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True Religion Apparel (NASDAQ:TRLG)

Q2 2012 Earnings Call

July 31, 2012 4:30 pm ET

Executives

Jean Fontana - Senior Vice President

Jeffrey Lubell - Founder, Executive Chairman, Chief Executive Officer, Chief Merchant and Chief Executive Officer of Guru Denim

Peter F. Collins - Chief Financial Officer, Principal Accounting Officer and Assistant Secretary

Lynne Koplin - President

Analysts

Eric M. Beder - Brean Murray, Carret & Co., LLC, Research Division

Scott D. Krasik - BB&T Capital Markets, Research Division

Diana Katz - Lazard Capital Markets LLC, Research Division

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Susan K. Anderson - Citigroup Inc, Research Division

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Janine M. Stichter - Telsey Advisory Group LLC

Dorothy S. Lakner - Caris & Company, Inc., Research Division

Operator

Greetings, and welcome to the True Religion Apparel Incorporated 2012 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jean Fontana of ICR. Thank you. Ms. Fontana, you may begin.

Jean Fontana

Thank you. Good afternoon, everyone, and thank you for joining us today to discuss True Religion Apparel's second quarter 2012 financial results. By now, everyone should have access to the earnings release, which went out today at approximately 4 p.m. 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. We've also posted on the site the detailed management commentary on our segment results for the second quarter of 2012. This call is being webcast, and a replay will be available and archived on the company's website.

Please note that all information discussed on the call today is covered under the Safe Harbor provision of the Private Securities Litigation Reform Act. We caution listeners that during this call, True Religion management will be providing financial guidance and making other forward-looking statements regarding future financial results and business opportunities. We encourage you to read the 2011 10-K, the upcoming 2012 second quarter 10-Q and other reports that we file periodically with the SEC. These documents contain a discussion of the risks facing our business, including factors that could cause these forward-looking statements to not come true. The company does not currently intend to update these forward-looking statements except as required by law.

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

Jeffrey Lubell

Thank you, Jean, and good afternoon, everyone. Thank you for joining us today as we discuss our financial results for the second quarter 2012. Speaking on the call with me today are Lynne Koplin, our President; and Pete Collins, our Chief Financial Officer.

Our total net sales increased by 7% for the second quarter. Our U.S. Consumer Direct and U.S. -- and wholesale segments continued to produce steady net sales growth. And our U.S. Consumer Direct business, which grew by 10%, driven by a 2.4% same-store sales increase and 20 new store openings since the end of the second quarter last year.

Our U.S. Wholesale segment net sales increased 7% year-over-year, driven by our men's business, including in the specialty channel. Men's represents 63% of our total Wholesale business so far this year. The International segment's net sales declined by 2%, which was in line with our expectations. We opened 5 International stores in the quarter: 3 in Canada; 1 in Ireland; and another in Australia. Lynne will go into some detail on new initiatives we have put in place in the International segment.

My overall read on the company's results for the second quarter is mixed. While our largest segment, U.S. Consumer Direct, had a same-store sales increase, we did not achieve our sales plan for the segment. Many factors contributed to this outcome, including a weaker response toward our spring and summer merchandise assortment, a more promotional shopping environment and negative economic news which impacted consumer spending. But we managed our business throughout the quarter, including the initiation of a semiannual sale, expanded sales efforts to specialty accounts in the U.S. Wholesale segment and overhead cost discipline. These efforts allowed us to exceed our second quarter earnings per share forecast.

Pete will discuss our outlook for the rest of 2012. Although we maintained that the overall retail environment will still be challenging in the fourth quarter, we anticipate that we will be better prepared with the right mix of merchandise between both men's and women's and denim and sportswear. We have rededicated our design efforts to updating our best-selling classics, while also adding a compelling collection of novelty treatments and fabrics that will attract new customers.

With that, I would like to turn the call over to Pete, who will discuss the key financial highlights of the quarter. Pete?

Peter F. Collins

Thank you, Jeff, and good afternoon, everyone. I will begin with some additional color to Jeff's comments and then will provide details on the quarter. Also, I will discuss our updated outlook for the remainder of 2012. As a reminder, we have posted a detailed financial commentary of our segment results for the quarter and year-to-date in the Investor Relations section of our website.

Our U.S. Consumer Direct segment's net sales increased by 9.4% to $64.4 million as compared to the prior year. Our same-store sales increased 2.4% in the second quarter, which was below the result we expected. During the quarter, we opened 7 branded retail stores and we relocated 1, bringing the total to 116 stores at quarter end, compared to 102 stores at the end of the second quarter of 2011.

U.S. Consumer Direct segment's gross margin decreased 310 basis points versus the prior year period to 69.8%, primarily because we recorded higher discounts to clear slow-moving women's merchandise in our outlet format stores. The U.S. Consumer Direct segment's SG&A rate increased in the second quarter of 2012 versus the second quarter last year by 70 basis points to 37.0% as a result of adding merchandise planning and volume resources plus field management to support this expanding business. The segments four-wall SG&A rate leveraged by 90 basis points due to improved labor scheduling.

This segment's four-wall operating margin decreased from Q2 2011 by 140 basis points to 39.2%. This reduction is due to the gross margin decrease. This segment's overall operating margin decreased 390 basis points to 32.7% due to the gross margin reduction as well as the addition of buying and management resources.

