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True Religion Apparel (NASDAQ:TRLG)

Q3 2009 Earnings Call

November 3, 2009 4:30 PM ET

Executives

Laura Foster – ICR, Inc.

Michael F. Buckley - President

Jeffrey Lubell - Chairman of the Board, Chief Executive Officer, Chief Merchant

Peter F. Collins - Chief Financial Officer

Analysts

Eric Beder - Brean Murray, Carret & Co

Todd Slater - Lazard Capital Markets

Christina Chen - Needham & Co.

Eric Tracy - BB&T Capital Markets

Ron Bookbinder - Global Hunter Securities

Dorothy Lakner – Caris & Company

Presentation

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the True Religion Apparel Incorporation 2009 third quarter results conference call. During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be open for questions. (Operator’s instructions) This conference is being recorded today, Tuesday, November 3, 2009. I would not like to turn the conference over to our host, Ms. Laura Foster, of ICR. Go ahead, ma’am.

Laura Foster

Thank you. Good afternoon everyone and thank you for joining us today to discuss True Religion Apparel’s third 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 third quarter of 2009 earnings release which went out today at approximately 4:00 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.truereligionbrandjeans.com by clicking on the investor relations tab.

This call is being webcast and the replay will be available and archived on the company’s website. Please note that all of 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 maybe very different from our current expectations. We encourage you to read the 2008 10-K, the upcoming Q3 2009 10-Q and other reports that we filed 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 is not currently intend to update these forward-looking statements except as required by law.

With that said, it is my please to turn the call over to Jeff Lubell. Jeff?

Jeffrey Lubell

Thank you, Laura and good afternoon everyone. Thank you for joining us today as we discuss our third quarter and year-to-date 2009 financial results. We are pleased that our positive trend momentum continued in the third quarter. Our performance which is notable given the tough conditions for premium priced goods and tight inventory controls amount retailers reflects our ongoing efforts to extend our product assortment, diversity our distribution and grow our global presence, as well as the ongoing preference for our brand.

For the third quarter net sales increased 3.8% to $82.4 million from $79.4 million in the third quarter of 2008. Gross margin expanded 630 basis points, 64.7% from 58.4% in the prior year quarter. Operating income increased 1.9% to $22.7 million from $22.3 million in the third quarter of 2008. And net income was $14.1 million or $0.58 per share compared to $15.4 million or $0.64 per share in the prior year third quarter.

The year-over-year EPS comparison is impacted by the tax benefits of $0.09 per diluted share that were reported in the third quarter of 2008.

In the first nine months of 2009 we have significantly strengthened our balance sheet, finishing the third quarter with $88.7 million in cash and cash equivalents, a $35.7 million increase versus last year. And we continue to hold no debt.

For the first nine months of 2009 we have sales of $218.2 million in operating income of $53.7 million. This translates to year-over-year sales growth of 10.7% and a 9.5% increase in operating income.

For the full year we are updating our guidance as follows; we now expect net sales in the range of $295 million to $300 million. Earnings per share is expected to be in the range of $1.82-$1.86 as compared to our previously issued guidance of $1.66-$1.84.

Despite quarter uncertain surrounding the economic outlook for the remainder of 2009 we are confident in our ability to deliver top and bottom line results in line with these expectations. Pete will provide additional financial details for the third quarter in his comments in a few moments. Michael will then provide an update on our operating performance by segment before we open up the calls to take your questions.

We believe our performance highlights the ongoing preference for our brand as we continue to deliver quality and innovation in our core jeans wear and jeans wear related sportswear merchandise. Just as September we showcased our upcoming holiday 2009 and Spring and Summer 2010 collections at the product shows in Las Vegas and in the EAK show in New York City. They were by far our largest collections yet and the response was very positive.

A True Religion we take great pride in infusing the marketplace with newness and innovation, throughout our jeans and related sportswear apparel. We believe this commitment continues to be rewarded by consumers. In fact, according to our recent on campus research study a poll of 11,000 students across 1,000 US campuses reported quality and uniqueness among the top two factors that contributed to brand preference among these students. And topping the list for must-have back to school shopping, True Religion brand jeans.

As I have said many times before in the past, it’s all about the product.

While we are pleased with our ability to deliver results in this challenging environment, we are more focused on the many opportunities that are being created in today’s marketplace to further extend to our brand leadership. We intend to capitalize on these opportunities by continuing to diversify our distribution, execute alongside our retail partners, grow our global presence and bring innovative products to the marketplace.

Here in the US, we continue to make our products more available to consumers through our wholesale retail partners as well as throughout own branded retail source. During the third quarter we opened six new branded retail stores, bringing our total store count to 66 stores at September 30th. We will end the year with a total of 70 branded retail stores by December 31st. We’re excited for the prospect of 2009 class of stores which are located in many of the nation’s top performing retail centers. And despite the rapid growth of our consumer direct platform we continue to believe we have opportunities ahead to expand in both new and existing markets.

