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Executives

Jean Fontana – Senior Vice President, ICR.

Jeff Lubell – Chairman, CEO and Chief Merchant

Lynne Koplin – President

Pete Collins – Chief Financial Officer.

Analysts

Eric Beder - Brean Capital

Diana Katz - Lazard Capital Markets

Susan Anderson - Citi

Scott Krasik - BB&T Capital Markets

Ed Yruma - Keybanc Capital Markets

Ronald Bookbinder - The Benchmark Company

Janine Stitcher - Telsey

Dorothy Lakner – Caris

True Religion Apparel, Inc. (TRLG) Q3 2012 Earnings Conference Call November 5, 2012 11:00 AM ET

Operator

Greetings and welcome to the True Religion Apparel 2012, third 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 morning everyone, and thank you for joining us today to discuss True Religion Apparel's third quarter 2012 financial results. By now, everyone should have access to the earnings release, which went out earlier this morning. 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 third 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 the information discussed on the call today is covered under the Safe Harbor provision of the Private Securities Litigation Reform Act. We caution listeners that during this call, True Religion management will be providing financial guidance and making other forward-looking statements regarding future financial results and business opportunities. We encourage you to read the 2011 10-K, the upcoming 2012 third 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 is my pleasure to turn the call over to True Religion Apparel's Chairman, Chief Executive Officer and Chief Merchant, Jeff Lubell.

Jeffrey Lubell

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

Happy outset, I want to express my support for everyone who was impacted by hurricane Sandy, while many of our stores in the North East were closed because of the hurricane, I was impressed by our people who came together to check on their co-workers and showed that they were eager to get back to work. Their caring for each other and resilience impressed me greatly.

Now onto the third quarter results. Overall we were generally pleased with our financial results for the quarter. We delivered strong sales performance in the U.S. wholesale segment and continue to benefit from our retail expansion in both the U.S and the international markets. Although, our same store sales fell short of our expectations, our ability to transition the full fresh merchandise into our stores for the holiday season should help to stabilize these trends and to position us to once again drive our store performance and productivity, higher in 2013.

During the quarter we opened 3 new stores in the U.S and 5 abroad, 2 each in Canada and Germany and 1 in Austria. Before turning the call over to Pete for detail financial overview, I’d like to provide an update on our strategy. In the third quarter, we were remained intently focused on executing our strategic plans, this includes 1) extending our differentiated and well established brand across our even broader spectrum of customers, by further enhancing our leadership in men’s wear, strengthening our women’s offerings and then expanding our sportswear, driving growth in the U.S wholesale sales by focusing on building core denim assortments and our overall merchandise in offering and continuing to increase our Specialty store penetration. Expanding our profitability in the U.S retail store base and growing our international business across our existing footprint and into new markets through wholesale distributors.

As you know, we have been taking a number of steps to execute against this growth strategy including, enhancing our source and capabilities to enhance the quality and breath of our sportswear offerings. Separating design resources into women’s and men’s teams, the sport, the women’s growth, organizing plan rolls with a greater focus on localization, coordinating merchandising across channels, both in the United States and internationally. And selectively, increasing brand investments with targeted marketing all while maintaining a disciplined cost structure to further leverage sales gains.

Although, there was still more work to be done, we have a differentiated and strong brand heritage and we believe we are making solid progress on many of our initiatives, to regain traction in our women’s business and drive growth and profitability across all channels and geographies.

In October, we hired three experienced leaders into our open positions to support our growth strategy. Our new general merchandising manager for North America consumer direct brings 32 years of women’s fashion retailing experience. Our senior women’s denim and sportswear designer brings 28 years of women’s denim experience, her experience will help us create distinctive new stalls for women’s and also add additional sportswear product on that side as well. Our new director of licensing will be responsible for reinvigorating our licensing business. Our priorities will be to collaborate with our current partners to ensure that product appropriately reflects the True Religion brand as well expand into additional categories with new partnerships. We have re-dedicated our design and merchandising efforts to focus on updating our best selling classics, will also stay in current on trends with a goal of leveraging our brand and broadening our customer base.

Additionally, we have worked to achieve the right mix of merchandise between both men’s and women’s and denim and sportswear, while we continue to anticipate that the overall retail environment will be challenging in the fourth quarter, we believe that these steps put us in a strong competitive position. In short, we are confident that the company is very well positioned for future growth and that we will continue to generate value for all of our shareholders.

With that as background, I’ll turn the call over to Pete to review the third quarter in more detail and discuss our outlook for the remainder of 2012, Pete?

