True Religion Apparel Q1 2010 Earnings Call Transcript

May. 4.10 | About: True Religion (TRLG)

True Religion Apparel (NASDAQ:TRLG)

Q1 2010 Earnings Call

May 4, 2010 4:30 pm ET

Executives

Laura Miller - ICR

Michael Buckley - President

Jeff Lubell - Chairman, CEO & CM

Pete Collins - CFO

Lynne Koplin - COO

Analysts

Eric Beder - Brean Murray

Todd Slater - Lazard Capital Markets

Christine Chen - Needham & Company

Eric Tracy - FBR Capital Markets

Ronald Bookbinder - Global Hunter Securities

Dorothy Lakner - Caris & Company

Operator

Greetings and welcome to the True Religion Apparel Inc. 2010 first quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator’s instructions) As a reminder this conference is being recorded.

It is now pleasure to introduce to your host, Laura Miller, of ICR. Thank you, Ms. Miller, you may now begin.

Laura Miller

Thank you. Good afternoon everyone and thank you for joining us today to discuss True Religion Apparel’s first quarter 2010 financial results. By now everyone should have access to the 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 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 2009 10-K, the upcoming 2010 first quarter 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 does 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 True Religion’s Chairman, Chief Executive Officer and Chief Merchant, Jeff Lubell.

Jeff Lubell

Thank you, Laura and good afternoon everyone. Thank you for joining us today as we discuss our financial results for the first quarter of 2010. On the call with me today are Michael Buckley, our President; Pete Collins, our Chief Financial Officer; and Lynne Koplin, our Chief Operating Officer.

In the first quarter of 2010, our Consumer Direct US Wholesale and international businesses performed well. Generating net sales of $77.9 million, an increase of 22% over last year’s first quarter. Our Consumer Direct business, now our largest segment once again led the way with a 68.1% sales increase, which exceeds our expectations.

We opened six stores in the first quarter, including five full priced stores and one outlet store and we continued to plan for 27 openings this year in the United States. Our international business also generated a strong double-digit sales increase with sales to both Europe and Asia we within the growth. In fact, our net sales to each of our top 10 international countries posted year-over-year increases in the first quarter.

Our US Wholesale, net sales were $24.2 million, down 16.5% from the $28.9 million in the same quarter last year. Our sales to off price accounts declined $2.3 million, or 26% versus last year, which is consistent with our plan of $10 million reduction in 2010. We also had a 12.4% decline in sales to mattress and booties, which was slightly better than our expectations for the sales channel. Also our Q2 order book for the US Wholesale segment is higher than it was last year. Pete will provide more details on his comments.

Our net income in the first quarter of 2010 improved by 10%; for our Consumer Direct segments, operating margin increased by 190 basis points over the results in the first quarter of 2009. We had overall margin pressure in the quarter resulting primarily from the plant expense increases due to improve the wholesale business and to continue to drive long-term international growth.

We’re pleased with each of our businesses in the quarter and with that initial productivity of the investments’ strategies, which we have recently implemented. We will combine the Consumer Direct sales increase to strong and broad increases in our international sales and our full priced it was also backlog gain, we are more confident about the direction of the True Religion brand.

Also these trends validate our growth strategy. We’re into develop trend setting merchandise, continue our growth in Consumer Direct we’re close to US Wholesale accounts and increased our international presence to serve the international marketplace, which we believe one day exceed our domestic market. Our financial position improved in the quarter as we increased our cash and cash equivalents, reduced our receivables and limited our year-over-year inventory growth to a rate below our net sales increase. Our capital expenditures to open branded source we pay for via operating cash flow.

We were on schedule to open 27 stores in the United States this year. Also we will open stores in the international market with stores in Tokyo, London, and Toronto. The Tokyo and London source have both set to open this month and the Toronto store is expected to open in the fourth quarter. Overall, we feel we are off to a good start in 2010, I am pleased by what I see from the changes we have made here over the past two quarters specifically at with the addition of (Inaudible), the US Wholesales sales team and our Asia Pacific team.

I remain optimistic about our future and now I’d like to turn the call over to Pete take us through the financial details, Pete.

Pete Collins

Thanks, Jeff and good afternoon everyone. For the firs quarter net sales increased 22.4%, the $77.9 million, up from $63.6 million in the first quarter of 2009. The more to recent quarters, growth within our Customer Direct segment led away. Same store sales increased 18.7% for the 46 stores that were opened for at least 12 months. When the e-commerce channels add to our same store sales basis, the year-over-year increase in Q1 was 18.2%.