In addition to growing our own retail stores, we strive to partner closely with our department store and boutique customers for a sales growth in this channel. This is particularly important in light of the ongoing challenges in the broader retail environment which we believe continues to forces retailers to manage inventory in a cautious manner.

As part of this initiative we are in the process of transforming from our independent sales agent, L'Atelier with our corporate sales force. We are establishing a corporate sales force which we will be responsible for managing our relationships with our US wholesale account. This is consistent with our objective to strengthen our business relationships and streamline our communications with our key customers.

As part of the transition, our sales agent, Jana Rangle has resigned effective December 31, 2009. Jana has been a great partner to the True Religion brand over the past five years and we are pleased to have realized and shared the success of the company’s growth. I truly thank her for her commitment to the True Religion brand.

We are currently recruiting for a Vice President of US Wholesale Sales and expect to have an experienced leader onboard by year end. At the end of this year we will formally hire L'Atelier Sales Associate who will become full time employees. And we will assume ownership of L'Atelier showroom including Los Angeles and New York City.

On the international front, we continue to expand our presence in key North American, European and Asian markets where the excitement for the brand matches that with we have seen here in the US. In the third quarter international business reached $16.6 million and represented 20% of our total sales. To meet the growing worldwide demand for True Religion we continue to build our international business on a market by market basis. Insuring we have the proper people, infrastructure and resources in place to deliver against our brand expansion strategy.

In summary, we are pleased with our year-to-date financial performance, particularly in light of the broader economic headwinds. By focusing on our strategic initiatives to expand our merchandise assortment, grow our branded retail store base and extend our global reach we are delivering against our strategic and financial objectives. We look forward to building on our positive brand momentum in the quarters and years to come, to reinforce our positioning as a global premium apparel brand.

That concludes my comments for today. I would like to now turn the call over to Pete to discuss our third quarter financial results and provide an update on our 2009 guidance. Pete?

Peter F. Collins

Thanks Jeff and good afternoon everyone. I’ll start with a detailed discussion of our third quarter and nine month financial results followed by updates to our full year 2009 guidance.

Net sales for the third quarter increased 3.8% to $82.4 million from $79.4 million in the third quarter of 2008. Similar to the first half of 2009, growth within our consumer direct segment in international business was partially offset by a decline in our US wholesale business.

As expected, this quarter’s sales off price retailers were $4.7 million below the 2008 third quarter net sales amounts. This reduction equates to 5.9% of our 2008 third quarter net sales. With the 2009 third quarter net sales increase of 3.8%, we achieved a 9.7% year-over-year net sales increase when we exclude the planned off price sales reduction.

Gross profit for the quarter grew 15.0% to $53.3 million or 64.7% of net sales, from $46.4 million or 58.4% of net sales in the third quarter of 2008. Our gross margin benefited from the ongoing sales mix shift towards our higher margin consumer direct segment, along with the reduction in off price sales, as well as an improvement in off price sales gross margin and a decrease in sales discounts within our international segment. Partially offsetting these margin improvements were the reduction in our higher margin sales boutiques, an increase in the percentage of consumer direct sales from our outlet and anticipated decline in our outlet stores gross margin.

Selling general and administrative expenses for the quarter increased 27.2% to $30.6 million or 37.1% of net sales from $24.1 million or 30.3% of net sales in the prior year prior. The year-over-year growth in SG&A expenses was driven by the cost associated with opening and operating 30 new stores since September of 2008.

Operating income for the third quarter increased 1.9% to $22.7 million or 27.6% of net sales, compared to $22.3 million or 28.2% of net sales in the prior year period. The year-over-year decrease in our operating margin reflects the deleveraging of costs associated with our retail store growth and the impact of the year-over-year decline in our US wholesale sales.

Turning now to our segment information, within our US wholesale segment, sales for the third quarter decreased 31.1% to $31.9 million versus $46.3 million in the prior year period. The decrease in this segment’s net sales was driven by the planned reduction in sales, off price retailers, the continued decline in sales boutiques and a greater than expected decline in sales majors.

While Michael will elaborate in his comments, our third quarter replenishment sales majors suffered due in part to the transition in our US wholesale team’s leadership and as a result of our major customers exhibiting greater conservatism with respect to inventory management.

International sales in the third quarter increased 47.6% to $16.6 million from $11.2 million in the prior year period. The year-over-year increase is primarily due to increased sales in Asia and Europe. Our international segment also benefited from the planned sales increase to Japan as a result of our 2008 transition from a third part distributor to a company owned subsidiary.

Consumer direct sales, which include our branded retail stores and e-commerce site increased 51.9% during the third quarter to $32.6 million from $21.5 million in the prior year period. The growth in our consumer direct segment is attributable to the expansion of our retail stores which totaled 66 at September 30, 2009, compared to 36 stores at September 30, 2008.

This segment sales are trending in line with our goals to increase sales by 60%-65% in 2009 over 2008. Our total weighted average square footage for the third quarter was 114,800 square feet compared to 59,500 total square feet for the third quarter of 2008.