Pete Collins

Thanks Jeff and good morning everyone. I am going to start off by building upon Jeff’s comments and providing details on the third quarter. I will then 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 third quarter and year-to-date in the Investor Relations section of our website. Overall, our net sale grew by 9.4% in the third quarter, driven primarily by the U.S wholesale segments.

We are pleased with the direction of our U.S. wholesale business, particularly with the strength in our men’s business. While comps in our retail stores were negative during the third quarter, we expect to see improved performance in the fourth quarter, as a result of our enhanced women’s offerings and marketing initiatives. In a few minutes, Lynne will add more color on the third quarter consumer direct sales performance and give an update on the fourth quarter merchandise assortment.

The overall gross margin declined by 150 basis points to 63.3% due to an increased sales mix of discounted merchandise. Our overall operating income for the quarter was $18.9 million, or 15.9% of net sales, as compared to $19.9 million or 18.4% of net sales in the third quarter of 2011. The third quarter 2011 operating income was impacted by separation costs of 1.2 million associated with the resignation of the company’s former president. Excluding that item, operating income for the third quarter of 2011 was $21.2 million or 19.5% of net sales.

Net income attributable to True Religion Apparel Inc. was $12.3 million or $0.49 per diluted share for the third quarter of 2012. This compares to $12.1 million or $0.48 per diluted share for the third quarter of 2011. Excluding the separation cost that I just mentioned, the third quarter 2011 adjusted net income attributable to True Religion apparel was $12.9 million or $0.51 per diluted share.

Our U.S. consumer direct segments third quarter 2012 net sales increased over the same period last year, by 5.7% to $65.3 million due to the increase in the number of retail stores operated this year, versus last year. During the quarter we opened 3 branded retail stores, bringing the total to 119 stores at quarter end, compared to 105 stores at the end of the third quarter 2011. Our same store sales decreased 4.7% in the third quarter, which we attribute to a slowdown in traffic, prolonged summer weather and a decrease in sales of denim merchandise.

The U.S consumer direct segment’s gross margin increased by 50 basis points versus the prior year period to 70.9% primarily due to improvement in the outlet stores gross margin. The U.S consumer direct segment SG&A rate increased 200 basis points in the third quarter of 2012, versus the prior year quarter as a result of the same store sales decrease and the addition of merchandise planning and buying resources to support the expansion of this business.

The increase in the segment’s SG&A rate causes operating margin to decrease 150 basis points to 32.5%, however the U.S. consumer direct segment’s operating profit increased over the last year, by $200,000 to $21.2 million in the third quarter of 2012.

Our U.S wholesale segment’s net sales exceeded our forecast as it increased by 35.4% to $29.8 million, this is the third consecutive year-over-year increase in this segment’s quarterly net sales. This segment’s sales growth was attributable to the Off-Price and Specialty Store channels. We increased the amount of slow moving merchandise sold to the Off-Price channel in order to put more design for merchandise in our outlet stores.

As we have mentioned in the past, the design for merchandise typically yields a higher sell through rate and better gross margins in our outlet stores, as compared to the performance of discounted slow moving merchandise. The Specialty Stores Channel has achieved 10 consecutive quarters of year-over-year quarterly net sales growth. This quarter sales increase was driven by sales of men’s merchandise.

The U.S. wholesale segments gross margin declined by 150 basis points, primarily due to the increased sales of slow moving merchandise to the Off-Price channel. SG&A dollars were flat from last year’s third quarter, which led to the 170 basis points of SG&A leverage. Operating margin for this segment rose 20 basis points in the third quarter of 2012, as compared to the same period last year.

In our International segment, net sales decreased by 3% to $22.7 million, which was roughly in line with our forecast. This segment’s wholesale sales decreased primarily in Korea, which was anticipated and in Germany. This wholesale sales reduction was mostly offset by 115% increase in retail net sales, the direct result of opening 15 International retail stores since the end of the third quarter of 2011. We opened 5 International brand and retail stores during the third quarter of 2012 and we operated 28 stores as of September 30, 2012 compared to 13 stores at the end of the 2011 third quarter.

The international gross margin declined by 320 basis points primarily due to an increase in wholesale sales discounts to clear slow moving merchandise in Germany, and the Canada retail price reduction we took in the second quarter of this year to move closely aligned our Canada retail prices with the U.S retail prices.

The International SG&A expense increased 52.3% due to the operating cost associated with the additional 15 branded retail stores. Turning to our core services segment, SG&A expenses decreased by 700,000 dollars to 15.2% of total net sales, down from 17.2% of total net sales in the third quarter last year. The prior year’s core services SG&A included the net impact as a separation cost that I mentioned earlier. Excluding that, the impact as the separation cost, the 2011 SG&A rate was 16.1%. The reduction in the core services SG&A rate is consistent with our plan to leverage our overhead cost as we increase our total net sales.

