True Religion Apparel, Inc. Q2 2008 Earnings Call Transcript

Aug. 6.08 | About: True Religion (TRLG)

True Religion Apparel, Inc. (NASDAQ:TRLG)

Q2 2008 Earnings Call

August 6, 2008 4:30 pm ET

Executives

Jeff Lubell - Chief Executive Officer and Chairman

Pete Collins - Chief Financial Officer

Michael Buckley - President

Andrew Greenebaum - Integrated Corporate Relation.

Analysts

Karen Short - Friedman, Billings, Ramsey & Co.

Jeff Mintz - Wedbush

Eric Tracy - BB&T Capital Markets

Ronald Bookbinder - Global Hunter

Jody Kane - Sidoti & Co.

Eric Beder - Brean Murray

Operator

Welcome to the True Religion Apparel, Inc. 2008 second quarter financial results conference call. (Operator instructions) I’d now like to turn the conference over to Laura Foster of Integrated Corporate Relation.

Laura Foster

Good afternoon everyone and thank you for joining us today to discuss True Religion Apparel's second quarter 2008 financial results. On the call today our Jeff Lubell, True Religion's Chairman and Chief Executive Officer; Michael Buckley, the company's President; and Pete Collins, the company's Chief Financial Officer.

By now, everyone should have had access to the second quarter 2008 earnings release which were announced 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 clinking on the Investor Relations tab. This call is being webcast and a replay will be available and archived on the company's website.

Please note that all 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 making forward-looking statements. Actual results could differ materially from those stated or implied by these forward-looking statements as to risk and uncertainties associated with the company's business.

These forward-looking statements are qualified in their entirety by the cautionary statements contained in True Religion's SEC filings, including the Annual Report on Form 10-K and the quarterly report on Form 10-Q. The content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, August 6, 2008. True Religion undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call.

With that said, it is my pleasure to turn the call over the Jeff Lubell; Jeff.

Jeff Lubell

Thanks Laura. Good afternoon everyone and thank you for joining us today as we discuss our second quarter and first half 2008 financial results. We greatly appreciate your growing interest in True Religion and we look forward to sharing our results with you today.

The format of today's call will include my brief business overview with the second quarter including key brand and project highlights. Pete will follow with a more detailed discussion of our second quarter financial results as well as provide an update to our 2008 guidance. Michael will then provide an update to our business operations before we open up the call to take your questions.

We are pleased with our second quarter results, which marks another record breaking quarter, the highest quarterly results in our history with net sales and earnings growth ahead of our expectations. During the second quarter we delivered net sales growth of nearly 80% highlighting the continued strength of our premium denim jeans collections and expanding sportswear assortment across both our retail and wholesale segments.

Gross margins for the quarter increased approximately 20 basis points to 57.5% from 57.3% in the second quarter of 2007. Operating income for the second quarter increased 83.0% to $15.4 million or 24% of net sales compared to $8.4 million or 23.5% of net sales in the prior year period. As we experienced profitable growth across each of our business segments net income for the second quarter was $9.3 million and diluted earnings per share was $0.39 which represents an increase of 86% over net income of $5 million and diluted earnings per share of $0.21 in the second quarter of 2007.

Importantly we delivered this increase in profitability while making several strategic investments; for instance our consumer direct team opened 15 new stores year-to-date and established a team of district manger to oversee the operations and development of our retail stores.

Additionally our corporate team added key hires to support and control our expanding business and we’re excited to announce that during the quarter end we established our first foreign subsidiary in Japan and our country manager board on a team of key managers who will drive to growth within our Japanese wholesale and retail business. We believes these investments are necessary to grow both domestically and aboard and we will continue to invest as it’s necessary in order to grow our business.

Year-to-date we have achieved net sales growth of 52% and net income increased over 60% and we are pleased to report that our positive momentum has carried over into the back half of the year as evidence by our third quarter U.S. wholesale forward order book which is up more than 35% as measured at June 30, 2008 versus June 30, 2007. As the performance of our retail stores and our wholesale segments exceeded our expectations we are able to increase our 2008 new store goal to 24; four more than our original plan of 20. By year end we expect our total store count will be 39.

Given our year-to-date performance and our improved visibility into the back half of the year we’re increasing our 2008 full-year guidance. We now expect net sales of $242 million to $247 million representing an increase of 40% to 42% over 2007 and earnings per share of $1.61 to $1.65, an increase of 39% to 42% over our 2007 diluted earnings per share.

We attribute our performance and ability to provide consumers with a wide range of innovative trend setting and well-fitting jeans and related sportswear products. As I’ve mentioned in the past, we are a product driven company, it’s all about the product and our product continues to be embraced by our wholesale customers and resonates extremely well with our consumers.

Our spring and summer collection, which is in stores now is performing strongly across our retail and wholesale channels. While we are thrilled with the level of consumer demand for our spring summer and 2008 collection we are even more excited to introduce our fall and holiday 2008 collection, which is just out and shipped to our wholesale consumers, customer and our retail stores.