Gross profit for the quarter was $50.0 million or 64.2% of net sales verses 60.9% of net sales in the first quarter of 2009. Our gross margin gain was driven by the ongoing sales mix shift towards a higher margin Consumer Direct segment. Selling, general and administrative expenses increased by 42.7% to $36.6 million in the quarter, and as a percentage of net sales SG&A was 47.0% versus 40.3% in the first quarter of 2009. The Consumer Direct segment SG&A rate decreased in the 2010 first quarter as compared to the prior year.

As a same store sales increase allowed us to gain leverage on fixed cost. This was more than offset by increased SG&A rates for our US Wholesale and international businesses due to additional spending to report our overall growth plan. The increase in SG&A rate for US Wholesale segment is due to the transition to our in-house sale force, a plant increase in advertising and increased depreciation related to the implementation that second half of 2009 of an ERP and warehouse management systems.

Increased expenses for our international SG&A are due to the ramp up of our sales efforts in Korea, Hong Kong and Japan and increase professional fees for work on the plant expansion of our international distribution. Operating income for the quarter was $13.3 million or 17.1% of net sales, compared to $13.1 million or 20.5% of net sales in the prior year period. The operating margin for the quarter was impacted by US Wholesale sales decline combined with the additional spending in our US Wholesale sales and international businesses.

Turing now to additional details on our segments for the first quarter, Consumer Direct sales increased 58.1% to $38.8 million. This was driven by store openings and same store sales increase. We operated 27 additional stores in the first quarter of 2010, as compared to the prior year period for a total of 76 stores. Our store count is now comprised a 58 full price stores and 18 outlets. In April, we opened one full price store and one outlet store. We expect to open in additional 19 stores in the US during 2010.

Our total weighted-average square footage for the first quarter was 134,000 square feet, compared to 81,000 square feet for the first quarter of 2009. At the end of the quarter, our total retail square footage was 141,000 square feet. Other key metrics in the Consumer Direct segment includes average selling prices for women’s jeans in our full priced stores were $237 versus $262 a year ago and for men’s jeans were $262 versus $287 a year ago. These trends reflect its balance sheet to cleaner embellish, which are less expenses are produce.

In women’s jeans 35% of our sales in our own full priced stores was price between $172 and $216, a year ago that price range made up 14% of our sale. In the men’s jeans categories over 60% of the sales in our full priced stores were price about $270. Sportswear sales made at 26% of our Consumer Direct sales, which is the same as our 2009 sales mix, though it’s continued to achieve healthy full of our margin.

To the first quarter of 2010, our full operating margin was 37.2% that compared to 34.6% in the same period last year. Operating income within our Consumer Direct segment increased 78.6% to $12.5 million driven by the 68% sales growth. The segment operating margin improved 190 basis points the 32.3%.

The margin improvement was driven primarily by the same store sales growth, which has allowed us to gain leverage on fixed cost. Within our US Wholesale segment, sales for the quarter decreased 16.5% to $24.2 million versus $28.9 million a year ago. The sales decline of the division was due to a planned reduction in sales to outside the account as well as the 16.3% sales decline majors. Sales boutique decreased 5.3%. We believe that the sequential improvement in sales declines of boutique is indicative of the positive impacts of our direct sales team.

The US Wholesales’ operating income decreased 63.9% to $2.5 million and the margin was 10.3% of net sales versus 23.7% of net sales in the prior year period. We expected an operating margin declines for the segment due to the deleveraging of the segment sales and an additional $600,000 in selling expense as weak transition from our sales agent to our direct sales team. A plant $400,000 increase in advertising expenses and an additional $500,000 of depreciation expense associated with the ERT and warehouse management systems that we implemented in July 2009. The selling expense increased should taper off in the second half, but the other trends are ongoing.

International sales increased by 22.8% to $13.8 million from $11.2 million a year ago. We saw our best sales growth in Korea, the UK and Germany and we had year-over-year net sales increases in all of our 10 largest markets. Our international operating income decreased 8.4% to $4.7 million with an operating margin of 34.3% versus 45.9% in the prior period this margin decrease was due to the increase in overhead expenses including a ramp up of wholesales sales efforts in Asia and professional fees associated with the planned expansion of other international distribution.

Our second quarter of wholesale sales of order book, which includes US full priced and international orders, but excludes off price orders was up 11% as of March 31, 2010 as compared to March 31, 2009. On March 31, 2010, second quarter order book for US Wholesale full priced customers, which includes all customers except the off priced accounts was up slightly from the prior year.