Our U.S. Wholesale segment's net sales increased by 6.7% to $22.4 million, which was ahead of our plan and represents the second consecutive year-over-year increase in this segment's quarterly net sales, the first time we achieved this since 2008. Growth was driven by a 17.8% increase in sales in the specialty channel, where we now have achieved 9 consecutive quarters of year-over-year net sales growth. We are very pleased with the continued momentum in our men's specialty store sales, which is by far the largest sales category -- the segment's largest sales category.

Net sales in the off-price channel were up 34% over the last year period, as we had more excess Consumer Direct inventory to clear. These sale increases were partially offset by a 25.3% decline in net sales of the Majors, which was primarily driven by the reduced demand for our women's merchandise in this channel. The annual guidance update that I will present shortly assumes that our full year 2012 off-price sales are similar to the 2011 off-price sales amount.

The U.S. Wholesale gross margin declined by 210 basis points, primarily due to the increased sales of excess merchandise to the off-price channel. We achieved a 220-basis-point increase in operating margin in this segment, primarily due to a reduction in bad debt expense.

In our International segment, net sales decreased by 2.0% to $17.7 million, and were in line with our plan. The segment's Wholesale sales decreased primarily in Canada, and as expected, in Korea. This Wholesale sales reduction was mostly offset by a 114% increase in retail net sales, a direct result of opening 14 International retail stores since the end of the second quarter of 2011. We opened 5 International branded retail stores during the second quarter of 2012 and we operated 23 stores as of June 30, 2012, compared to 9 stores at the end of the 2011 second quarter.

The International gross margin expanded 550 basis points, driven primarily by our sales mix shift to retail, which earned a higher gross margin than our Wholesale business. The International SG&A expense increased 31.6% due to the operating cost associated with the additional 14 branded retail stores.

Turning to our Core Services segment. Our Core Services' SG&A expenses decreased $2.2 million, primarily due to a $1.5 million litigation settlement expense related to a trademark litigation settlement in the second quarter of 2011. Adjusting the Q2 2011 Core Services' SG&A to exclude the litigation settlement expense, Core Services SG&A as a percentage of total net sales decreased 180 basis points in the second quarter of 2012.

Overall, our net sales grew by 6.8% in the second quarter, driven primarily by the U.S. Consumer Direct segment, followed by the U.S. Wholesale segment. We are pleased with the direction of our U.S. Wholesale business and we believe that we can improve the same-store sales trend in our U.S. Consumer Direct segment when we offer a more balanced merchandise assortment later this year.

The overall gross margin declined by 120 basis points to 64.3%, due to -- due mostly to higher discounts of slow-moving women's merchandise in our outlet stores and in the off-price channel.

Our overall operating income for the quarter was $16.6 million, or 15.9% of net sales. In the second quarter of 2011, operating income was $15.2 million. Excluding the 2011 litigation settlement and bad debt expenses, the operating margin in the second quarter of 2011 was 17.7%. Net income attributable to True Religion Apparel Inc. was $9.8 million or $0.39 per diluted share for the second quarter of 2012.

For the second quarter of 2011, net income attributable to True Religion Apparel Inc. was $9.4 million or $0.38 per diluted share, and excluding the litigation settlement and bad debt expenses of $0.05 per share after tax, was $0.43 per diluted share in the second quarter of 2011.

Turning to our balance sheet. We ended the quarter with cash, cash equivalent and short- and long-term investments of $201.1 million compared to $173.7 million at the end of the second quarter last year. Inventory at the end of the quarter was $57.9 million, an increase of 22.3% from a year ago. The largest components of this inventory increase is linked to our expanded retail store count, which increased 25.2% over the past year and the expansion of our Direct Wholesale sales in our EMEA region, where we now store inventory at a third-party logistics facility to support the region's Wholesale sales growth.

Following the end of the second quarter, our Board of Directors approved our second quarterly cash dividend of $0.20 per share payable on August 29th, 2012, to holders of record on August 15, 2012.

Next, I want to comment on our outlook for the second half of 2012. In Q3, we now expect our net sales will increase by mid-single digits from last year, as our retail store count gross will be offset by lower sales in women's merchandise in our U.S. full-price sales channel. The third quarter forecast anticipate a flat-to-low, single-digit sales increase in the U.S. Consumer Direct segment.

International net sales are anticipated to be flat to last year in the third quarter. Earnings per share in the third quarter are expected to be $0.45 per diluted share based on a share count of 25.3 million shares and an effective tax rate of 38.5%. We are expecting an improvement in the year-over-year sales trend in the fourth quarter as compared to the expected third quarter sales growth, thanks to the merchandise mix changes we are taking. This is expected to deliver a low-single-digit, same-store sales increase in the U.S. Consumer Direct segment in the fourth quarter.

Overall, for 2012, we are anticipating net sales of $450 million to $455 million in earnings per diluted share of $1.80 to $1.86 per diluted share, with shares outstanding at 25.3 million and an effective tax rate of 38.6%. With that, I'd like to turn the call over to Lynne for her remarks about sales trends and other developments. Lynne?

Lynne Koplin

Thanks, Pete. I'll begin with some additional details on our results for the second quarter, building upon the explanation Pete provided. I'll also update you on the progress in the overall business.

As you know, our strategy is to build a brand that is dual-gender, multichannel and globally distributed. This enables us to focus our efforts on areas we believe we can achieve the greatest return. We are driving sales in our men's business, where we believe we can continue to build upon our strong foundation and momentum and we're stabilizing our women's business. We continue to expand our U.S. retail store base, which gives us greater control over our brand and access to our loyal customers. We also have a significant opportunity to expand in International markets through both Wholesale and retail channels, and we have built a talented management team to execute on our growth opportunities.