As I’ve discussed previously, our fall 2008 collection is our largest and most comprehensive collection to-date with a full range of jeans, sportswear and licensed products including headwear, footwear, fragrance, swimwear and handbags. Within our jeans collections assortment we introduced new groups for both our men’s and women’s collection in a myriad of styles and concepts with various stitches on it, fits, leg openings, fabrics, rises, trends, washes and fresh new trade combinations. We further differentiated ourselves with added style details, hardware, updated logos and many embellishments.

We also expanded our collection to include merchandise that meets the consumers in-seasons needs. In addition to expanding our jeans and better product assortment, we continue to build upon our sportswear assortment. We introduced a wide array of knits and woven shirts. We significantly expended our outerwear collection with several styles and jackets including corduroy, denim and pleats, some with and without triple lining and we added a new collection of denim, jackets in a wider range of colors.

To improve at our women’s sportswear collection we’ve incorporated stretch fabrics into our knits and woven division. The introduction of stretch fabrics helped increase our women’s jeans sales in the past, so we expect that this change in our knits and woven tops would be received favorably by consumers. We are very pleased with the continuous strength and growing acceptance of this sportswear product.

During the second quarter, within our own retail stores, our jeans represented approximately 73% of our total store sale and our sportswear product represented approximately 27% of total sales. Long-term it’s our goal for our sales mix to be approximately 40% to 50% sportswear in license product in 50% to 60% change. We continue to believe that growing our sportswear in a complementary fashion to our change is key to establishing True Religion as a global aspiration brand.

I’m excited to announce that we will be reviewing the first phase of our spring and summer 2009 collection as the upcoming project show in Las Vegas and ENK Coterie shows in New York. Our spring and summer ’09 collection build upon our fall and holiday collection and is by far the most unique at most extensive collection to date in our company’s history.

We are very proud of this collection which we believe highlights True Religion’s commitment to delivering the apparel that is not only well, but continues to redefine the limits of fashion while remaining distinctively True Religion. We welcome you to visit at the upcoming projects ENK Coterie shows, where you can preview the new collection first hand.

Positive financial results shared with you today reflect the continuation of the growth of the company I delivered since we sold our first pair of True Religion Jeans in 2003. All though we’ve passed five fiscal years we have an average annual net sales growth in excess of 80% by introducing innovated jeans and related sportswear products. Opening our branded retail stores and developing more global points of distribution all over remaining true to our jean roots.

This growth continues to be recognized and we’re rewarded within the apparel industry. In July we were ranked by Apparel Magazine, the leading publications serving the apparel and retail industry as a number one of the 50 most profitable publicly traded apparel company as defined by our 2007 profit margin. This is a significant accomplishment and servers as a testament to the growing worldwide demand for True Religion Apparel brand.

Recently our company was added to the S&P SmallCap 600 Index. This index is based on various criteria including market capitalization, financial viability as defined at least four quarters of positive and supported earnings, adequate liquidity and sector representation. We believe our inclusion in this prestigious index is the acknowledgement of the strong financial performance True Religion has delivered.

In addition I was recently made Ernst & Young 2008 entrepreneur of the year in the hospitality and retail category for the greater Los Angeles area. This prestigious sward would not have been possible without the support of all of our employees, our retail partners and our loyal consumers with whom I share this honor. On behalf of the senior management team and our board of directors I thank you all for your continued support of the True Religion brand.

In summary, we are very pleased with our strong start to the first half of 2008, particularly in light of the overall consumer environment. We’re especially pleased to report our momentum has continued into the third quarter as evidenced by the strength of our U.S. wholesale forward order book despite our growth today. I believe that True Religion remains a very young brand.

We continue to believe that True Religion has significant potential for long-term growth both domestically and abroad, core to building on our position as global premium, aspirational brand with the ongoing product expansion to evolve, innovate and bring forth trend setting concepts for many years to come. We also see opportunity for continues growth within our own branded retail stores.

Further penetration in our existing U.S. premium wholesale doors and expanded global reach to a combination of investments in international markets in adding new distributors within certain key markets around the world. Looking ahead we will continue to invest in the infrastructure that’s necessary to support our ongoing growth and keep our momentum strong.

In closing it’s all about the product, it’s all about the fit and it’s all about the team work. I conclude my remarks and I would like to turn the call over to Pete to discuss our second quarter financial result, as well as provide an update on our 2008 guidance; Pete.

Peter Collins

I’ll start with a detailed discussion of our financial results for the quarter, followed by a brief discussion of our year-to-date results and then I will provide some commentary on our updated full-year guidance.

Net sales for the quarter increased 78.9% to $64.2 million versus $35.9 million in the second quarter of 2007. Within our U.S. wholesale segment sales for the quarter increased 57.3% to $38.4 million versus $24.4 million in the second quarter of 2007 led by our innovative men’s, women’s and kids product offerings. Net sales of the majors increased over 84% in 2008, over 2007 due primarily to further penetration of existing doors.

International wholesale sales in the second quarter increased 66.3% to $7.8 million from $4.7 million in the prior year. The expected decrease in sales in Japan was more than offset by the increase in sales of the U.K. and through increased sales to our International distributors as we started to ship our fall 2008 merchandize at the end of June versus July as previously expected.