This is the first time in six quarters that we have achieved an increase in the order book for these US Wholesale full priced customers. These are positive indications of our upcoming business that we continue to be focus on execution from design, sales and credit to build our global portfolio business.

Finally, first quarter net sales also include $1.2 million of licensing revenue, which is included in our other segments, this compares to $419,000 a year ago. Our effective tax rate for the first quarter of 2010 was 37.2%, compared to 41.7% in the first quarter of 2009. The first quarter 2009 provision for income taxes, included $0.5 million of expenses associated with the adjustment of paid income taxed proportionate factors. This adjustment impacted with first quarter of 2009 effective tax rate by approximately 400 basis points.

Net income for those 2010 first quarter, was $8.4 million or $0.34 per diluted share based on weighted average shares outstanding of 24.9 million shares, compared to net income of $7.6 million or $0.32 per diluted share based on weighted average shares outstanding at 24.0 million shares in the first quarter of 2009.

Now turning to our balance sheet, we ended the quarter with $108.7 million in cash and cash equivalent, compared to $105.5 million as of December 31, 2009. We continue to trigger that and we fund our growth from internally generated cash reserves and current operations.

Accounts receivable at end of the first quarter was $19.8 million, a $7.4 million decrease from $27.2 million as of December 31, 2009. Inventories at the end of the quarter were $33.7 million, an increase of $5.6 million or 19.9% from the end of the first quarter of 2009. All of this year-over-year increase is for retail stores that we opened in the past year. Our total inventory for weighted-average square foot decreased 10.3% for the first quarter of 2010, as compared to the first quarter of 2009.

Turning to guidance, as we said on the call in February, we do not expect to revise 2010 guidance during the quarters in 2010. We will report our results each quarter and comment on significant business trends or market development that we absorbed if any. Our fiscal 2010 guidance for net sales is approximately $360 million, representing an increase of 16% compared to 2009 net sales of $311 million. We expect our earnings per share to be in a range of $2.10 per share.

With that, I would like to turn the call over to Michael, who will take us through a review our operation. Michael.

Michael Buckley

Thanks, Pete. Good afternoon everyone. What I want to do on this call is dive deeper into our Asian business to give you an understanding of our efforts and results so far in that region and hopefully to highlight the tremendous opportunities that we still have ahead of us and before discussing Asia specifically, I want to point out that we could see very positive brand momentum in all of our key international markets.

Despite ongoing challenges of the global economy, our sales have continued to perform well across the globe, with performance in each of our top ten markets improving our year-over-year basis in the first quarter. Our strategy of evaluating opportunities a board on a market-by-market basis is proven to be the right strategy for our company.

The most approach in the US, our goal is to offer our premium denim, sportswear, and licensed merchandise, international consumer through a mix of True Religion branded retail stores and premium international department stores and boutiques. We entitle our investment strategy to these specific market opportunities. Our approach includes company owned retail stores, wholesale distributions, joint ventures, franchises and licenses.

Now, turning to Asia, where we have several key developments in the works that I would like to discuss. You may recall some prior discussions that John Geering joined us in October 2009 to be our General Manager of Asia Pacific. Asia Pacific encompasses made distinct markets for our company including Japan, Korea, China, Singapore and Hong Kong were John entering in our base.

Our Asia Pacific efforts in 2010 are focused on increasing our presence in Japan, transition to company managed business in Korea and managing and building stable wholesale relationships in Hong Kong and other parts of Southeast Asia for 2011 sales. Our efforts in Japan are led by our country manager. John has recently hired a new country manager with significant retail experience in Japan.

We haven’t placed the brand manager in a wholesale sales team to serve boutique customers. We use two third-party distributors to serve the Japanese department store channel. Our first full price branded store in Japan would be (Inaudible) section of Tokyo with premium, (Inaudible) brand nearby. The store is 1,294 square feet. The work designed by and build-out was managed by our team here in Verdun to make sure our D&A lives in the store.

We see this full priced store as the key component to building our brands in Japan and this still will showcase our entire collection including our newest style, which should strength in our brand in Japan. We will support the store openings with grand opening activities and much more peer in marketing than what we typically do in the United States.

Jeff will travel to store opening and he with the press to describe the history and culture of True Religion brand. We expect to open our next company on store in Japan in 2011. Another focus for 2010 in Asia Pacific is taking more control of our brands in Korea. Today Korea is our largest market in Asia. In the first quarter, we established a subsidiary in Korea (Inaudible) brand manager, who previously worked in Korea for Burberry, Zenith and products.