Beginning with our U.S. Consumer Direct segment, our same-store sales decelerated from the first quarter, as Jeff and Pete talked about already. Our same-store sales were weaker in April as our new style did not connect with women at the same rate as our iconic branded merchandise had in the past. The 2.4% same-store sales growth was driven by strong performance of our men's business at full-price stores and our outlet business, offset by weakness in women's.

Our men's business continues to benefit from strong brand loyalty among our customers, as well as favorable response to newer categories like corduroy pants and cargo shorts.

In our women's business, we introduced 4 new collections of denim bottoms replacing some of our classic best-selling styles. These new collections, which represented subtle True Religion Brand Jeans did not resonate well with our customers. While we are committed to expanding and evolving our assortment to include fresh and innovative new merchandise, we were overly aggressive with the pace of change this season. While we will continue to make every effort to provide an exciting merchandise offering to our customers, we will need to be more strategic in the way we introduce new product concepts and maintaining better balance between new collections and core styles that are familiar to our repeat customers. We expect to have a better balance and more of our branded iconic merchandise in the stores by the beginning of the fourth quarter. This should help our fourth quarter same-store sales trend and especially in the important holiday season.

Turning to our outlet business. Our sales growth was led by the men's merchandise, especially tops, shorts and denim pants. In the women's category, the outlet stores, the sales trends were challenging because we had a higher mix of slow-moving transfer merchandise that we discounted more heavily. We expect that by the fourth quarter of this year, we will have aligned the assortment with an increased mix of women's design per outlet merchandise, which will improve our gross margin because the DFO merchandise earns higher gross margins.

Overall, for our Consumer Direct segment, we saw strong sales in our sportswear business, driven by higher sales in our shorts and tees categories. Sportswear represented 37.3% of the total U.S. Consumer Direct sales, up from 31.8% in the second quarter last year. The improved performance in our sportswear offering was attributable to enhanced design and merchandising efforts. We expect sportswear to grow at a faster pace than denim as we continue to diversify our merchandise base.

Looking at our U.S. Wholesale segment. As Pete mentioned, we remain very pleased with growth in our men's specialty store business. Our total Majors business was just slightly below plan due to women's, while our off-price sales were higher than expected due to the softer-than-expected, full-price retail sales. We believe we have a good opportunity to continue to gain market share in the men's business as we deliver an expanded assortment, including cargo shorts, denim jackets and vests, and a broader range of knits. We believe that we can broaden our customer base as we continue to introduce increased breadth to our assortment.

Our International business declined 2% as strong growth in our branded retail business was offset by sales declines at Wholesale. We continue to see good traffic trends at our retail stores as we fine-tune our merchandise offering and provide fresh shipments more frequently to drive higher conversion rates. We are developing merchandise planning and buying skills for our key markets, including the U.K., Canada and Asia-Pacific. These planners are expected to tailor our merchandise offering to cater to the local fashion preferences while also incorporating aspects of new merchandise from our overall seasonal collection. And our teams in Europe, especially in Germany and Switzerland, have been developing and sourcing new sportswear styles under Jeff's direction. The fall 2013 season will be the third season with this new sportswear concept, which will be sold in our retail stores in Europe and North America.

Our new VP of International, Giuliano Sartori, has been with us now for about 3 months. He has brought a seasoned perspective to our business prospects in Asia and Europe. He is in the process of analyzing our business in our larger International markets. Giuliano shares the goal that Jeff, Pete and I have to build our International business on a solid foundation so it produces sustainable operating profits for years to come. Our International priorities include working with successful, established partners, merchandising each key market to accommodate their local preferences and planning and pricing our products strategically. I look forward to updating you on our progress in the upcoming quarters. Now I'd like to turn the call over to the operator to open the line for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Eric Beder from Brean Murray.

Eric M. Beder - Brean Murray, Carret & Co., LLC, Research Division

Since running International, could you give us an update on where we are with Korea?

Lynne Koplin

Yes. Basically, Giuliano is in Asia right now. We are at a point with Korea that we are in the process of being very realistic about what the business prospects are for the balance of the year, and we've taken the plan down to a level that we feel is appropriate for the amount of products that we want to ship in for the balance of the year. We have a new country manager that started about one week ago who is very, very experienced in the industry and will help us find the right balance between how we want to manage at retail. We're going into more of our own controlled retail environment, taking control over distributing the product ourselves, and as we go into next year, really realistically planning what we expect. It'll probably take about another 1.5 years to clean up and set it right.

Eric M. Beder - Brean Murray, Carret & Co., LLC, Research Division

Okay. And in terms of -- if I look at the comp that you came out with for the stores, is there a split there between full-price and outlets or was it pretty much the same?

Peter F. Collins

Well, Eric, I'll take that. The full-price was very slightly negative and outlet was positive. But as far as the trend from Q1 to Q2, both of them kind of came down by similar rates from a sequential perspective.

Eric M. Beder - Brean Murray, Carret & Co., LLC, Research Division

Okay. And I know that for the back half of this year, you brought in a new design team for women's. I know you've talked about it in terms of cleaning out the product, other pieces, but what are we going to see differently as that design team comes through? And as we went through the stores, it was interesting. You were starting to roll off entire collections of product versus kind of single items. Is that something we should be thinking about going forward in terms of that thought process?