Consumer direct sales which include our branded retail sales and e-commerce side increased 170.5% during the second quarter to $17.7 million from $6.5 million in the prior year period. The growth in our Consumer Dress segment is attributable to the expansion of our retail stores which totaled 30 at the end of the second quarter of 2008 compared to eight retail stores at the end of the second quarter of 2007.

Second quarter net sales included $269,000 of licensing revenue which is included in the other segment. As it relates to the three primary channels of our business 60% of our net sales came from women’s merchandize, 37% from men’s and 3% from kids. The average sales price in our full price retail stores was $206 for women’s, $196 for men’s and $100 for kids.

Gross profit in the second quarter grew 79.6% to $36.9 million or 57.5% of net sales from $20.5 million or 57.3% of net sales in the second quarter of 2007. This improvement in gross margin reflects the ongoing segment mix shift towards our higher margin consumer direct business. Gross margin by segment for the second quarter is as follows; consumer direct increased to 76.3% from 75.5% in the prior year quarter. U.S. wholesale gross margins declined to 50.9% from 53.5% in the prior year quarter.

International wholesale margin decreased to 45.8% from 49.6% in the prior year quarter. The gross margin for our U.S. wholesale segment was affected primarily by higher inbound freight cost on certain imported denim fabric and an increase in our sales to major department stores which received a volume price discount.

Our selling, general and administrative expenses for the quarter increased 77.1% to $21.5 million from $12.1 million in the prior year period. SG&A for the quarter included $4.09 and incremental operating costs related to the expansion of the consumer direct segment. In addition we incurred incremental pre-opening expenses of approximately $800,000 in the second quarter 2008 versus 2007.

In the second quarter of 2008 we invested in additional areas that will provide future benefit to the company including approximately $250,000 to evaluate in selected ERP application to improve our wholesale and corporate operations and approximately $200,000 to establish our Japanese subsidiaries. We also incurred over $450,000 in professional fees associated with the restatement of our prior year financial statement. Its work noting that included in our second quarter 2007 SG&A expenses are approximately $1.2 million of severance and recruiting costs.

Operating income for the second quarter increased 83.0% to $15.4 million or 24.0% of net sales compared to $8.4 million or 23.5% of net sales in the prior year period. In 2008 the combination of incremental pre-opening costs, production planning costs, international growth costs and restated professional fees reduced our operating margin by approximately 260 basis points in the second quarter of 2008.

Our effective tax rate for the second quarter 2008 was 41.1%. Net income for the 2008 second quarter was $9.3 million or $0.39 per diluted share based on weighted average shares outstanding of $23.9 million compared to net income of $5.0 million or $0.21 per diluted share and weighted average shares outstanding is 24.0 million in the second quarter of 2007.

Turning to our balance sheet at June 30 2008, we continue to be pleased with our overall financial position. The business continues to be very strong on a cash flow basis and we are confident that our financial position provides us significant flexibility to execute our strategic growth plan. We ended the quarter with approximately $43 million in cash and cash equivalents, a slight decrease from $48 million as of March 31 2008. The primary driver of the cash reduction is our capital expenditures for our new company-owned stores.

Inventory totaled $29.7 million at June 30 2008 versus $24.6 million at March 31 2008. Approximately $3 million of the quarter-over-quarter increase is attributable to the consumer direct sales growth including the opening of our 12 new retail stores in the second quarter. The remaining inventory investment of $2 million supports the year-over-year increase in our third quarter wholesale order book.

For the second quarter of 2008, our annual inventory churn rate was four times per year. We use our outlet stores and sales to select our priced retailers to clear end of season and obsolete merchandise to keep our inventory clean. We are satisfied with the position of our inventory as its content is appropriate and the balance is consistent with our annual inventory turn goal. I am pleased to say that we continue to carry no debt and we continue to fund our growth from internally generated cash reserves and current operations.

Let me now briefly discuss our year-to-date results. For the first six month of 2008, our net sales increased 63.1% to $117.6 million from $72.1 million in the same period last year. Net income grew by 59.9% to $16.2 million or $0.67 per diluted share from $10.1 million or $0.43 per diluted share last year. With that, let me now turn to our financial guidance for 2008.

We are updating our guidance as follows. Net sales for fiscal 2008 are expected to be in the range of $242 million to $247 million. This compares to our previous range of $220 million to $225 million. Our diluted earnings per share is anticipated to be $1.61 to $1.55 for the year compared to our previous range of $1.52 to $1.56.

Our updated guidance reflects our better than anticipated results in the first half of the year, increased visibility into our wholesale quarter order book through the third quarter of 2008 and an increase in our 2008 targeted store count to 39 stores at year end 2008, which Michael will discuss momentarily.

That said we’re not raising our wholesale net sales outlet for the fourth quarter. We believe this is prudent given the challenging environment in which we continue to operate and the difficult year-over-year comparison we face in the fourth quarter of 2008. While we do not provide quarterly guidance given our revolving business model we believe it is appropriate to provide some color on how we see our guidance falling between the third and fourth quarters.

We expect sales in the second half of 2008 to be relatively evenly split between the third and fourth quarters with a mix shift towards our higher margin consumer direct business in the fourth quarter. As such net income is expected to be slightly higher in the fourth quarter versus the third quarter of 2008. We expected the U.S. wholesales gross in the third quarter to be similar to our second quarter margin but they start to improve in the fourth quarter as we begin to receive the stretch fabric from our domestic model.