We are setting up a showroom installed and we are trending one of our design team members from our headquarters to sell to assist our Brand Manager especially with product knowledge. A small team we’re focused on selling our full collection to the premium department store, boutiques and e-commerce customers in Korea.

We were shipments directly from our DC here in Verdun to the larger Korean account and where we used third-party distributors to service the needs of smaller accounts that our Brand Managers signs to the distributors. We’re taking this steps gain more control of the wholesale business, which was previously handled by distributor.

In the future, we expect to look at opportunities to expand into branded retail stores in Korea possibly by a franchising. A sum of sales that we are generating and the skills of the team we are assembling in Korea, we anticipate growth in the future from the Korean market.

Our Hong Kong based wholesale sales team, is taking off some distributors and some markets and developing new opportunities and other markets. Their market focus includes Hong Kong, Taiwan, Singapore and the Philippines. As of now, we are little penetration in these markets. The team in Hong Kong will present the full spring 2011 collection to these customers beginning later this quarter.

Our current sales of these markets are small, but the early indications are very positive that they can generate meaningful year-over-year net sales increases beginning in the first quarter of 2011. This import our overall growth in Asia Pacific, we’re also developing a franchising program to standardize our approach to the rollout of branded True Religion brand jeans stores in markets, we believe the local knowledge may want a franchise approach.

Beyond the dressing sales growth in Asia, we also are active in expanding our trademark license region to clue the way for future sales growth and to increase efforts that help restrict account for merchandise from entering, from interfering with global sales.

Overall, we see a very promising outlook for our long-term growth in Asia as we leverage our iconic American premium denim brand image. We look forward to updating you on our progress in this region.

So in summary, though international sales in the first quarter increased 22% over the prior year, we are still relatively young and under penetrated brand outside the United States and we continue to see significant upside to our international business. We are focused on identifying additional growth opportunities abroad and making appropriate investments to solidify our status as the global premium lifestyle brand.

Now I would like to ask the operator to open up the call for questions.

Question and Answer Session

Operator

(Operator Instructions) Our first question comes from Eric Beder from Brean Murray.

Eric Beder - Brean Murray

Could you guys talk about a little bit about how is the new natural sales forces settling in and what kind of advantages, what kind of gains are you seeing from the sales force in terms of putting it internally now?

Lynne Koplin

The sales force is now comprised of 15 people, inclusive of 10 specialty stores reps on both Coast and five major store reps and basically we have just completed the hiring of a sales analyst to assist in working with the store to analyze sales on a door-by-door basis. We’re in the process of finishing up hiring the retail coordinator position, which there will be five in the stores, working with the stores directly and making sure the merchandise presentation is at its best and also the stores were stocked on a door-by-door basis side wise.

So that has been completed just in the last three weeks. What we’re seeing is a much, much more favorable response on our customer side with the amount of interaction that we’re having with them now and the interest level in our business both on the specialty stores side in particular, we’re traveling to the accounts, which we have done in a very long time. So we’re very, very happy about that and you’re seeing the increase in the specialty stores businesses as a result of it.

Eric Beder - Brean Murray

Could you talk a little bit about the London opening, how should we think about European expansion and what you wanted to do there?

Jeff Lubell

Well, I think the London store is a very much a test store for us. We’re interested in getting that open and really understanding the potential of the brand, in particularly at the price point that we’re at there. I mean which are anywhere from 40% to 50% more expensive than they are in a state. So we want to get that open, we want well understand the marketplace, understand the different product mix that we can sell in their before we take any more steps for further expansion in Europe.

Eric Beder - Brean Murray

Finally one of your key competitors have joined some financial difficult, what do you think in terms of the competitive arena in the US?

Lynne Koplin

I would say right now we’re obviously looking to take some of that real estate that is one thing that we’re finding out and talking to our major accounts is that our competition is shipping late and having to offer discount and basically it’s an opportunity there for market share increase, which is really what we’re looking at. The product on their side is not performing as well and I think the market in general is going to get smaller and will increase our market share as the result of it.

Operator

Our next question is coming from Todd Slater from Lazard Capital Markets.

Todd Slater - Lazard Capital Markets

I was hoping you could give some color on the wholesale order book, which I think you said was up 11%, how should be thinking about that impacting the second quarter wholesale revenue, that’s my first question?

Jeff Lubell

The order book to give color on it included international as well as our full price US Wholesale side and what we said that the US Wholesale full place component the order book was up slightly and that was the first time in six quarters that we’ve seen that discussions that Lynne just laid it through as it relates to the impact of our sales team is driving a lot of that improvement in the order book.