Lynne Koplin

There is actually quite a few initiatives that we have for the balance of the year. Basically, with respect to the women's business, we had really not supported updating our core programs enough. We've looked at pricing it more strategically and we've got a good new women's basic program coming in at around the $200 price point, which we're very, very excited about. The other thing we had kind of walked away from, which our customer has really demanded from us, is the whole area of embellishment, which obviously traditionally does well in Q4 to begin with for that holiday time frame. So we've really gone and built that business back up again. We've offered a lot of new sportswear programs, whether it's T-shirt, knits, hoodies, gift-giving oriented merchandise and we've really committed a lot to growing the t-shirt and knitwear business in both women's and men's. And then we're actually launching a whole accessories initiative as well. We're finally getting into the belt business, we're getting into the underwear business, we have a new Fragrance launch coming in October. So there's a lot of exciting things, not to mention really growing from a platform of success that we had this past year, which was corduroy, which we're doubling the business in and there's a tremendous amount of excitement coming in that category as well just because the color offering for both men's and women's is expanding in key items. So it may not just be collections, there are key items within those collections. But we're very bullish on the items that we have going forward and we think it's going to be great for both men's and women's.

Operator

Our next question comes from the line of Scott Krasik from BB&T Capital Markets.

Scott D. Krasik - BB&T Capital Markets, Research Division

Pete, can you talk about the components of the sales guidance now? I mean I think you took it down by about $5 million. You gave the comp guidance, but the last comment, I think, was International sales will grow mid-teens. I didn't hear an update there. And then also, expectations now for Wholesale.

Peter F. Collins

Well, as it relates to the second half forecast for International, it's down from where we were at the beginning of the year. So remember back in the first quarter, we talked about how basically the shortfall we were seeing in International versus our original budget was being made up by U.S. Wholesale, which has performed better than we had anticipated. So for the back half of the year, basically that same trend is expected, although U.S. Wholesale, we -- with the excess merchandise we had in some of the women's areas from Consumer Direct, we ended up selling more to the off-price channel in Q2 than what we had originally budgeted. So that was to the tune of about $2 million. So that's going to organize, reduce the plan, the forecast for off-price and U.S. Wholesale in the second half of the year. Otherwise, U.S. Wholesale and International would basically offset each other, with U.S. Wholesale being up and International being down for the back half.

Scott D. Krasik - BB&T Capital Markets, Research Division

Okay. And down in the back half is...

Peter F. Collins

That's -- let me clarify that. I don't want to give you an impression that it's down absolute. It's just down versus budget. So it's still up. It's going to be -- we expect it to be flat, as I said in my remarks, in Q3, but it'll be up on a year-over-year basis in Q4. And that's driven by the increase in the number of retail stores we've got.

Scott D. Krasik - BB&T Capital Markets, Research Division

Okay, that makes sense. And then if you could just comment on the comps? It sounded like comps got better since April. Is that what you were trying to say?

Peter F. Collins

Yes, in the month of -- I'm sorry, in the second quarter, April was the most challenging same-store sales month and it did improve in May and again in June. So what we were saying for the outlook is, is that we're anticipating a flat-to-low, single digit in Q3, and I'm speaking about the overall U.S. Direct-to-Consumer segment and then a low-single digit for Q4. When you add that with the 7.8% that we've done year-to-date, you'll get mid-single digit for the full year 2012.

Scott D. Krasik - BB&T Capital Markets, Research Division

Okay. And then I guess you alluded to it on the last question, Lynne, but maybe talk about your strategies for pricing and for positioning the brand because it seems like you're expecting a lot better sales in the fourth quarter. So is it taking the pricing down? Is it the fashion? What are you counting on?

Lynne Koplin

No, I mean, it's basically kind of covering our bases. I think that the trends that we've seen now for 2 years running at this point is that the women's business becomes really kind of very one-dimensional in terms of what women are buying. It has a price sensitivity to it. When you're looking at core basics, there's definitely a lot of comparison shopping going on, and I think that we really walked away from updating our core products, I think, aggressively. And it's one thing that we really needed to represent. We got -- we went in a lot of different directions, trying to kind of match what was going on in the market and really didn't stick to our roots. So what we did is we kind of developed a core basic program, which is much more price-sensitive. I mean this brand was founded on good classic fit from $172 to $198, and not that we feel we need to be that low, we don't. But at that $198 price point, we think that we have a customer that's always going to be looking for a classic fit. And this applies to both men's and women's. On the higher-end products, on the products that really are -- represent newness and probably a little bit more trend-driven like a lot of the treatment and new techniques, whether they're coatings or prints or whatever, obviously, we know that the price-value relationship there commands a little higher price point when you have something new, and that's where we feel we can kind of hit that mid level. And then in terms of the real classic embellishment, whether it's the Super T, whether it's the Crystal, a lot of newness coming along there. We've also shifted, starting with fall, getting great reaction to it, and that really takes us to that high $350 price point that we still have a huge percentage of our business dedicated to. We just needed, again, to represent newness in that category. So we feel that we that we have everything covered, which we haven't, I think, in spring because the market really went away from denims and I think the market's returning to denims in the fourth quarter.

Scott D. Krasik - BB&T Capital Markets, Research Division

Okay. And then just a couple more. The margin on the stores -- International stores is a little lower than I was expecting. I mean, is that trending that way because there's a handful of stores that are underperforming? Is that sort of where you're targeting now, a mid-to-high teens operating margin for the stores? How should we view that over the next few quarters, few years?