Additionally during the fourth quarter we expect to invest in our international growth, our marketing campaign and pre-opening costs for the first quarter 2009 store openings. We continue to anticipate an effective tax rate of 41.0% for the full year. Our guidance assumes fully diluted weighted average shares outstanding of approximately $24.1 million share for 2008.

With that I would like to turn the call over to Michael to take us through a review of our operations and plans for the rest of year; Michael.

Michael Buckley

The second quarter of 2008 marks another quarter of record net sales and earnings growth. This represents our fourth consecutive quarter of record breaking sales and our fifth consecutive quarter of double digit earnings growth. Importantly we experienced solid growth across each of our business segments highlighting the strength our multi segment distribution model in a market that we believe has a good amount of future growth.

For the second quarter we experienced 78.9% sales growth over the prior year period with approximately 60% of business coming from U.S. wholesale, 12% international wholesales and 28% from our consumer direct business. We recently revised our long-term sales mix goal and now expect our business to be comprised of 45% wholesales, 50% consumer direct and 5% licensing.

In our U.S. wholesale business net sales increased 57.3% to $38.4 million in the second quarter. Year-to-date U.S. wholesale sales increased over 2007 by 43.2% to $70.9 million. In the U.S. wholesale channel, True Religion continues to be one of the top performing apparel brands in terms of sales volume and sell through within our key department store accounts.

In addition, sales per door within our key department store accounts continue to rise. Despite the challenge in the retail environment in which we continue to operate, True Religion continues to gain market share within our existing accounts as retailers selectively increase the number of files offered by top selling brands.

We see opportunity to further increase our penetration with an existing account as we add additional styles for men, women and children within our jeans and sportswear product assortments. As successful as we are, I normally find an offering of ten or fewer styles when I visit the women’s or men’s departments of our major accounts. This compares to hundreds of styles for women and men in our own retail stores.

We have 45 accounts that makeup more than half of our U.S. wholesale sales. Our goal is to focus on these accounts and increase styles presented in their stores. We will also selectively expand the number of wholesale doors through which True Religion is distributed through door growth in existing account and selectively adding new accounts. In total we believe there is an opportunities to add approximately 40 to 50 new doors per year within our U.S. wholesale channel.

With respect to our U.S. wholesale business for the third quarter our sales order backlog was up more than 35% as measured on June 30, 2008 versus 2007. We are very pleased with the strength of our U.S. wholesale sales order backlog which continues to exceed our expectations indicating that our product continues to be well received by our wholesale buyers and consumers. We see no signs of a slowdown as we continue to offer an expanded compelling collection.

With respect to our international wholesale business, net sales in the second quarter increased approximately 66% to $7.8 million. Year-to-date in-house of wholesale net sales increased over last year by 43.8% to $16.7 million. We currently have distributors on six continents covering 50 countries. During the second quarter our top six countries outside of the U.S. represented 72% of our international net sales.

Our international sales order backlog for the third quarter was down from a year ago. This is the result of a timing shift in the shipment of our fall orders from July 2008 into June 2008. As such our third quarter international sales are expected to decrease by approximately 12% from the third quarter of 2007.

With respect to Japan, we recently established our wholly-owned subsidiaries True Religion Japan Inc. under the direction of Kanji Kawahara our country manager; the subsidiary will operate our Japanese wholesale sales and retail business including marketing and distributing True Religion Apparel to premium wholesale customers and managing the introduction of True Religion branded retail stores. Kanji is currently assembling a strong team.

Establishing the Japanese subsidiary marks our first significant investment in our international business. We are targeting at lease one to two free-standing retail stores in Japan by the end of the year. Marc Klein, our Vice President of Real Estate and I are planning to travel to Japan in September to view available store location. We’ll return if we find store locations that performance at or above our operating margins target of 30%. We would like to add three to four new stores per year in Japan.

If, our approach and Japan is successful we would like to replicate this model in other international markets. In order to do so, we will conduct significant research on each marketplace to develop the best solution for entering that market directly. In September we are planning a trip to London to view potential store sites for our first European True Religion branded store. We believe a direct model is not appropriate for the brand; we’ll franchise opportunities.

To long-term international growth opportunities, we are still significantly under penetrated to outside the U.S. marketplace. We are currently evaluating our distributing network, exploring potential structures for franchising and determining the type of management expertise required to realize the brand opportunity around the world. In order to grow the brand to its fullest potential, we will need to continue to invest in the U.S. and internationally.

Turning to our consumer direct segment, net sales for the quarter increased approximately 170% to $17.7 million reflecting the significant increase in our store accounts on a year-over-year basis. We are very pleased with the performance of our branded retail stores to-date. We budget our mature stores to come positive in the mid single-digits and to-date these stores continue to exceed our expectations. As a class these stores continue to deliver industry leading metrics.

For the second quarter our gross margin was in excess of 76% and stores delivered a full operating margin of 44% and the segments operating margin was 35.4%. Included in the consumer direct operating margin was approximately $800,000 in incremental year-over-year pre-opening costs. These additional pre-opening costs equate to 4.5% of the segments net sales in the quarter.