Third quarter net sales also include $1.3 million of licensing revenue which is included in our other segment. Third quarter 2008 net sales included $400,000 of licensing revenue. During the third quarter 2009, many of our licensees contracts entered new years with higher minimum sales which resulted in an increase in (inaudible) royalties.

Operating income by segment is as follows; within our US wholesale business our operating income decreased 40.0% to $9.3 million or 29.0% of sales, from $15.4 million or 33.4% of sales in the prior year period. The decline in operating margin for the segment was primarily due to the deleveraging of this segment’s big cost and the addition of resources in the past years to support the company’s overall sales growth, with those costs being classified in the US local segment.

This was partially offset by a reduction in sales commission and improvement in our off priced sales gross margin and other sourcing improvements.

Our international operating income increased 63.4% to $7.8 million or 47.1% of sales from $4.8 million or 42.6% of sales in the prior year period. Our international operating margin benefited from an increase of direct sales in select Asian markets which carry a higher gross margin than sales through distributors. This was partially offset by an increase in cost incurred by our subsidiary in Japan.

Operating income within our consumer direct segment increased 35.8% to $11.3 million or 34.5% of sales from $8.3 million or 38.6% of sales in the prior year period. A year-over-year decline in our consumer direct operating margin was attributable to the deleveraging from new stores as well as an expected comparable store sale in decline.

Our effective tax rate for the third quarter 2009 was 38.2% compared to 31.1% in the third quarter of 2008. Our third quarter 2008 effective tax rate benefited from two primary factors. During the third quarter 2008 we implemented a tax planning strategy that reduced our tax provision in the quarter and increased our earnings per share by $0.06. We also finalized our 2007 tax returns in that quarter which reduced our income tax provision in the third quarter of 2008 increased our earnings per share by three cents.

The (inaudible) impact of these changes benefited our 2008 third quarter net income by $2.3 million or $0.09 per diluted share. Net income for the 2009 third quarter was $14.1 million or $0.58 per diluted share based on weighted average shares outstanding at 24.2 million shares and compared to net income of $15.4 million or $0.64 per diluted share based on weighted average shares outstanding of 24.2 million shares in the third quarter of 2008.

Excluding the 2008 tax benefits I just mentioned, net income for the quarter would have increased 7.2% over the prior year period.

In the third quarter of 2009, the average selling price for women’s jeans in our full priced stores was $253 and for men’s jeans it was $273. We believe these ASPs show that consumers are willing to pay a premium for merchandise that is unique to the marketplace.

Turning to our balance sheet, we ended the quarter with $88.7 million in cash and cash equivalent, representing a $31.5 million increase from December 31, 2008 and a $32.9 million increase from September 30, 2008. Increase in our cash balance was driven by the cash flow from operation generated in the first nine months of 2009. For the first nine months of 2009 we generated cash flow from operations of $45.0 million compared to $42.2 million in the prior year period.

Operating cash flow was used to fund the expansion of our retail stores, build corporate and international infrastructure and for other financing activities. With a net increase invested in an FDIC insured custody cash deposit account.

Accounts receivable at quarter end was $28.5 million, a $4.6 million decrease from December 31, 2008 and a $5.2 million decrease from September 30, 2008.

As we mentioned in our August conference call we terminated our factor agreement with Merchant Factors in July and now manage our credit in-house. We believe that in taking direct control of credit decisions we can more effectively manage the credit risk of our accounts by maintaining a conservative posture with our credit sales while establishing more direct relationships with our customers and diversifying our overall exposure. To support this initiative, in the third quarter we have expanded our credit team including the hiring of a director of credit.

Inventory at the end of third quarter increased by $12.0 million from year end. Approximately $7 million of the year-to-date increase is attributable to the increase in consumer direct sales, including the opening of 24 new retail stores in 2009. Also in the third quarter we drove a onetime build in our warehouse inventory to support faster and better replenishment to our retail stores. This action is consistent with our goals to minimize out of stock risk within our retail stores and we believe represent an appropriate use of capital given our strong financial position.

It is also important to note that our retail inventory turns to our slower average rate then our inventory to support our wholesale business. Overall we are comfortable with our inventory position which accounts for our slower average current rate and is in line with our plan.

We continue to carry no debt. And we fund our growth from internally generated cash reserves and current operations. During the quarter we completed the implementation of our Oracle ERP system which we believe will provide us with a stable well supported platform to support our ongoing business growth both domestically and internationally.

Turning briefly to our year-to-date results. For the nine month ended September 30, 2009 net sales increased 10.7% to $218.2 million from $197.0 million in the prior year period. The net sales increase for the period was primarily due to the continued expansion of our consumer direct segment.

Gross profit as a percentage net sales increased 500 basis points to 62.7% in the first nine months of 2009 from 57.7% in the prior year period, primarily due to the increase in the higher margin consumer direct segments net sales.

Operating income for the first nine months of 2009 increased 9.5% to $53.7 million or 24.6% of net sales from $49.0 million or 24.9% of net sales in the prior year period.