So we’re very pleased with that, but the order book is a good indication as we move into the quarter, but you remember that we’ve decided in the past that roughly 25% of our sales are written in the quarter. So it’s good to start the quarter with a little bit ahead of where we were. Last year, we’ve forgot a lot of work to do to execute from all the way from design sales of credits to get the type of sales we’re looking for this quarter.

Todd Slater - Lazard Capital Markets

How is that order book trending going at the end of the fourth quarter going into first quarter?

Jeff Lubell

I don’t have that in front of me as far as where we were from fourth quarter at December 31, you’re saying Todd?

Todd Slater - Lazard Capital Markets

Yes, I mean this seems like a much more firm order book and so it seems to me, we should be thinking about in the significant improvement in the wholesale trend in second quarter?

Jeff Lubell

The international business has been consistently doing well, Todd and that’s been ongoing.

Todd Slater - Lazard Capital Markets

Could even up slightly in US is pretty good results?

Pete Collins

So that why we called that out 30% in six quarters we’ve been able to report this.

Todd Slater - Lazard Capital Markets

Give us some color on how we should be thinking about that impact on second quarter wholesale revenues?

Pete Collins

As we said it’s a good start to the quarter, but there’s still plenty of gain between the quarter and we’re going after.

Todd Slater - Lazard Capital Markets

Let’s move order to talk a little bit about the retail side, the direct side. If you maybe can talk a little bit of the performance in the stores women’s versus men’s regional difference maybe full price versus outlets, how the Easter, the holiday shift maybe impacted the comp and how we should be thinking about that shift that impact on second quarter comps?

Laura Miller

The performance right now on our retail stores side has basically been very, very good, it’s strong. What we’re seeing though is a little bit of shift from women’s into men’s. The average unit retail is impacting that, we’re selling a higher percentage of high price product on the men’s side to over $300 range as opposed to women or trends are really dictating what women are buying rate now for the spring summer timeframe. So you’re looking at to trends impacting the retail because we’re selling short, skirts etc. So in general, the both businesses are healthy, just a little bit of a shift.

Todd Slater - Lazard Capital Markets

On full price versus outlet and then maybe you can also talk a little about sportswear versus denim, denim versus non-denim as well?

Jeff Lubell

As far as full prices versus outlet, both continued to be positive and we’ve seen good trends kind of across the Board just as we get back in the fourth quarter. So we’re very pleased with the performance that we see kind of end-to-end within the business. From a region perspective, we saw very good business in our Southwest region, which is primarily Texas and also in Northwest region, which includes Las Vegas and then as far as sportswear goes, we delivered a 26% of our sales in the quarter were made at the sportswear merchandized, which is consistent with the run rate we were on a year ago.

Todd Slater - Lazard Capital Markets

Then just Easter shift, does it have an impact?

Jeff Lubell

The same store increase that we just reported was something we saw consistently throughout the quarter, it started strong in January and it was strong probably through at the end of the quarter. The last week of March was a good week, but it didn’t significantly move the needle for us, the whole quarter was good.

Todd Slater - Lazard Capital Markets

Then on the inventory down 10% per square foot, just wondering how much of that is related to sort of average price and how much to, let’s say actual unit decline? I’m assuming that’s a dollar or it’s kind of metric?

Jeff Lubell

It is, yes.

Todd Slater - Lazard Capital Markets

Average prices were down, so I’m just wondering we had similar kind of units is a pricing internationally or --?

Lynne Koplin

Yes, the price is down about 89%.

Pete Collins

It’s inline with the pricing and we touched a lot more will double the percentage of sales in that lower grade category, the 172 to 216 for women versus where we were a year ago going from 14% to 30% on a year-over-year basis.

Todd Slater - Lazard Capital Markets

Lastly, just can you talk about any inflationary pressures you might be seeing on the transportation cost related to the oil or raw material cost related to cotton and so on?

Jeff Lubell

We’re fortunate that, a lot of our merchandize is new fashion each season, and so we’re able to work with our suppliers both the contractors as well as the raw materials player and get an idea about where the costs are trending and then we can dig that into the wholesales selling prices after we have a good idea about where our costs are going to be. So we don’t anticipate significant impact from raw material input price changes as it relates to our margins going out into the future.

Operator

Thank you, our next question comes from Christine Chen from Needham & Company.