Additionally our branded retail stores while enhancing our profitability also continued to prove incremental to wholesale with buyers and consumer alike visiting our retail stores to view the entire and expanding collection of True Religion Apparel and license product.

We compare our year-over-year sales per door increased for certain Nordstrom stores in which we have True Religion stores to those centers in which a True Religion store did not exist. The key finding here is that the net sales increased was nearly identical in these groups; both were up more than 70% in the first half of 2008 over 2007.

During the quarter we opened 12 new branded stores bringing our total store account at the end of the second quarter to 30 stores. At the time of this call we have 34 stores opened consisting of 26 full priced and eight outlets. We are ahead of plan with respect to our retail rollout for 2008. We continue to secure more key locations for our branded stores with excellent lease terms.

In addition, with a strong balance sheet we are positioned to capitalize on leases available to us and to establish our retail presence in some of the best retail centers across the country. As such we are increasing our target store counts to 39 by year end an increase from our previous target of at least 35 by year end.

We expect to open two more stores in the third quarter with the remaining store opening placed for the fourth quarter. It is important to note, however that given the increase in targeted store account we are now anticipating incremental pre-opening costs of approximately $600 in the fourth quarter of 2008 relating to the additional 2008 new store openings and the anticipated five first quarter 2009 store openings that we will take position of in October and November.

That concludes my remark. We’d now like to open up the call for questions; operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Eric Beder with Brean Murray; please go ahead

Eric Beder – Brean Murray

Could you talk a little bit about the focus in shifting some of the department stores to more non-denim products? We’ve really started to see that the flow comes out more when the non-denim product is hitting the stores, how is that going?

Michael Buckley

Well we gave you the domestics of how it’s going in our own stores being 73% jeans and 27% sportswear. It’s a little bit slower process to get into the departments stores and the boutique, because they only have so much space and quite honestly one of my comments was that any store I walk into you have maybe 10 styles on the floor which is mostly jeans and going back we literally have 100s of styles, again mostly jeans. If we had our choice to double the amount of queues on the floor we would do it with jeans first before we would just want to put more sportswear in there, although quite frankly we’d like to put both in there.

Eric Beder – Brean Murray

What are you seeing as the trends for fall? You started to ship some new products and starting to hit the stores, what are the trends you think are going to be key for fall?

Michael Buckley

Well I think some of the things that we’ve already started to put into market place in terms of high Disco or Rockstar, the Super-T continues to do well even some of our painted pocket and some new colors and whatnot.

Eric Beder – Brean Murray

Actually the final question I want to ask you about is the design sale. Do you guys feel like you are completely ramped up to where you want to be with all the designers you need now to kind of take it to this vision and I guess the final question is has the strength in wholesale pushed out kind of when you think that your own stores will be 50% plus of sales?

Jeff Lubell

Eric, as far as the designs go I have plenty of groups plan to break into the marketplace, but I hold them back because I have to give the time for new groups that we do break and give them the time to have the seasonality -- like when I introduced the Super-T it took three years before it became stable in the line. So as I introduce new groups into the marketplace we have to give the time for the consumer to digest it, to buy it, to understand it and give it the proper selling period before we constantly flood the market with new concepts and ideas. So you got to give it the life.

Michael Buckley

And Eric on your last your question; actually I think what we said is when we’re coming out of 2009 that we’d like to see 50% of our sales coming from the consumer direct segment, but your points dead on. When we had said that statement before we weren’t expecting the type of growth we’ve seen in the U.S. wholesales business.

So, we’re going to continue to open our stores with the clipper on roughly 20 to 25 stores a year so they continue to perform as they have been and if the wholesale business performed better than we expect then we may not reach that 50% threshold coming out of 2009, but there is nothing wrong with that because we’ll still be doing very well.

Operator

Thank you our next question is from the line of Karen Short with Friedman, Billings, Ramsey; please go ahead.

Karen Short – Friedman, Billings, Ramsey & Co.

Just a couple of questions; first question is, can you may be just give me a breakdown on corporate expenses like restricted stock versus the other components within the $5.8 million?

Michael Buckley

Well the restricted stock Karen is let’s see for the quarter, roughly being around $2 million and the rest of the expenses, in Jeff’s comment he indicated that we have increased our team here. We continue to add on the right people for creating the foundation to grow the business and so we’ve made some selective additions in the quarter.

I think we’ve talked to everybody about having a new Vice President of IT, we hired on a Director of Store Construction, those types of additions, as well as just even at the more junior level, the support team that we’ve got. We want to make sure that we are well controlled as we grow the business both from a wholesale and retail side and we’ve been making the right investments basically for the last two years since Michael joined the company.

Karen Short – Friedman, Billings, Ramsey & Co.

Okay. So that number that we saw for the second quarter excluding the restricted stocks should be about the run rate on an obsolete basis for the rest of the year, is that fair to say?

Michael Buckley

Yes, you could back into the -- with the earnings release, you can back into where you think we’ll be for the year and in general we expect to be where we said at the beginning of the year from a corporate perspective; we have had some expenses related to the restatements, year-to-date it’s around $800,000 that weren’t necessarily in the original guidance for the year, but that’s about the only real call out at this point.