Similar to our third quarter results, the year-over-year decrease in our operating margin reflects the deleveraging of costs associated with our retail store growth and the impact of the year-over-year decline in our US wholesale sales.

Net income for the nine months ended September 30, 2009 increased 3.3% to $32.7 million or $1.35 per diluted share from $31.7 million or $1.31 per dilute share in the prior year period.

With that, let me now turn to our financial guidance for 2009. Net sales for 2009 are expected to range from $295 million-$300 million representing a net sales increase of 9%-11% as compared to 2008 net sales of $270 million. Our expect sales by segment remain unchanged from our previous guidance. As a reminder, net sales within our US consumer direct business are expected to increase 60%-65% over 2008. Net sales within our US wholesale business are expected to decline by 18%-20% over 2008.

Net sales within our international business are expected to increase by more than 20% as compared to 2008.

In our 2009 net sales guidance includes $4.0 million in licensing revenues.

With respect to profitability, earnings per share is now expected to be in the range of $1.82-$1.86 versus our prior estimate of $1.76-$1.84 and compared to 2008 earnings per share of $1.83. Our upperly revised 2009 EPS guidance reflects stronger than expected gross margin improvement, particularly with the company’s US wholesale and international segment.

Imbedded with our earnings per share guidance are fully diluted weighted average shares outstanding of approximately 24.6 million shares and an effective tax rate in the range of 38.8%-39.5%.

With that I’d like to turn the call over to Michael to take us through a review our operating performance.

Michael F. Buckley

Thanks, Pete. Good afternoon everyone. During the third quarter we continue to see strong sale through within our major wholesale accounts and within our own branded retail stores.

In the third quarter of 2009 we delivered year-over-year sales growth of 3.8%, with approximately 39% of the business coming from US wholesales, 40% from consumer direct, 20% from international and less than 2% from licensing.

This compared to sales contributions for the prior year period of approximately 58% from US wholesale, 27% from consumer direct, 14% from international and less than 1% from licensing.

With respect to the US wholesale business, net sales to (inaudible) for the third quarter declined 17% in advance of our expectations. Despite strong sell through of True Religion Apparel across our major accounts majors were conservative with their reorder business in the third quarter as we believe they focused on selling through slower moving over inventoried brand.

As we’ve discussed in the past, today’s retail environment requires that we proactively partner with majors to drive merchandise and sales in this channel. During the third quarter our replenishment business with the majors suffered due in part or the transition in our US wholesale leadership team. In addition over the summer we identified we had two-two styles offered on replenishment.

We expect to ramp up the styles we offer on replenishment in the fourth quarter. The jeans offered on replenishment will be more heavily weighted towards our cleaner introductory price points of $172-$220, which we have identified as an opportunity to reach a broader range of customers that shop within this channel and that we expect will be incremental to our more fashion forward jeans offering.

We do however continue to believe that majors based with their own working capital requirements are exhibiting greater conservatism with respect to inventory management, particularly in advance of the holiday season.

In light of this, we believe our transition to a direct sales force model will be a driving force in reigniting growth within this channel. Particularly in light of the strong sell through that our brand activity in the third quarter we continue to view the opportunity to increase penetration of True Religion brand jeans and related sportswear apparel within our US wholesale customer accounts as significant. We are confident that the establishment of a direct sales force will result in a more direct line of context to our customers, reduce our response times to market opport9nites and ultimately enhance the sales potential within our current customer base.

Further, a direct sales team will be a key component to building our boutique customer base, a longer term opportunity to True Religion.

With respect to Boutiques, we experienced an improved rate of net sales decline on a year-over year basis in the third quarter as compared to the first half of 2009. While this business has decreased sharply over the past four quarters, we are seeing some signs of stabilization as the rate of stores going out of business and order cancelations are declining from prior quarters.

In addition, we faced easier comparables in the fourth quarter of 2009. As part of our transition to the direct sales force, we plan to hire more sales people dedicated to serving our boutique customers as well as put those people on the road to enhance existing relationships as well as build new relationships to increase our presence within this channel.

Turning to the off price channel, sales to these customers declined $4.7 million for 31% year over year. Sharp decline is consistent with our plan to reduce the sales of this channel in 2009 and reflects our production improvements over the past year which reduced the amount of slow moving merchandise that required extra discounting.

Turning to our international business, our brand momentum is very positive with strong gross across our key European and Asian markets. Our strong performance is a testament to our market-by-market approach to growth whereby a diligent approach to explore local market opportunities and partner with local market experts has established a solid foundation from which to build the True Religion brand.

Along these lines I am pleased to welcome John Geering, who recently joined the True Religion brand as our General Manager of the Asia Pacific Region. John joins True Religion from Adidas Asia Pacific where he served as the director of brand retail for four years. John resides in Hong Kong and will report directly to our headquarters. He will have the responsibility of developing and expanding the True Religion brand throughout Asia including Hong Kong, greater China, Japan, and Korea, to name a few. He will lead the market by market expansions strategy to drive growth of the True Religion brand across both wholesale distribution and through True Religion branded retail stores as appropriate. Additionally, he will oversee and manage the Japan country manager and the brand development of True Religion Japan.