Christine Chen - Needham & Company

So, I was curious on you know you talk about the shift amendments higher price pointing selling better with the guys, why are the guys less price conscious do you think than the women’s, I mean I understand the shift assorts, but if you can talk little bit that?

Lynne Koplin

Well I think that women are definitely impacted more by seasonality. Women right now are buying products that are more seasonally influenced, so you’re seeing that crop shorts white et cetera., all these lower price point trends lagging in for instance, which has been pretty much as a major is about 20% to 25% penetration of their inventories and their sales that’s really what dictating the women’s trend, men loves our Super Ts and our Super Ts, which is our (inaudible) signature looks in a jean is really there just continuing to sell like you cannot believe our guy wants to be very identifiable if you wants to be seen in true religion and he is buying and we cant keep them in stock its really pretty incredible and you know it’s unique to our brand and I think that really hasn’t impact of why it does so well.

Christine Chen - Needham & Company

And then sportswear, if you could talk about any differences in the selling approach on the wholesale and one has certainly noticed in the stores that its getting more prominent displays as far as tables and fixtures and wondering how you are sales process might be changing with the…

Lynne Koplin

Are the way we merchandize a line when we should, the collection save sports ware until the end of the presentation we incorporated into the presentation and should look and merchandize the product in with denim. So that is really impacted it, also we are showing sportswear more in cover story and we are flowing the product a little bit differently than we have in the past that’s having the impact and I think right now we’ve really capitalize on the (inaudible) trend and that’s where we are seeing a lot of increase in sales and then also in [huddies] and then t-shirts obviously are huge for us so we really on trend with every categories and then.

Christine Chen - Needham & Company

And then with respect to comps, the up 18 is pretty awesome, is it traffic conversion, transaction size, all of the above?

Jeff Lubell

Well, it’s really a conversion rate I mean we’ve continued to focus on training within our stores as well as improving the merchandize mix, but we’ve increased conversion close to a point in the first quarter, so that’s clearly driving the same store sales increase.

Operator

Thank you. Your next question comes from Eric Tracy from FBR Capital Markets.

Eric Tracy - FBR Capital Markets

I mean shift there little bit focused on the margin side, if I could, first on G&A, Pete, I know you sort of alluded to this in terms of tapering off in the back half, but maybe just kind of talk about this incremental expenses be it to the transition or ERP system sort of the (inaudible) and maybe their magnitude of how we should think about that tapering off the balance of the year?

Pete Collins

We’ll just get a run through, the best way really I think about it, Eric, is by segments so within the consumer direct segment we talked about how the SG&A rate actually came down on a year-over-year basis, but you’re going to think the same-store sales increase primarily, but as we continue to rollout stores over the rest of the year you’re going to see an increase in that spending. And the US Wholesale segment we talked about the depreciation associated with our systems and as I’ve mentioned that was about $500,000 in the quarter, that’s something that’s going to be ongoing.

We increased our advertising spend which is another investment that we’re making for the year that as about $400,000 and we see that on going especially the second quarter and then the other component that we talked about comes at the end of the year, but we have some incremental selling expenses with our sales teams, that Lynne was talking about, as we’ve got down ramped up now and kind of in a fixed cost, we are also paying the commission to our former sales agents.

So that cost was roughly $600,000 in quarter, in that business the component was going to taper off as we move into the back half of the year it will be slowing in the second quarter, but then it really wrapped up the end of the second quarter and then it is a factor in the back of the year.

Moving into international area, we’ve invested a lot in international and it wasn’t just in this quarter, it started only back last year as Michael talk in his remark about John Geering coming on board in the fourth quarter of last year, he setup a team over in Hong Kong and we also put in place a Director of International Business Operations here at our headquarters to help facilitate the growth between here and teams out in the fields.

In this quarter, we added a sales team in Hong Kong to begin selling especially heading into spring of 2011. We set up a subsidiary in Korea and we hired a brand manager in Korea. And then the other things we got going on right now is investing in these stores specifically in Tokyo and London.

When we look at how we performed in the quarter from an international SG&A perspective, we do have probably about $500,000 of costs that I don’t expect this to barely recur, but if you strip that out, the rest out that is pretty much the run rate that we’re looking at. And then we’ve got the costs that are becoming associated with the new stores in Tokyo and London.

Eric Tracy - FBR Capital Markets

Okay. So the sales transition sort of the redundancy that sort of tapers and softens and then that’s fully gone after future, is that correct?

Pete Collins

For the sales team, yes.