Peter F. Collins

We've been -- the goal is that they should be doing somewhere in the 20% to 25% range for an operating margin, and they did just about 18% in the quarter. So it's not a huge gap. And we've talked in the past that we're not getting the sales productivity out of especially the U.K. stores that we had anticipated. So the -- I guess the good news is that the operating expenses, you can pretty much predict at the time you're signing the lease. Now it's just a matter of refining the way that we're buying and allocating merchandise into the stores, getting it there timely from a replenishment perspective to try to improve that sales productivity. So we've been working on that for 3 or 4 months now. It's really, especially in the U.K., it's an opportunity to identify back in the -- coming out of the first quarter. So we're hoping that by the end of this quarter, we'll start to see some improvement there.

Scott D. Krasik - BB&T Capital Markets, Research Division

Okay. And then sort of last question, Jeff, this is a bigger-picture question. But Hudson brand was for sale. I think that's pulled now. J Brand is looking to do something. Paige took an investor. There are smaller brands out there. What does that say about the premium denim category, how do you view it in its life cycle? Is it capital running for the doors? Is it just an opportunity for more people to come in and where do you think you play in all that?

Jeffrey Lubell

Yes, I think some of the larger brands out there see opportunity with the denim space on the M&A side where they could leverage their International experience. And -- so I think that's why there's opportunity for a lot of brands in our space. They can pick them up for 6x EBITDA and really roll them out with their infrastructure. You take a brand like True Religion, where we're doing it by ourselves and you make a hiccup, you make a mistake, you find out you over-distributed in Korea, you're in too many channels and we have intentions of being a global player is price is a big concern today. Even though on the men's side, it's -- we have a much more loyal customer, and on the women's side, it seems that they are very price sensitive. I do a lot of shopping in the stores, see what's going on out there. The space has radically declined since my inception of 2002 and 2003, where if you take a store like Barney's, the floor used to be in the denim space, about 30% of the business. And today, they don't even have jeans at Barney's. And it's been a very challenging market. It seems like the market in the last 2 to 3 years become very -- looks like almost private label oriented and very generic by nature. And it's all about all those all about in-your-face stitches and big T and single-needle and Super Ts and then this kind of anti-logo brands came about, and I was trying to figure out a way to be -- bring product to the forefront that was differentiated us from them, but keeping the aesthetics and the aspirational customer. It's kind of like the NBA, sometimes you win the championship, and sometimes you don't. And certainly, in the summer, we could've done a better job and it is a disappointment for me. But we are working hard to fix it. For the back half of the year and for years to come, but I think to answer your question, there is a lot of M&A interest in my brand and other jean brands out there. Whether those brands will sell or there is major interest in my brand, I'm not currently up for sale, I haven't hired a private investment banker. So -- but if something does develop, we will bring it to the forefront.

Scott D. Krasik - BB&T Capital Markets, Research Division

Would you ever want to lever up to buy a brand that does well on women, like a Hudson or a J or something or is it too expensive?

Jeffrey Lubell

I think we have the right product on the women's side. I don't know what the mentality is on the Wholesale side versus the retail side and getting this product into the stores. I saw what was coming, I saw what the trends were. We have some very aspirational products that we're going to try to impact for the fourth quarter. Actually, I sent the product to Germany because we were having a couple of shows down there and my German JV partner said, it's some of the most innovative product in the L.A. marketplace that he's seen in many years to come, and he had an exceptional market in Germany. So based on that fact is, we really need to get behind it, buy it, plan it, allocate it, ship it, get it in the stores, get reads, test and get behind the product. We could sit here and say what's wrong, what's good, what's bad, what's indifferent, but it really takes -- you have to really try. Because I remember in the beginning days when I tried and nobody really wanted to buy my brand. But I wouldn't take no for an answer and I kept pushing and pushing and pushing and pushing, and 9 years later, we're $450 million to $455 million brand. We're still a very prestigious brand, I call it a hiccup, but Wall Street likes to do what they do best, based on performance and our job here is to perform every quarter. So that's what my plan is for future quarters and we'll keep plugging away.

Operator

Our next question comes from the line of Diana Katz from Lazard Capital Markets.

Diana Katz - Lazard Capital Markets LLC, Research Division

Starting with U.S. Consumer Direct, can you break out the comp components in the quarter between traffic and conversion at both full price and the outlets?

Peter F. Collins

Well, overall, Diana -- this is Pete. Traffic was down slightly in both formats, conversion was up in both formats. But with the -- just like 2% or so same-store increase, the real driving factor that we saw was more the split between the men's merchandise and the women's merchandise. So men's trended, from a sales -- same-store sales perspective, trended up and it was offset by the decline in women's. So it wasn't so much a traffic conversion as much as it's more a gender. Unfortunately, our traffic and conversion counters can't distinguish between men's traffic and women's traffic, but as we -- we're kind of going through the quarter, what we observe was more the gender versus the traffic conversion.

Diana Katz - Lazard Capital Markets LLC, Research Division

Okay. So on the gender issue in 3Q, so you anticipate a 2Q trend in women's kind of stays the same in 3Q because you did lower the sales plan? But I guess I'm a little confused, but at the same time, it sounds like you feel better about the product in the stores already.