As we have mentioned in the past, we view the opportunity in these markets as significant and we are confident that John's background in developing brands in the Asia Pacific region will serve to support the growth of our brand in this key region well.

During the third quarter our Japanese business performed well, led by increased sales to our existing wholesale accounts and to a lesser degree, increased sales within our three outlet locations.

We look forward to supplementing this growth through the expansion of our consumer direct platform. Along these lines, among John's top priorities will be seeking out and establishing full price retail stores in Japan and shopping shops. We are also pleased with the strength of our brands across key regions of Europe led by maturation of several key distributor relationships. Over the past few years we have had the opportunity to upgrade our distributor relationships and partner with distributors possessing knowledge of the apparel industry in each of their respective markets. These contributors have done a terrific job of driving growth in a manner that is appropriate for our premium brand.

Looking ahead to 2010 we're evaluating building upon these partnerships through potential joint ventures or franchise agreements to open True Religion branded retail stores in select markets. We'll keep you updated on this initiative's progress.

We’re also on track to open a full price store in London in 2010. As previously mentioned, we established a legal entity in the UK during the second quarter to prepare for our retail expansion within this market.

With respect to the wholesale business of the fourth quarter, our wholesale sales order book which includes both our US and international orders, was up 7% as of September 30th, 2009 as compared to September 30th, 2008.

Turning to our consumer direct business, our third quarter net sales increase was driven by the increase in our store count on a year over year basis. We added 30 new stores on a year over year basis ending the third quarter with 66 stores. This is comprised of 50 full price stores and 16 outlets. In October we opened one additional retail store and we plan to open three additional retail stores in the balance of the fourth quarter for a total of 70 branded retail stores at year end.

On a consolidated basis our stores performed in line with our expectations during the third quarter and are on track to deliver sales growth of 60%-65% over 2009. Gross margins in the consumer direct segment were 74.6% compared to 77.9% in the prior year period. The decline in gross margin was due to an increase in the percentage of consumer direct sales from our outlets as well as the merchandise mix shift within the outlets as they now have fewer higher margin irregulars in their assortment.

Similar to the second quarter we continued to experience a greater percentage of consumer direct sales from our outlets. We attribute this to continued improvement in planning and allocation which created better visibility into our inventory within this channel ensuring that we stock our outlets with a more comprehensive selection of items and sizes, and despite a reduced gross margin due to the nature of our outlets' product mix, our outlet stores deliver a healthy operating margin, contributing to the overall profitability of this segment.

As such, despite a decline in same store sales productivity resulting from the challenging retail environment, on a consolidated basis our stores delivered a full operating margin of 38.4% compared to 41.9% in the prior year period.

With respect to 2010 we continue to expect to open an additional 20-25 branded retail stores in both new and existing markets in some of the best performing centers in the country in top locations within those centers and at attractive lease rates. This will position True Religion, we believe, to benefit as the economy and consumer spending recover in the long term.

Turning to our licensing business, we continue to view licensing opportunities as a key component to establish True Religion as a global brand. We ended the quarter with six license categories; headwear, footwear, swimwear, fragrance, eyewear, and leg wear. We recently displayed our eyewear products at the Project shows and the response was terrific.

Our new swimwear licensee has secured wholesale orders for the upcoming resort season and the customer response has been positive for the 2010 spring and summer season. We expect that growth in current categories, in addition to the introduction of new categories, will contribute to the future growth and licensing income.

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

Question-and-Answer Session

Operator

(Operator's Instructions) Our first question comes from the line of Eric Beder.

Eric Beder - Brean Murray, Carret & Co

Hello, good afternoon. Could you talk a little bit about how do you look at the shift owing to the more direct selling model, what were the drivers behind that in terms of what you felt it could add to the company, and are there going to be additional costs associated with that shifting over here or are the savings on commissions going to kind of outweigh that?

Jeffrey Lubell

Are you talking about going to direct selling as opposed to L'Atelier?

Eric Beder - Brean Murray, Carret & Co

Yes.

Jeffrey Lubell

Well, I mean I think ultimately we think we can have a lot better control over the business if we can run it in a corporate way where there's a lot closer contact with the corporate office, as well as we're going to make a larger investment with more sales people and more people traveling out there and really driving the business and working closely with all the major accounts as well. And I believe you can talk, Peter, to the —

Peter F. Collins

From the budget perspective, Eric, we're still working through that. We talked on the call in our prepared remarks how we're recruiting for a vice president of sales. We're still in the process of establishing what our total team is going to look at. We've told the sales people that work for L'Atelier today that at the end of the year will offer them positions to join our team. We're going to take over their showrooms. So there are still a fair number of moving pieces, but I think at the end of the day we look at it like we were spending roughly 6% of those sales on commissions and that's a pretty significant chunk of costs that we have to work with to move into next year.