Turning to our balance sheet, we ended the quarter with cash, cash equivalents and investments of $200.4 million compared to $182.8 million at the end of the third quarter, last year. Inventories at the end of the quarter was $64.1 million, an increase of 18.4% from a year ago. The largest component of this inventory increase is linked to our expanded worldwide retail store account which increased 24.6% over the past year. In addition, we increased our unfinished sportswear and our inventory in transit to support our growing sportswear merchandise categories. Also, our international wholesale inventories have increased as we shift our sales and procurement function closer to our customers.

Next I want to comment on our outlook for the fourth quarter. As a result of hurricane Sandy, 35 of out of 121 U.S. retail stores were closed at some point last week. As of Friday, 6 of our stores were still closed, however as of today, all the stores are open. Also, many of our wholesale customers closed stores due to the hurricane. At this point, we are not able to assess the storm’s financial impact on our fourth quarter results, and therefore the impact of hurricane Sandy, is not included in our fourth quarter and full year guidance.

In the fourth quarter, we expect our net sales will increase over last year’s net sales by approximately 7% to 11%. The primary driver of the year-over-year sales growth is expected to be our retail store count growth, both in the U.S and abroad. We are expecting that our fourth quarter effective income tax rate will be 37.5% and our diluted share count will be 25.6 million shares. We anticipate earnings per diluted share in the fourth quarter will be in the range of $0.52 to $0.58 per diluted share.

Overall for 2012, we now expect net sales of $458 million to $463 million. We expect earnings per share of $1.80 to $1.86 per diluted share with shares outstanding at 25.3 million and an effective tax rate of 37.5%. Also the fourth quarter and full year guidance excludes cost associated with the strategic review that we are conducting. And with that, I like to turn the call over to Lin, for her remarks about sales trends and other development. Lynne?

Lynne Koplin

Thanks Pete. And before I provide some additional color around the results for the third quarter and share an update on our progress with overall business initiatives, I want to extend my wishes for a quick recovery to everyone who was impacted by hurricane Sandy. We continue as a company to build upon our strategy to be a dual gender, multi-channel global brand. Our priorities in the quarter were to sustain strong momentum in our men’s business, continue to evolve our women’s merchandise assortment, grow our U.S. retail store base and build upon our international expansion efforts.

We believe we are making excellent progress in all of these areas. Our men’s business performed well in both our retail stores and in the wholesale channel. We opened 3 additional stores in the U.S. during the quarter and continued to employ initiatives in our international business that we believe will enable to capitalize on the significant opportunity to grow in our current markets, and to expand our geographic presence.

Beginning with our U.S. consumer direct segment, we did see our same store sales decline due primarily to a slowdown in traffic and prolonged summer weather during the September transition to the fall assortment. While denim sales slowed, we remained pleased with the continued momentum in our men’s business, particularly in corduroy, tees, and shorts. The brand loyalty in our men’s business remained very strong, as we continued to deliver merchandise assortments that align with their taste.

We are also pleased with the direction we are taking with the merchandise assortment for the Holiday season, and to a greater extent in 2013. We expect to have a better balance in our more of our branded iconic merchandise in the stores to help drive fourth quarter same-store sales trends, especially in the important Holiday season.

Specifically, we have made adjustments to the assortments for the fourth quarter to reflect greater core statements in both bottoms and tops. We are placing greater emphasis on the iconic True Religion items such as new iterations of super tees, crystal embellishments and a broader offering of updated core indigo denim. Being that it’s the Holiday season, we are also focusing on novelty items in both bottoms and tops for women that wardrobe beautifully and will expand our women’s customer base.

Similar to the full-price stores, sales in our outlet business were hurt by weak traffic trends during the quarter, particularly around the key 4th of July period and during the back-to-school season. As Pete commented, we plan to increase the proportion of special “design for product” in our outlet stores such as woven tops, active sets and jackets, as well as accessories including belts, bags, and underwear.

Our merchandise assortment for outlet is planned to be 70% special design for and 30% slow-moving transfer product. We believe this will lead to improved gross margin for our outlet business. Overall, for our consumer direct segment, we continue to see a positive response to our sportswear business, driven by higher sales in corduroy, tees and shorts categories.

Sportswear represented 35.1% of the total U.S. consumer direct sales, up from 28.8% in the third quarter last year. We believe that our efforts to diversify our non-denim will continue to drive sportswear growth at a faster pace than denim.