Karen Short – Friedman, Billings, Ramsey & Co.

Okay and I’m curious, just a couple of things on your retail stores; first of all what are some of the locations of the new stores that you’re going to be opening in the next three quarters and then within the stores what is your second biggest selling items after Jeans in general at your retail?

Michael Buckley

I will answer the last one first. T-shirts really would be the second biggest category next to jeans; then it’ll be like pleats and woven shirts.

Karen Short – Friedman, Billings, Ramsey & Co.

Okay and what about the locations of the stores, can you give us some of those?

Michael Buckley

We haven’t disclosed any particular locations. We would rather leave them open for now.

Karen Short – Friedman, Billings, Ramsey & Co.

Okay and then I just wanted to check on something. In the fourth quarter of last year if I remember correctly you had shipped some product a little early. You might normally have it shipped in January but I think you pushed it forward a little bit and shipped it in December. I’m just wondering if we’re doing a year-over-year correction for that; do you have a dollar amount for that.

Michael Buckley

The shift in the back half last year was from Q3 going into Q4, but year end we had a normal pattern as far as being able just to -- there were some replenishments going in for the U.S. wholesale business and then there is also shipping into international for their spring season very late in Q4 for us, so nothing abnormal that we wouldn’t expect to continue on this year.

Karen Short – Friedman, Billings, Ramsey & Co.

And any updates on being able to capture more gross margin on the international side?

Michael Buckley

The margin this quarter is inline with where it was in the first quarter. The real improvement in margin is going to be as we are able to invest directly in those markets and Europe will speed on what we’re doing with Japan. So, beyond that it’s going to take time for us to make those investments country-by-country and Michael had comments about the other type of investments we’re going to be making internationally overtime once we’re able to see if the model in Japan is successful for us.

Operator

(Operator Instructions) Our next question is from the line of Jeff Mintz, with Wedbush; please go ahead.

Jeff Mintz – Wedbush

A couple of questions on the wholesale business; the growth obviously was fantastic and far above what I was looking for. Can you talk a little bit about how the new replenishment business kind of played into the increases?

Michael Buckley

Well, as we said previously we clearly have more stalls on replenishment than we ever have as well the fact that we’re now shipping closer to the beginning of the window than previously we were closer to the end of the window and clearly we’re seeing the reorder business pick up. I mean in the first half when Nordstrom was up 92%, markets was up 88%, Metro Pop was up 97%, so clearly by having more product on replenishment and earlier it’s really helping to drive our sale.

Jeff Lubell

A lot of it had to do with the performance of the product that retail was causing them to take the goods in earlier and quicker.

Michael Buckley

When I do my channel check on looking at stores, the other thing that you’ll see is just more styles. I mean Michael kind of talked about that when he’s out there he sees 10 or few. 10 or few are still better than were it was before. That’s the other thing that’s driving this wholesale business is replenishment definitely is part of it but also over the last 12 months the product has been retailing well and in Beijing the majors have continued to kind of shift from having a lot of it from brand to having a more limited number, but investing more in those brands that are doing well for them and we’re benefiting from that trend.

Jeff Mintz – Wedbush

Okay, great and then on the gross margins on the wholesale side, they were obviously down a little bit and you talked about how you expect them to pick back up in Q4; just can you talk a little bit about kind of your longer-term expectations for gross margins in that channel?

Michael Buckley

There are a couple of thing that are going on; one is the shift to more sales in U.S. wholesale coming from the majors. We do give them a volume discount and so we’re not expecting that that trend is going to change into the future. We’re very pleased to have the type of business we have with the majors, they’re very big customers for us and from the easier of doing business with them and from a credit perspective they’re great customers for us.

So, we’re not necessarily expecting that that part of the business is going to be decreasing in relation to that total for U.S. wholesale out. We have had some impact over the last six months and we expect it to continue for the next quarter, into the third quarter. We have had some issue where we had to air freight fabric in from Italy and that’s brought down the margin for the last few quarters and that’s when we’re going to able to start sourcing that product and receiving that product into the four quarter.

We should be able to see some pickup in margins really across the board. I mean it’s not only impacting our U.S. wholesale, it’s really impacting all of the margins, because that stretch fabric that we’re getting is sold in all of our channels. So that’s where we’ll see the benefit in the margin in the fourth quarter.

Jeff Mintz – Wedbush

Okay, great thanks and then finally just shifting over to the consumer direct for a second. I know you haven’t broken it out specifically in the past, but can you just talk in general a little bit about your retail stores, the full price versus the outlet and kind of what you’re seeing in terms of metrics there, sales per square foot and margins between the two?

Michael Buckley

Well, as we mentioned we have 26 full price and eight outlet stores and the outlet stores in particular, we take all of our damages as a matter of fact and put them through our outlet stores which work on a gross that’s very similar to the gross margin in our full priced stores. So, overall it slightly less the margin in our outlet’s versus full price, but the blend keeps us at 75%, 76% levels that we’ve seen for last few quarters. As a productivity it various; we see strong productivity in some of the sales per square foot whether it would be in certain full prices or certain outlet.

Operator

Our next question is from the line of Jody Kane with Sidoti & Co; please go ahead.