So it's still a little premature to know exactly what the impact's going to be for next year, but there was a significant cost that we’re incurring to have that (inaudible). But at the end of the day like Michael prescribed, this isn't really about cost. It's really more about the opportunity to be closer to our customers and drive the sales in a manner that we think is best for our brand, having the whole collection presented to our customers and really being more of a partner with our customers.

Eric Beder - Brean Murray, Carret & Co

And to that level, do you believe this shift is going to let you drive more sales of non-denim product in the wholesale channel? And actually, what was the non-denim penetration in your own stores in Q3?

Jeffrey Lubell

Q3 it was 74% jeans and 26% sportswear. And yeah, absolutely, one of the challenges we've had is that we didn’t seem to get the passion behind the sportswear like we wanted. Michael had a meeting with one of our major wholesale customers this summer and really had to sit there and push the discussion with them about sportswear where it was apparent that it just hadn't been something that had been on the table for a few seasons. And I shouldn't say pushed as he just had to almost introduce it to get it on the table.

So I think that having control is going to help us with a lot of things, sportswear being one, the product range, the breadth of the collection, as well as the various price points. So we're excited about this transition. We think it's really going to help us and it's something that we look forward to.

Eric Beder - Brean Murray, Carret & Co

Great, thank you.

Operator

Thank you. And our next question comes from the line of Todd Slater.

Todd Slater - Lazard Capital Markets

Thanks very much. Hey, guys. Let's start just on the inventory number, how much would you attribute the one-time build to the overall $10 million year over year increase?

Peter F. Collins

It's about $4 million of that increase and it's really been the driver for some of the improvements we've made in our conversion rate this year. If you think about what we’ve talked about doing, it's making sure, especially in our outlet stores, that we've got the full assortment of bodies and styles and sizes — not so much styles for outlet stores, but bodies and sizes to make sure that when a consumer comes in and wants to buy some of our outlet jeans at the right price point, that we've got that merchandise on the floor in our outlet stores as well as just having a deeper assortment of the latest styles in our full price stores. So that's the thinking behind that.

The other thing we looked at was with the amount of cash we've got available, we felt it was a prudent investment to make to put some of that cash in use, to have this reserve stock so that we minimize our out of stock position. I mean the alternative is to earn 10 basis points on the cash. So we think this is a much better return for the company by having this $4 million bill at inventory to support these plans.

Jeffrey Lubell

Yeah. And there's no absolute inventory there, Todd. I mean this is all fairly merchandise that was made for the outlets, as Pete said, so we can make sure we have the right amount of volumes and price points.

Todd Slater - Lazard Capital Markets

Sure, okay. And then based on what you saw the promotional activity in the wholesale channel in the third quarter, how would you handicap the promotional advance looking into the fourth quarter both on a sequential basis as do you think it is getting better or worse and on a year over year basis? How would you characterize the way that wholesale, specially the majors, promote a denim product or got emotionally aggressive?

Jeffrey Lubell

Well, I mean I think clearly if you look at the fourth quarter of last year they were heavily promotional. So we're not aware of any plans for them to repeat those types of mark downs. I mean quite frankly they're running their businesses very lean on the inventory side, looking to chase as much as they can. And as we have more styles on replenishment going into fourth quarter we should able to benefit from that.

Todd Slater - Lazard Capital Markets

They still did a lot of buying two pairs to get 20 off for friends and family and so on and so forth, were you surprised by that level of cadence given the sell throughs you were seeing in your product and do you think that this any — does that give you any trepidation at all about what they might do in fourth quarter?

Jeffrey Lubell

Yeah. We saw a couple of things, but I have to say, we didn’t hear a lot about it.

Todd Slater - Lazard Capital Markets

Okay. And then Peter, maybe could you guys give a sense of how you feel about the comp store sale trajectory in the retail stores? In the past you sort of talk about how they're performing in the trenches and how the productivity may be tracking relative to your expectations.

Jeffrey Lubell

Yeah. In relation to our expectations, the stores are performing right there, Todd. We’re definitely in line to deliver the 60%, 65% increase year over year, and in the quarter the expectations we had for the year were met as far as boutiques or stores.

The nice thing that we saw was that September was the best month in the quarter. Some of that had to do with the fact that September a year ago when the real jolt of consumer spending started and that from a run rate perspective or with the same store perspective, we think that moving to September and into the fourth quarter, that’s a nice trend to be on.

Todd Slater - Lazard Capital Markets

Okay great. Thanks very much.

Operator

Thank you. And our next question comes from the line of Christina Chen.

Christina Chen - Needham & Co.

Thank you. I want to see if you could expand a little bit about how the change in the sales agent has affected your replenishment business. Can you maybe just talk a little bit about that in detail?

Jeffrey Lubell

Well, I mean I think at the end of the day the kind of focus that we expect to have on driving the business with the majors may have been a little bit different than how it was being handled in the past. So we got actively involved in the summer of hits year, worked with a lot of the majors, and really decided — okay, how do we drive this, how do we really get ahead of it? And it was clear that we weren't in the replenishment game as much as we should have been and we edited a lot of files for the quarter.

