve definitely taken a more dedicated focus to micro manage the stores and really train the sales people on, engaging the customer, client telling, learning the product, engaging them, getting into the dressing room, offering them multiple items. And really we’ve just recently brought on board or about to bring on board a full trainer and really invest even more in this training program. So I think there is a lot more improvements to come.

Ronald Bookbinder – Global Hunter Securities

How did units per transaction and average unit retail at the company stores compared to last year?

Pete Collins

Well on the – I don’t have the UPC in front of me. But as it relates to the selling prices Ron, we talked about the prices being up in a 5% to 10% on the jeans year-over-year that’s really – that’s a more apples-to-apples type of comparison. The sportswear depending up on the mix, it varies a little bit more. But what we saw was that the women’s jeans where averaging selling price was $262 in our own full price stores and that was up $21 versus year ago and then men’s up $287, up $18 from year ago.

Ronald Bookbinder – Global Hunter Securities

Okay, well, great. And thank you for taking my questions and a continued good luck.

Michael Buckley

Thanks Ron.

Pete Collins

Thanks Ron.

Jeff Lubell

Thanks Ron.

Operator

Thank you. And our next question comes from the line of Christine Chen with Needham & Co. Go ahead, please.

Christine Chen – Needham & Co.

Thank you. Congratulations on a great quarter.

Jeff Lubell

Thank you.

Christine Chen – Needham & Co.

Just wanted to see at your own retail stores, did you see the anticipated Easter shift benefit and can you talk a little bit traffic trends throughout the quarter, were they consistent, did they pick up at the end of March and I guess thus far into the second quarter?

Michael Buckley

Well we absolutely saw the shifts from March to April and as everyone else did out there. In terms of traffic patterns, I mean February and March were pretty similar month for us. I mean January was actually a – I think a fairly strong month, which I think was driven by just a lot of consumers continuing to shop after the New Year.

Christine Chen – Needham & Co.

And then can you just remind us about how much overlap there is in product your own stores and the wholesale channel?

Michael Buckley

Well, I mean, I think if you go into your typical wholesale door whether it be Nordstrom or Bloomingdale, you're probably going to find six to ten individual style, body, wash combinations. And if you go into our store, you probably have ten or 15 times that. So obviously there is – our stores we try to carry everything so there will be an overlap on the few styles that are in the wholesale channel, but it’s a much, much, much wider range within our own stores.

Christine Chen – Needham & Co.

And then as a percentage of wholesale, what was majors versus boutiques this quarter?

Pete Collins

Well the majors as Michael said in this remarks, were only down 12.6% and then as we had expected the boutiques were down sharply year-over-year. So – and the majors are by far the largest group – largest channel within our US wholesale segment. And then the boutiques are unfortunately declining year-over-year and there was an increase of boutiques in the first quarter of last year, but it’s down sharply and so the overall trend has reversed at this stage for the first quarter.

Christine Chen – Needham & Co.

And then in international, it was up much more than we were expecting. And I think you had said that the order book was up about 25% in constant currency, but because of the exchange rate, it would only be up low-single digits, did Japan drive the majority of that surprise?

Michael Buckley

You’re talking in terms of first quarter.

Christine Chen – Needham & Co.

Yes, in the first quarter.

Michael Buckley

Well, really across-the-board, Japan obviously beat their plan as we mentioned in the call. But our business is also up in a number of other international markets.

Pete Collins

It was – there was just about everybody. If you look at the top six or eight markets Christine, I think if we look at the top six – start look at top eight, I think six we’re up and two we are down. So it was pretty across the board increase that we saw. It did surprise us because especially a couple of currencies had really moved against us with the dollar strengthening so much against it, but the teams that we work with on the international side has done a nice job of getting the merchandise out to the – getting the samples out to the distributors earlier, we’re able to move the merchandise to the distributors, earlier they’re able to get into their accounts quicker and that’s creating some reorder business for us that we hadn’t seen in the past. So the product is doing well and we’ve made some improvements from a process perspective that is helping us as a kind of compound on the product doing well.

Christine Chen – Needham & Co.

Thank you and good luck for the rest of the year.

Michael Buckley

Thank you.

Jeff Lubell

Thank you.

Operator

Okay, thank you. And our next question comes from the line of Eric Tracy. Please go ahead.

Eric Tracy – BB&T Capital Markets

Hi guys, just a quick follow up. On the backlog, I think last quarter you broke it down between US and international and I think quarter it was combined, is it possible to get the breakout there?

Pete Collins

We gave the combined number. There is a little bit kind of a delta shift between the two groups this year versus last year. So it’s really more important and we think just look at it from an overall perspective that’s what we gave that visibility.

Eric Tracy – BB&T Capital Markets

Okay, all rights. Thanks guys.

Michael Buckley

Thanks Eric.

Operator

Okay, thank you. And ladies and gentlemen, that does conclude our questions-and-answers session for today. I would now like to turn the conference over to Jeff Lubell for any closing statements.

Jeff Lubell

Thank you and thank you again for joining us this afternoon. As always, we appreciate your continued support and the interest in our company. If anyone has any further questions, please do not hesitate to contact Pete with the team at ICR. And this concludes our call today. And thank you again for your attention.

Operator

Ladies and gentlemen, that does conclude the True Religion Apparel, Incorporated first quarter and fiscal year conference call 2009. If you would like to listen to a replay of this, please dial 800-406-7325 or 303-590-3030 with the pass code 4054899. Thank you for your participation and you may now disconnect.

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Source: True Religion Apparel, Inc. Q1 2009 Earnings Call Transcript
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