Jody Kane – Sidoti & Co.

Just firstly, where do you think the strength is coming from in the denim business just given the environment and what everyone else is saying and just kind of give a sense of what’s really driving it or what do you think is driving the demand for your product?

Michael Buckley

Well, I think the product itself is driving it plus I think we’ve said that we’re still a very young brand, I mean we’re in our sixth year and we feel like there’s so much growth ahead of us and I think word of amount just continues to spread all over the world about True Religion and its unique product, but at the end of day if that unique trend setting product is the reason they’re buying from us versus some of the other brand out there.

A lot of our competition is making very similar products to themselves, but True Religion is really the innovative fashion leader out there in terms of product on the premium downsize.

Jeff Lubell

Jody I’d add on to that that the overall category opinion there is doing well, especially in the U.S. and it gets back to some of that maturity comments that Michael was talking about, not just for our company but the category that there is a lot of consumers that are still new into the premium denim category and you hear comments from the major retailer about how premium denim is a category that’s doing well for them despite the issue that they say is maybe from an overall basis, impacting the overall business. So, its our product, but it’s also the category that’s doing well.

Jody Kane – Sidoti & Co.

And on wholesale side, I mean the wholesale international side it looks like the numbers are pretty strong there. Is there any particular region say in Europe or something that’s doing particularly well?

Michael Buckley

Well, comparing it with last year I mean the distributor is in the U.K. has done a decent job really getting the brand well positioned; he’s doing a job in terms of male to female mix that’s been strong, plus Germany has been strong to us, a couple out there that is growing but should be growing faster, but overall we’re very happy with the performance internationally.

Jody Kane – Sidoti & Co.

Alright and then just on the SG&A; are you expecting SG&A for the second half to come down a little considering that you have the extra expenses in the second quarter?

Michael Buckley

More importantly there is extra expense in the first quarter associated with the timing and the restricted stock compensation for the year. So you can see in your guidance that we’ve included in the earnings release what we’re expecting for the full year and that in general would show a little bit of a decline from the first half of the year.

Jody Kane – Sidoti & Co.

Okay, on an absolute basis or as the percentage of sale?

Michael Buckley

Absolutely

Jody Kane – Sidoti & Co.

And then just finally on the retail side are you guys finding that you are now running out of perfect location for retail stores in just giving decent of good ones or are there still some really good ones out there.

Michael Buckley

No this time we have a whole roster of stores that we’re already working on; some signed and a lot in negotiation for next year and what we are finding is that some of the location that were harder to get say a year ago between the economy getting tough for some other retailers and some boxes were opening up and I think the developers are realizing the strength of our brand. So, we’re getting the majority of the top real estate out there.

Operator

Thank you. Our next question is from the line of Ronald Bookbinder with Global Hunter. Please go ahead.

Ronald Bookbinder – Global Hunter

Booking at the seasonality of denim -- not thinking about the rollout of stores and all that, just looking at the seasonality of denim, what do you think would be the weakest quarter of the year?

Jeff Lubell

I would say it would have to be the second.

Ronald Bookbinder – Global Hunter

And so, as we go into the fall, with the cooler weather denim sales would continue to increase and then with holiday the store should be doing a lot better?

Michael Buckley

Well, basically in the second quarter it’s a lot of spring and summer merchandise and we did a lot of shorts, mini skirts and more apparel that was for the weather. So, that’s why we had such great performance with some of those categories that we were able to impact.

Ronald Bookbinder – Global Hunter

But, you were still pretty much around 80% denim bottoms.

Jeff Lubell

Yes, its denim shorts, denim skirt, denim micro mini, we had all sorts of shorts, also caprices and more for the weather.

Ronald Bookbinder – Global Hunter

But, if this quarter was as fantastic as it was in revenue, we could be looking at something even stronger in the back half?

Michael Buckley

Well, I think we gave you what our guidance is and you heard our comment about the back half being evenly split, so...

Ronald Bookbinder – Global Hunter

Okay, looking at the department store buyer, do you find that their buying closer to need and buying more on replenishment that the backlog might not be as significant as it has being in the past?

Michael Buckley

No, I mean our brand is very, very strong within our major account. Though it’s in the best interest of place more upfront, at least we’re staying upfront than obviously to leave some and have to drive and chase some reorders that they had in the past, but we’ve seen really no change in terms to the timing of their orders coming to us.

Ronald Bookbinder – Global Hunter

Are you having any trouble fulfilling orders; is there demand that you’re not able to capture them?

Michael Buckley

No, we’ve really ramped up our production team substantially and we’re fully on top of that so very comfortable with fulfilling all the orders?

And we just stated to go into our selling season with the upcoming project sale Ron and then going to corduroy and we’re really kicking off the shows right now, really starting very shortly.

Ronald Bookbinder – Global Hunter

Okay and what caused the shortage of the Italian stretch denim and what makes you comfortable that you’re going to be able to see that freight come down?

Michael Buckley

Basically, it was that we had tremendous amount of demand for the product probably doubling our usage from last year and they weren’t able to pickup their momentum in producing the fabrics, so we had to add more goods in and I shifted the product to a domestic mill, so I’ll get a better cost out of the goods and able to deliver as much as I need on that similar product.