So as we take control of this business forward there will be much more dedicated focus on micromanaging what's happening with the majors and driving that business.

Christina Chen - Needham & Co.

So I guess if you look at the third quarter that just occurred, I don’t know if you mentioned this, but can you break out what the majors were down versus what the boutiques were down?

Jeffrey Lubell

Yeah. We talked on the call that the majors were down 17%. The boutiques were down sharply, but it was actually a better rate than we'd seen for — we'd been down significantly for four quarters now, starting in the fourth quarter last year, but this third quarter result was the best out of those four quarters. So we are starting to see stabilization there and especially as you move into Q4, now we're starting to come up against a much weaker comparable from a comparability perspective. But the majors were down 17% and then the boutiques were down in line better than they had been for the past three quarters.

Christina Chen - Needham & Co.

And then with respect to your inventory, the one-time build for replenishment, how much of that is finished goods versus just having the materials so if someday runs out of a certain fabric on a certain body that you can make them pretty quickly?

Jeffrey Lubell

No. It's all finished goods.

Christina Chen - Needham & Co.

It's all finished goods?

Jeffrey Lubell

Christine, yeah. It's here. It's dedicated for the retail stores. We've actually kind of bifurcated on a virtual manner, kind of internally assigned inventory to the retail stores because we want to make sure that we're not out of stock or they and we're fully supporting our retail store growth. We think that the changes we've made here from planning and forecasting perspectives as far as merchandise goes for our stores combined with our in-store selling train that we've done this year has been the two main factors as to why our conversion rates are up year over year in our retail stores?

Christina Chen - Needham & Co.

Got it. And you said September was the best month. And can I infer from your comment later that October is seeing an improvement from September at your own stores?

Jeffrey Lubell

Well, we're really just releasing information for Q3 so let's just leave it at that.

Christina Chen - Needham & Co.

Okay thank you. Good luck.

Operator

Thank you. Our next question comes from the line of Eric Tracy.

Eric Tracy - BB&T Capital Markets

Hey, guys. All right, maybe just a followup on the wholesale with respect to the guidance kind of holding that down 18 to down 20 in majors versus boutiques. So the majors down 17% in Q3, so does the guidance imply that that run rate sort of stays the same and boutiques come back or should we expect a pickup in the majors in Q4?

Jeffrey Lubell

Well, the 18%-20% down, Eric, is an aggregate of all three channels within that segment, the majors, the boutiques, and the off price. So the trend that we saw in the third quarter, we're not expecting majors to be down 17% in the fourth quarter, and then the comp that the boutiques come up against in the fourth quarter is much softer than it was in third quarter so there's a number of moving pieces here. But at the end of the day we still expect to get to the results of 18%-20% for the year.

One thing that we're looking at as we look at the order book for Q4, and Michael talked about the order book being up 7% year over year as of 9:30, embedded in that is the majors, and we see we're expecting our performance in Q4 with the majors to be more similar to how it was in Q2 when we were down 2% on a year over year basis. We think we'll get somewhere plus or minus a couple of percentage points around that type of performance in Q4.

Eric Tracy - BB&T Capital Markets

Okay, that's really helpful. And then just kind of turning to pricing beyond the promotional activity, you guys have alluded to an opportunity, again sort of at a lower price point, an opening price point to really drive some incremental volume. Could you just talk about what you’re seeing, whose potentially share you're taking from, if it all, and sort of how we should expect it to play out for the balance of the year.

Jeffrey Lubell

Well, similar to the discussion that we had just a few minutes ago about working with the majors and getting styles on replenishment, as we've been more involved in the selling efforts since the summer, one of the aspects of that is not just replenishment styles, but that cleaner less embellished, less distress look for the jeans. And so we've brought in a lot of that merchandise (inaudible) in our retail stores as well as in the merchandise plans for the wholesale business for Q4. So we are seeing the amount of merchandise on the floor increasing in that cleaner style that tends to have a price point that's more in the introductory zone of 172-220, and we're expected to drive incremental sales there in Q4. And based on what we've seen so far in October, we're getting the right type of attraction with that shift in our merchandise.

Eric Tracy - BB&T Capital Markets

And based on the cleaner styles, assuming that the cost behind that is less and therefore margins hold —

Jeffrey Lubell

Yeah. You know us well enough to know that we work on a standard gross margin. So just because the retail price is less doesn't mean that we're not getting it at our gross margin rate. We're still earning the gross margin on those sales just like we would anything else.

Eric Tracy - BB&T Capital Markets

Okay. And then just lately within international you focused on Asia and Japan, talk a little bit about Europe kind of what we’re seeing by region and any traction within the European segment?

Jeffrey Lubell

Well, I mean in terms of Europe there's a couple of particular markets where we've upgraded to new distributors over the last couple of years that are really starting to take force and we're looking at doing a possible joint venture or joint ventures or franchise stores there in addition to the one store that we mentioned we would do ourselves in London next year.