Eric Tracy - FBR Capital Markets

Okay. In terms of the gross margin again should we not expect the mix shift direct-to-consumer and even international continues to ramp, any other puts and takes that we should be thinking about that would necessarily change that from continuing?

Pete Collins

No, I think that we’ve been consistent as our sales mix has shifted more towards our Consumer Direct segment that our gross margin has expanded and like you have got a chance to look at the table and the press release or the earnings release that you can see that on a year-over-year basis, our segment margins were very consistent, so that part of the business, the combined figure to expanding, the components are relatively stable to so it’s an easy explanation as to why it’s going, it’s just the mix of more sales coming from Customer Direct.

Eric Tracy - FBR Capital Markets

Okay, and then maybe just turning to again, you talking about the backlog in US Wholesale churning up slightly. How you guys thinking about it in terms of inventory positioning if in fact consumer demand stabilization does persist in back half, I know a lot of it’s on replenishment and sort of in the quarter, but how are you all thinking about that just still being relatively cautious I mean it was reads from the retailers, in terms of how they are thinking predicting in the back half of the year?

Lynne Koplin

Right now we are looking at all of our replenishment programs to make sure that we are in the right styles. That’s something that we for the last three months have been looking at and analyzing at returning to the level that restores on them. Also from a planning standpoint we have put in planning team that basically will oversea all domestic international wholesale and retails so that we can start looking at it as really an entity instead of looking at it as separate pieces.

And the style is good and we can use our retail stores to really test and really see if something is going to perform on a small store basis and react quickly. So, that’s the advantage of having a strong retail store business, if it can teach us a lot about what we should be putting in the wholesale channel. We also have a production model where we can react very, very quickly and it is something that we need to take advantage of and not own a lot of inventory for these stores and be able to react to them and they have a good seller.

Eric Tracy - FBR Capital Markets

Lastly on pricing, you talked about the retail piece, maybe just on the wholesale, again I know there is some seasonal aspects that are sort of pulling it down, but maybe just talk about if there is anything systematically going on, something particularly in the women side sort of remains at these levels, again I know you sort of producing products to that margins so there is going to be an impact there but just overall sort of industry trends on the wholesale side.

Lynne Koplin

(Technical Difficulty) impact prices going higher just due to the fact that all will go back in to ‘10, we also go into much more of a Vintage Wash trend, not the dark washes which are at the lower price point so be a lot more diversification in wash there is also be more diversification in terms of fabrication as we introduced corduroys and some non-denim classifications that we feel is important as we go into fall. And then just from a (inaudible) stand point it’s moving from this skinny and legging category into a fuller flair (inaudible) which is also going to increase the average unit retail, plus finally maximizing the business on the Super T side on both men and women. So that’s penetration is increasing.

Eric Tracy - FBR Capital Markets

And sort of from a year-over-year perspective in the fall should that pricing be you think higher then it was, say, last fall?

Lynne Koplin

I don’t think it’s going to be very noticeable I think on the women side, you’ll see a little bit of boost, but generally men’s, I think, will be consistent with last year.

Operator

Thank you. our next question comes from Ronald Bookbinder from Global Hunter Securities

Ronald Bookbinder - Global Hunter Securities

Looking at the slight increase in the full price wholesale business, which is just terrific, is that mainly coming from department stores or boutiques and is there a margin difference between sales at the boutiques to department stores versus

Lynne Koplin

I would say it’s generally coming from boutiques, I think we’re seeing in healthier specialty store segment emerge and that’s also a business that we really can replenish and there is a lot of reorder business. It is a higher margin business, obviously on the specially store side as opposed to major, so I think that’s going to impact our margin favorably going forward.

Ronald Bookbinder - Global Hunter Securities

Okay, and you talked about how many people you have in the sales force now, but could you give people a reference as to where you were last year?

Jeff Lubell

Well, I remember a year ago we had an independent sales agent that was managing this 13, was about 10 people, so we got 15 today plus the other resources that Lynne mentioned, specifically signing resources as well as to merchandize coordinator group that we’re establishing overall incremental through what those agent was, how she was managing in the past. So it’s a significant increase from the headcount perspective, plus don’t forget that you impacted our (inaudible) travelling now. We’ve invested a lot more in that out of pocket category then what the sales agent was doing. We have been very pleased with the results from that, the accounts, they want the service, they want to take people and we have been able to get some nice increases in that was associated with, clearly what I’m trying to say is, getting a nice payback from incremental travel. So overall, we’re very pleased with the transition.