Lynne Koplin

Yes, I think what we did in terms of adjusting for Q3 is we came through in Q1 and Q2. And starting actually with the back half of last year, we just really needed to get the inventories in line with the sales. Our stock to sales was off. We were chasing men's now for a long period of time and basically trying to really get the business in ratio to what's selling on the women's side. So if you into Q3, you're going to see that readjustment that's going to take place and we're very much in line, and obviously, bought and distributed proportionately. Also, I think as you go into Q3 in the denim industry, you tend to feel very positive and very optimistic about the fact that you would go back into the denim business. You can go back into the pants business from the short and t-shirt business. So we feel that we had a lot of newness coming, starting with Q3, which is really where we set the new basic denim program. We shifted in starting in July, and the reaction has been great. So as much as we're very optimistic about Q3, I think by the time we get more of the new novelty and treatments on the floor, it'll be probably around the end of September, which is into Q4.

Diana Katz - Lazard Capital Markets LLC, Research Division

Okay. And then just on the International Wholesale front, can you talk about performance by some of your larger countries, U.K., Germany, and in particular, what's going on in Canada?

Lynne Koplin

In the U.K., in particular, the U.K.'s probably similar to the U.S. Maybe, I'd say, 6 months behind in terms of our trends. But it's very similar in terms of our men's business. When you look at Selfridges or a Harrods, when we have shop and talk, performing very well, very large distribution, huge account. Selfridges is # 1 account and it was doing very well. On the women's side, it typically looks like a U.S. department store. It's a lot of different brands, sharing a smaller and smaller space. It's a classification business. It's very trend-driven, and again, price is a factor. So we're seeing the women's real estate in the store kind of shrink a little bit. And we're really only represented by one classification which is bottom. So similar, I think, our Wholesale business is actually maintaining in the U.K., but it's similar to the shift that you're seeing in the U.S.. In Canada, I think what you're seeing in Canada is essentially, a lot of what we had in a Wholesale business kind of being replaced by what we're going in and operating as our retail store business now. So once again, when you go into a major department store like Holt Renfrew, men's is up, women's is down, but as our retail stores come in and we really have a major brand presence, that's where you're seeing a lot of the Wholesale business shift, too.

Diana Katz - Lazard Capital Markets LLC, Research Division

Okay. And then finally, on gross margins for the year, going into the quarter, I think gross margins for the year were planned flat to slightly up. How should we think about the year now? You gave some of the pieces, I wondered if you could go into it a little bit more? I think probably end of down this year, is it planned down for 3Q with improvement in the 4Q?

Peter F. Collins

No, the way we're looking more at gross margin business is, the -- we're expecting that we'd be able to make some improvement there. But what we've found is that with the additional merchandise that we need to transfer into the outlet stores, that the mix of sales there is more skewed towards that excess or transfer merchandise than what we had anticipated. So the consolidated gross margin is probably going to be closer to being flat. I think Q3 it's down slightly, in Q4 it's up slightly, Diana. But that's one of the big deltas from the previous guidance to this -- the new forecast that we've got is the fact that sales decline that the margin improvement we were expecting, doesn't look like we'll -- we're not sure we're going to be able to deliver that so we forecasted it more kind of to the back half, basically in line with LY.

Operator

Our next question comes from the line of Edward Yruma from KeyBanc Capital.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

I know you guys cited the incremental promotion that you ran at the full price stores, but obviously, this is the first quarter in some time where denim ASPs have been down year-over-year. Is that really because of the promotion or is it just a trend that we should expect to continue, particularly given this price sensitivity that you've cited within the women's business?

Lynne Koplin

Our seasonal promotion at the end of the -- during the quarter does not actually include denim. It was all seasonal product that we really wanted to clear to make way for fall. So denim was not part of that promotion at all. Our average unit retails on the denim side really have not gone down that much. The only thing that this could have impacted just a little bit was kind of the shorts category because it sells at a slightly lower average unit retail. But generally, we haven't really seen it that much.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Got you. And I know you also cited -- you've obviously talked about the -- a higher sell-through at the outlet because of some of the clothes that merchandise. You talked a little bit about you used the off-price channel. I guess from a philosophical perspective, you've been very aggressively trying to whittle down your use of off-price. Was this really due to the fashion misstep or are you taking kind of a different look at that business now?

Peter F. Collins

No, we -- as I said in my remarks, Ed, at the current time, we're planning that we're going to keep the off -- sales of the off-price channel flat with last year. So in the quarter, basically as with the same-store sales coming in below our plan, we had access inventory leading up to the end of the quarter, and so, we chose to move that into the off-price channel because it wasn't included in the plan for the outlet stores. However, what that really did is just accelerate the off-price sales from the first -- from the second half of the year into the second quarter.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Got you. And final question. I'm trying to dissect from your comments around the women's business, that obviously been a little bit of a weaker performer relative to the men's business. I know that you had put a lot of attention toward some of your cleaner, lower-priced denim. Are you effectively moving away from that market given your focus on embellishment into just retooling that product? And I guess how long do you anticipate until you get that business stabilized?