Eric Tracy - BB&T Capital Markets

Okay. And then on the wholesale basis, I mean do you feel like any one is weaker than the other or strength that you are seeing?

Jeffrey Lubell

I mean, there are a couple strong markets there overall. I mean, we're pretty happy with what's happening in Europe. In Michael's prepared remarks he talked about the maturation of our distributor relationships and specifically the UK and overall German territory are examples of that where we've been working with those guys for a few years and the development, the cohesiveness of the relationship is definitely paying off this year.

Eric Tracy - BB&T Capital Market

Okay great. Thanks guys, best of luck.

Operator

Thank you. (Operator's Instructions) And our next question comes from the line of Ronald Bookbinder.

Ron Bookbinder - Global Hunter Securities

Good afternoon. On the strength of the international business, what did you say in the text as to what you're looking for growth for the full year?

Jeffrey Lubell

We're saying that it's going to be up more than 20% for the year which is unchanged from the guidance we gave back in August.

Ron Bookbinder - Global Hunter Securities

Um-hum. Wouldn’t that be a weaker growth rate from what we saw in the 1st, 2nd, and 3rd quarters?

Jeffrey Lubell

Yeah. It would, but you got to remember that fourth quarter is not a real significant quarter for this business. The third quarter is when you're shipping the fall merchandise and a lot of the spring merchandise won't begin to ship until Q1. So from a run rate perspective or from a dollar magnitude perspective, fourth quarter's not a significant quarter for this business really just due to seasonality.

We have received very positive feedback though for the spring 2010 collection our international distributors, so this business has done well for us for a number of quarters now and we continue to see a lot of strength there.

Ron Bookbinder - Global Hunter Securities

Now you've brought in a regional manager for Asia and you've got a country manager for Japan have you brought in anyone for just total international development and are you looking at a regional manager for Europe?

Jeffrey Lubell

Well, we brought in someone a few months back to be director of international operations and that person's very involved helping to drive the business, helping to set up companies outside the US, working with the different departments here and ultimately helping drive the market. And as far as Europe, there are a few balls in the air there and we hope to update you soon on that.

Ron Bookbinder - Global Hunter Securities

Okay. And this taking over of the corporate sales force, are you buying anything from L'Atelier or you're taking the sales force, you're taking the show rooms, is there going to be some sort of Q4 charge for those actions?

Jeffrey Lubell

No. The payments that we’re making are basically for the infrastructure and the show room. So their fixtures and equipment and improvement are really what we're working with.

Ron Bookbinder - Global Hunter Securities

Okay, great.

Operator

Thank you. And our next question comes from the line of Dorothy Lakner.

Dorothy Lakner – Caris & Company

Just to go back for a second to replenishment, I was just wondering if you could just talk about how many — I mean, what's the magnitude of the number of styles that you will have on replenishment in the fourth quarter versus the third? And secondly, just a little bit more color on how you expect this transition in the sales team to occur and whether you're comfortable with how things are going into the holiday season and having to affect that transition. And then lastly just a housekeeping detail, can you give us the breakdown by gender; the men's, women's, and kids' percentage of the business for the third quarter. Thanks.

Jeffrey Lubell

In terms of the replenishment piece of it, some of our larger accounts, we're looking to have on each gender, four or five different styles on replenishment. Now that's obviously an addition to the fashion styles that they buy and they just flow out every month and sell through on. And that's probably double what it was in the third quarter.

Dorothy Lakner – Caris & Company

And you still feel comfortable that you're not giving up a sale on the more fashion forward styles to get the cleaner styles into the stores?

Jeffrey Lubell

No, no. I mean we basically sat down with them and we got the fashion advice that we wanted out of them and obviously the replenishment is the drive to business and the sell through.

On the gender breakdown it's pretty consistent with the year-to-date trend so it's 55% for women, 41% for men, and 4% for kids.

Dorothy Lakner – Caris & Company

And then just on the sales team transition?

Jeffrey Lubell

Well, I mean this is something that didn't just happen overnight so we've been working to bring on a VP of sales which hopefully we'll make an announcement shortly on, as well as talking about the showrooms and the type of structure we’re going to need to drive the denim business as well as the sportswear business . So I mean net-net this should be a long-term very big positive for the company.

Dorothy Lakner – Caris & Company

Right. And then in the meantime you and other people in senior management have been pretty intimately involved with this whole process.

Jeffrey Lubell

Absolutely.

Peter F. Collins

That's correct.

Dorothy Lakner – Caris & Company

Great, thank you.

Operator

Thank you. There are no further questions at this time. I would now like to turn the call back over to management. Go ahead.

Jeffrey Lubell

Thank you again for your time today. As always we appreciate your continued support and interest in True Religion Apparel Incorporated.

Operator

Ladies and gentlemen, this concludes the True Religion Apparel Incorporation 2009 third quarter results conference call. This conference will be available for replay after 3:30 PM Pacific Standard Time, today through December 3rd, 2009, at midnight. Thank you for your participation. You may now disconnect.

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