Ronald Bookbinder – Global Hunter

So, you’re producing some of that while you’re having some of that fabric produced domestically which would probably be a little bit less per yard?

Jeff Lubell

I’m already producing it domestically and hypothetically the Italian supply who supplying me with good could make 40,000 yards a week. Now I can get a half a million yards a week if I needed it.

Michael Buckley

Without the cost of air freight.

Jeff Lubell

Changing currency, I have to add it in; it’s a mill quality in the United States of America, where we make our goods.

Ronald Bookbinder – Global Hunter

And lastly as you’ve seen the shift to more of your fashion product, the Disco and Super-T, do you think you’re gaining market share because your competitors are so much the same? Do you think you’re getting just more square footage in the department stores?

Jeff Lubell

The Disco sold out from that spring almost. It’s growing, I’m adding more colors of stones and also adding some new groups that are going to be very strong for us I feel going forward that will impact our sales and you’ll be able to see these group at the upcoming shows.

Ronald Bookbinder – Global Hunter

Do you have special fashion products set for holiday that we’re going to be able to see at project?

Jeff Lubell

Sure, you’ll be able to see the entire full holiday and the new spring summer collections.

Operator

Our next question is from the line of Eric Tracy with BB&T Capital Markets. Please go ahead.

Eric Tracy - BB&T Capital Markets

Maybe just to startup on the U.S. wholesale business; Michael, you talked about the ten styles that are out there, still more room to grow. I believe on the last call you mentioned doing some shop formats, how is that progressing and when can we expect to see that sort of rollout?

Michael Buckley

Yes, we’re close to finalizing the design concept and we’re going to be meeting with Bloomingdale’s in particular who’s the one at that’s open to us getting a shop in their stores. So hopefully we can solidify that and it would be no earlier than spring of 2009.

Eric Tracy - BB&T Capital Markets

Spring ’09 okay and then just in terms of again the selling on the sportswear side within the key department stores, any great attraction there?

Jeff Lubell

Well, we saw some great traction with Nordstrom and Bloomingdale’s customers buying into T-shirt and solids and the graphics and the vintage types of goods that we did. The fleece did very well, the Big-Ts, some of the tank hoodies, the Western Shirts, the over died shirts, the Baseball T-shirt, so we’re starting to get some good traction I feel with a couple of the majors.

As we do more in our own retail stores I think they’re seeing the results; actually our sales people are pursuer and then filling in the majors on the performance of the items within our own store, but again I’m a little more excited about the non-denim product as well and creating more of a lifestyle brand.

Eric Tracy - BB&T Capital Markets

Okay and then within your own stores, there seem to be a little bit of markdown activity going on with the non-denim; is that just a function of sort of getting the pricing right and is that in anyway…

Jeff Lubell

We don’t have any markdowns on our non –denim product in our own stores.

Michael Buckley

Yes we don’t mark down.

Eric Tracy - BB&T Capital Markets

Okay, so not with like some of the handbags, okay I must be wrong with that. Okay and then also within the in-stores, I think this is the first time you kind of mentioned a target or results on a comp basis, kind of up mid-single digits.

Michael Buckley

We said that the retail stores Eric were planned for the year, it’s the up mid single-digit and the year-to-date for both Q1 and Q2 those stores have exceeded the plan. We haven’t gone beyond and been more explicit about the comp rates just because we want to wait till we got a meaningful base to present that information on.

Eric Tracy - BB&T Capital Markets

Yes, fair enough. Okay and then on international is it possible to quantify that shift from Q3 to Q2. I know you said 12% decline for Q3 expected, but able to get sort of the absolute dollar amount of the shift.

Michael Buckley

It was roughly about $3 million.

Eric Tracy - BB&T Capital Markets

And then lastly Pete, just on the guidance I want to make sure I got this right in terms of Cadence for the back half, so sales roughly similar between Q3 and Q4 on an absolute basis and then from a net income that I hear you say Q4 is expected to be higher than Q3?

Pete Collins

That’s right. The mix is different between the two quarters. Q3 has more wholesale business in it and wholesale business had a slightly lower operating margin and then the office where the inverse goes on in the fourth quarter where retail kicked up, it’s actually with the holiday season and then that carries a higher operating margin, so that’s how the back the half should shape up.

Eric Tracy - BB&T Capital Markets

So more than offsetting that; I though you said too that it sort of increased investment in Q4, did I miss…

Pete Collins

You have got that, there is going to be some increased investment in Q4. For instance one of things that we’ve been able to do, Michael was talking about how strong the real estate market has been for us. When we came into the year, we didn’t expect that we’d be taking possession in the fourth quarter of ’08 for stores we’re going to open in the first quarter of ’09.

We’re now expecting that we’ll have probably five stores that will take possession of it in Q4 and so we’ll be incurring those pre-opening cost in Q4 without having any incremental sales from them until we get to Q1 of next year. In fact that’s what happened last year. We didn't take possession of any stores in Q4; with Q1 opening basically everything that we had in Q4 was opened and then we started taking possession early in Q1 and that’s why we didn’t open any stores in Q1 this year until the last half of March.

Operator

Thank you and at this time we have no further questions.

Jeff Lubell

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

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