Lynne Koplin

Starting with this quarter, we're definitely, as we go into Q3, we're reviewing the products as we [indiscernible] described, but it's basically really kind of recreating what put us on the map in the very beginning, which was our core styles, our classic styles, but updated in a new fabrication. And new washes, but just our classic stitch treatments with our horseshoe pockets. We really want the brand there, but we're obviously not shouting it at people. But it's the classic group of styles that people come in and look for us for all the time and we just haven't had it represented well on our denim bar in our stores or and even at Wholesale. On the flip side of that, in terms of how we round that out at the other end of the spectrum, is really updating embellishment as well. So we've just gone through it and analyzed how -- what we need to be known for. Women's has gone into many so different fits in this industry in the last 2 years. I mean, we probably had as many as 30 fits on the floor between boot cut, straight legs, I mean it's just -- you can -- mid-rise, low-rise, high-rise, and so, what we really want to do and what's so beautiful about the men's business, is we wanted to kind of go back to really simplifying it and representing what we're known for in the highest quality possible, at price points that we think women will spend depending on what category they're shopping. If it's a new embellished item, they'll spend a lot more. If it's something that's kind of a good, classic basic, they want to spend about $200 to $220. So we've just done a whole market study and really applied it to what our brand needs to be and what we need to represent to our core customers.

Operator

Our next question comes from the line of Susan Anderson from Citigroup.

Susan K. Anderson - Citigroup Inc, Research Division

I was wondering on the International front, if you could give a little bit more color on just the retail stores by country and how they're performing? And then also, if you could talk about maybe the change in the outlook and the gross margin, the drivers of that?

Peter F. Collins

Certainly, a retail store perspective in International, the biggest concentration of stores that we've got is basically Canada, the U.K. and Germany, and the German stores continue to perform well. It's probably the group, the best-performing. Canada is doing well. I'd put them in the second slot. We think we've got opportunity to improve that business, though, with an improved processes buying, planning it out, giving merchandise to them. And then the last group would be the U.K. And in the U.K., we've got probably about 2 or 3 stores that, I'd say, are -- really need some work, and then the stores are doing well. So some of the things we've been working on in the U.K. include making sure that we've got the right merchandise mix for those markets and we've got the styles, both from a fabric, from a fit, from a wash perspective that the consumers want. And then we're also looking at our pricing to make sure that we're competitive from a marketplace perspective. So that's really the overview from a International stores perspective. On gross margin, like I was describing earlier, the biggest delta from the budget to the updated outlook season is in the U.S. retail stores. And what we're seeing is that we had anticipated we'd be able to improve our margin through some better buying. But with the amount of excess merchandise that's going to be transferred into the outlet stores that's either there or is heading there, we're not expecting that we're going to be able to get the margin lift that we had expected. So that's going to basically drive the consolidated gross margin to be just slightly down in Q3 and slightly up in Q4 or basically flat to LY in the second half.

Operator

Our next question comes from the line of Ronald Bookbinder for The Benchmark Company.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

On -- Lynne, on the pricing, didn't you implement some new more competitive pricing this past quarter? And how did that product do or was it overshadowed by the fashion misstep?

Lynne Koplin

Probably a little bit. I mean, we didn't offer a lot of new for denim for Q2. We really tend to shift into more of a summer assortment, so it -- it's perhaps not as present as it was in Q1. We still have at a basic denim selling at like $172 to under $200. But essentially, I don't think there was enough newness, whether a new washer fabrication or stitch color. So the price was there, but I don't think the product match did. And the misstep that we took, basically, which was to go away from the branding and into some different types of stitch treatments in terms of more of decorative branding, I guess, you could say are more western influence that just really didn't register to the degree that we owned it. We did sell some of it, we just didn't sell everything that we owned of it. So we had an excess amount of it.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And pricing in Europe, the product has typically been priced at the higher end in the European market. Are you looking at bringing your prices in Europe into a more competitive position?

Peter F. Collins

Well, the changes we've done there, and Lynne can probably add to what I'm going to say, but it's more kind of targeted, Ron. The team, with the input of Giuliano Sartori, our new VP of International, have really instead of taking more of a formulaic approach to setting retail prices, are looking at it more kind of item-by-item basis and seeing what they think they can -- where the competitive price is. And probably with more -- where we change prices, more of the prices were coming down slightly. But there were some where they decided they can actually raise prices. So the overall impact to the gross margin rate wasn't going to be -- we don't expect it to be significant. So we're hoping that by adjusting that pricing, especially on some of the key items, that we can be viewed as more competitive in the market. Now obviously, we're not going to come down and match the European brand pound-for-pound in U.K., for instance, but we do want to be at a certain level above them, and in some cases, we were outside of that premium range we'd like to be in.

Lynne Koplin

Yes, I think, also, in terms of the sportswear product is fairly healthy percentage of our business, even in Europe and we have new European product going into the stores over there. Our price points and margins on that product have actually, I think, going forward in the Q3 and Q4 are really going to raise the bar as well. I mean, you're looking at very, very high-quality, beautifully made knitwear and sweaters and outer wears that are going to go in at price points that are really kind of commensurate with the premium denim fit. So that's going to add a new dimension to product mix that you haven't seen before in Europe.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And in the U.S. market, color seemed to be a big driver this past season. Did it just not perform well for you guys? You guys started off with some pastels and then switched to some brighter colors. Was it just a miss on shades there or how did you see it?

Lynne Koplin

I think it's dependent on the fabrication. Basically, in women's, in the legging category, color was fabulous. We -- our colored legging was -- which was a little bit more of a crop, did incredibly well, sold double-digit, 20,000 units of it, which is a key item, which was great. And it really gave us the confidence of knowing that we can sell that many units in a key item as the color multiplier. We also sold color very well in corduroy, specifically in men. So that was another one. I think where we fell a little short was probably on the men's chino pants side. We did very well in colored shorts, but not as much on colored chinos. So it really kind of depended on the fabrication, the wash treatment, et cetera. But we definitely had some highlights in color.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Do you see color carrying into the fall or you going to focus, as you said, more on getting back to your core roots of denim and...