Ronald Bookbinder - Global Hunter Securities

Okay. And looking at the licensing business, it look like it ticked down sequentially from Q3 to Q4, are there any new licenses coming on mind that we should start getting revenue from that that we’re going to see that go back to increasing?

Jeff Lubell

I think to withdraw the sequential result you factored that, it is really just the seasonal aspect of the sales. So fourth quarter you’ve got holiday in there and we’re able to recognize licensing revenue when our additional licensing revenues when our licensees exceed their minimum and it was more of that in the fourth and than you would see in the first quarter which is to be expected from a seasonal perspective. As far as new licensees, we’re constantly evaluating licensing category and at this point there is nothing to report.

Ronald Bookbinder - Global Hunter Securities

Okay. In your text you talked a lot about all what you are doing in Asia, I know you don’t want to break out on a dollar basis, but what percent or how much larger is your Asia business compared to your European business?

Jeff Lubell

Well, there is actually a fair amount of balance when you think about the kind of three parts of the world that we sell to and you look at it as Asia, Europe and North America which is excluding the US, which would be Canada and Mexico. Asia would be largest, Europe would be second and then North America would be third. But that is said, that there is still a lot of balance between Asia and Europe, it’s not a huge difference between the two. What is different about them is that we are direct investments into Asia at this point and we have it beyond the store in London that we’re going to opening this month. We haven’t solidified direct investment into the European market yet.

Operator

Thank you. Our last question comes from Dorothy Lakner from Caris & Company.

Dorothy Lakner - Caris & Company

Just a follow-up to-date on the new sales team and the transition here, I mean clearly it sounds like you’re really getting results from your efforts on the boutique side of the business with reps seeing out there and traveling and really getting into the business. I think when you were finalizing the coordinators on the department store side.

So just wondering when we should expect some impact or a little bit more impact on the department store side, second quarter or more in second half and then just wondering what you’re hearing generally from department stores whether or not you feel that they’re sounding more perhaps a bit more optimistic than they were even back at MAGIC, if you’re hearing anything here?

Lynne Koplin

I would say generally we’ll start to see the retail coordinator program by fall. Right now we have the East Coast covered and we have not yet hired for the West Coast, but East Coast is where we have a tremendous amount of product penetration. So you’ll see a lot of that impacting the Northeast and Southeast.

In term of the level of optimism on the department store side, I think they are cautiously optimistic and I would say, I don’t think right they’re spinning out of lot of inventory.

Dorothy Lakner - Caris & Company

Right.

Lynne Koplin

They’re very focused on improving their churn and that’s one of the reasons why we’re in there to really kind of analyze their business with them and run it very much the way we would run our retail business. So we’re really going in and planning the business a lot more closely with them. So I think you’ll probably see the impact again by fall.

Dorothy Lakner - Caris & Company

Then just in terms of the overall wholesale numbers, have there been any change in the composition there, Pete between department stores, boutiques and off-price?

Pete Collins

As we talked about on the call, we tied back the off-price business, sales doesn’t count for down 26% or $2.3 million, which is writing the volume at the $10 million reductions we had planned for the year, the majors down 16% and change percent and then the boutiques were down 5.3%, Dorothy. So when you think about sales team coming on, they were able to make a more immediate impact with the boutique and it’s a little bit longer kind of lead times in making that impact with the majors.

Dorothy Lakner - Caris & Company

Sure. But in terms of the overall numbers, boutique, it sound like they were bigger portion of the mix than they were before...

Pete Collins

They are growing. It’s still relatively speaking, and [50, 25] that was the type of a mix, yes.

Dorothy Lakner - Caris & Company

So that really hasn’t changed?

Pete Collins

Not significantly yet.

Dorothy Lakner - Caris & Company

If Michael could comment perhaps little bit more on the new country manager under your pan where you know how that person differs from the manager before and what the background is and so forth?

Michael Buckley

We’ll the person that we hired, he’s more of a retail background and I think we went in that direction, we think the significant wholesale growth in our market place, but quite frankly if I look at some of our competitors, in particular Diesel, 80% to 90% of that business in that market today is vertical retail so we clearly wanted something with a skill set that’s heavy on the retail side, get locations build that stores and really drive that side of the business.

Operator

Thank you. At this time I would like to turn the call back over to Mr. Lubell for any closing comments.

Jeff Lubell

Okay thank you for you time today, we greatly appreciate your continued support and interest in True Religion. As always should you have any follow-up questions, please do not hesitate to contact Pete Collins or ICR.

Operator

Thank you. This does conclude today’s teleconference; you may disconnect your lines at this time. Thank you for your participation.

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