Lynne Koplin

Yes, I think, again, it has a lot to do with fabrication. We believe very, very strongly, going into the season, in corduroy, and we're probably expanding it into 6 or 7 different color lines, and that's in both men's and women's. I think where you're seeing color happen, both in Wholesale and retail, is men are really starting to wear color. Women have had it now for 2 years, and now you're starting to see men's red pants, blue pants. We've got just great kind of men's wear colors as we go into the back half of the year. So now that both men and women are wearing it, I think we'll be selling a lot of it, personally.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And are you seeing any silhouette shifts that could cause a replenishment cycle such as women getting away from the skinny?

Lynne Koplin

I -- honestly, we're focusing a lot on straight legs. We're kind of loosening up that leg a bit and it's not so tight and ankle-length, but definitely adding another silhouette into the women's area. I mean, obviously, we were in a crop and did very well for spring/summer. But as we go into fall, we're really focusing on more of a straight leg and try to bring back more of an interest in the boot cut and always representing kind of our classic Joey Flare. In men's, we're getting actually a lot narrower. Our silhouette is really getting slimmer. I wouldn't call it skinny, I'd definitely call it slim. But definitely, away from the boot cut into the straight and slim.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And lastly, share repo, did you guys buy any shares back during the quarter?

Peter F. Collins

No, not in the quarter.

Operator

Our next question comes from the line of Janine Stichter there from Telsey Advisory Group.

Janine M. Stichter - Telsey Advisory Group LLC

I was just wondering if you could talk a little bit more about the semiannual sales since it was the first time you did this, what kind of lift you saw from it and how much of the improvement in June you think was due to the sale versus just having better products? And then also, with the current inventory position, are you planning any incremental sales for the third quarter?

Peter F. Collins

The impact of the semiannual event really wasn't significant to the overall sales for the quarter, same-store sales for the quarter. We analyzed and estimated what the impact was and -- but we still would have rounded to a 2% increase in same-store sales, even without the benefit of the semiannual event. As far as the third quarter, no, we're not anticipating any type of sales event for the -- promotional event for Q3.

Operator

Our next question comes the line of Dorothy Lakner from Caris & Company.

Dorothy S. Lakner - Caris & Company, Inc., Research Division

Most of my questions have been answered, but I just wanted to -- not to beat a dead horse, but come back to women's a second. Lynne, if I'm hearing you, you were saying you feel good about the mix going into the third quarter, but you'll be better positioned in the fourth quarter. Is that fair? And then just -- so what are the big differences, I guess, between what we're seeing, what we're going to see in the third quarter and what you'll have for fourth? And I guess where do you see the balance being between the core, the classics that you got away from but are going back to and the rest of the mix? What will that rest of the mix be composed of?

Lynne Koplin

I think what Jeff and the design team did, as we kind of get to the latter part of Q3, is launch a whole new collection of novelty treatment. And they're not printed per se, they were all kind hand processed and they're really quite unique and very authentic and done in a very classic True Religion fit and fabrication, but just beautiful, sexy treatments for women. The skinny silhouette is still very important as we go and if you look at all the fashion direction that you see for the fall holiday season, it's still going to be important. But novelty treatments, whether it's through colors or coatings or whatever new dimension there is out there here in the design world, we have just a lot of it coming that we feel is going to be sophisticated, it's something we've never really done before, and I think it's going to be fantastic for both our current customers and new customers that wants to come in and find something new. On the core side, I see it really contributing about, especially when you consider that this is really the replenishment piece, it's probably a good 40% of the business going forward. I think that's a healthy level to be at when you're in kind of a classic denim, high-quality, premium business. We have a very specific customer, whether she still wants that flap pocket in the back, which she does. If she wants some embellished style like a crystal, that to us is a classic because we represented that for many years and we just kind of walked away from it. So -- and that really starts to come back in a new way, both in denim and color for Q4. But -- so we kind of plant the seeds for Q3 and then we really come in by the end of September, which will, obviously, be at retail -- seeing some retail feedback by October.

Dorothy S. Lakner - Caris & Company, Inc., Research Division

Okay. And then just looking at the Wholesale business in the U.S., how did -- where did it end up in terms of the breakdown, department store specialty and off-price in the quarter? And where do you see the difference is between department stores and boutiques? You have said that men's was stronger in both, but clearly, boutiques are doing a lot better. Are there any difference between women's and department stores and boutiques that's making a difference?

Peter F. Collins

Dorothy, so the -- in my remarks, I may have blown through it too quickly, but we said that the specialty sales in the quarter were up 17.8% and that Majors were down 25.3%. If you're to add those 2 together, we would've been down 2% on a year-over-year basis, that's kind of basically the aggregate of your full price U.S. Wholesale business. So -- and that's kind of a trend we've been on, where basically the decline you're seeing in the Majors is being made up for on the specialty side.

Operator

There are no further questions in the queue. I'd like to turn the call back over to management for closing comments.

Jeffrey Lubell

Okay. Thank you, again, for your time today. We really appreciate your continued interest in True Religion Apparel. As always, if you have any follow-up questions, please do not hesitate to call. Contact Pete Collins or the ICR team.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.

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