Turning to the U.S. wholesale business, we are very pleased with the strong growth in our men’s business, particularly in the specialty store channel. The styles we are delivering continue to resonate well with our male consumer and we believe we can continue to grow market share, as we maintain a strong denim assortment and continue to expand our sportswear offering.

Looking forward, in the women’s market, we are seeing a shift back to basic denim after a two-year hiatus in non-denim. Our updated core fits in new washes and fabrics now being offered at prices from $172 to $228 are resonating with consumers and we anticipate that these products will continue to grow as a profitable foundation for the business.

Our international business declined 3% in the third quarter, as strong growth in our branded retail business was offset by sales declines at wholesale, particularly in Korea and Germany. We have a number of initiatives in place in our target international regions that we believe will drive accelerated performance in these markets.

In Korea, we are in process of transitioning to a direct business model in order to gain better control over distribution and pricing of products. As we have talked about in the past, we are pulling out of accounts that are upper end appropriate in clearing inventory through a pop-up outlet location. We have a new country manager in place who is leading this process and evaluating new distribution for our brand in this market. We also plan to implement a local POS system and 3PL support is in the works with a target completion by end of December.

This will enable True Religion Korea to be the sole importer of records and reduce parallel imports. In Japan, we hired a new country manager in the beginning of October, who is working on the transition of our department store business from third-party distributors to direct. We also downsized the team and are now outsourcing back office functions in finance and logistics.

We hired a new merchandise planner in Hong Kong, who will help us to better localize the product to align with specific market taste and fit preferences, and we are continuing to develop the same merchandise planning and buying skills for our key markets in the UK and Canada as well.

Giuliano SarToro[ph] , our VP of International, continues to look for business prospects in Asia and Europe, as well as Latin America, including Panama and Brazil. Our international priorities remain to work with established partners in local markets, tailor merchandising in key markets to accommodate local preferences and distribute and price our products strategically.

In summary, we are making progress across several strategic fronts that we believe will drive growth across our business channels in 2013 and beyond.

Now, I would like to turn the call back to Jeff for some additional remarks before we open the line for questions. Jeff?

Jeffrey Lubell

Thank you, Lynne. I would like to briefly comment on our recent announcement for strategic alternatives process. In October, we announced that after receiving indications of interest from third parties regarding a potential transaction with the company, True Religion’s Board of Directors formed a special committee of non-management directors and hired financial and legal advisors to evaluate potential strategic alternatives available through the company, including a possible sale, with the goal of maximizing shareholder value, that review is currently underway.

It is important to note that no decision has been made to engage in a transaction and there can’t be no assurance that any transaction or any other strategic alternative will result from this process, nor as the special committee set a definite timetable for completion of this review process. As you can appreciate, we will not be commenting on this process until the Board takes some action or otherwise determines disclosure as appropriate or required.

With that, we will open up the call for questions. Operator?

Question-and-Answer-Session

Operator

(Operator Instructions) Our first question is coming from Eric Beder from Brean Capital. Please proceed with your questions.

Eric Beder - Brean Capital

Good morning.

Jeffrey Lubell

Good morning, Eric. How are you?

Eric Beder - Brean Capital

All right. We are doing well. To talk a little bit about Canada, I know you are anniversarying, you are now changing the parity pricing. How does that help drive traffic and when you look at the U.S. consumer, what are your assumptions there as that U.S. consumer is going to change and come more aggressive than shopping, how are you thinking about that?

Lynne Koplin

I would say, in the case of Canada right now, where we have several new markets that we are in, we have the traffic. The traffic numbers are definitely there. Our challenge right now is conversion and really converting that traffic and getting the product assortments right. I think the prices are where they should be. They are about 16% higher than the U.S., which is I think competitive with the market. So, really, it’s about driving conversion at this point, Eric.

Eric Beder - Brean Capital

And when you look at Germany, what is the issue there and you said it’s just a shift from wholesale to retail or is it other issues of Germany?

Lynne Koplin

Yes, I think it’s predominantly the shift from wholesale to retail at this point, and then also the balance of full price in outlet and really understanding how to bring inventory in, you know, in terms of a product flow to manage the store dynamic much the way we manage it here.

Eric Beder - Brean Capital

Great. I guess the final thing here is how should we think about – you talked about bringing new designers and improving the women’s product. When should we start to see the full benefit of that? When are we going to start to see the benefit and when will see, start to think about the full benefit of that?

Jeffrey Lubell

Eric, I will take that call. It’s Jeffrey. How are you?

Eric Beder - Brean Capital

I am doing great.

Jeffrey Lubell

Yes, recently, I hired a head women’s design with approximately 28 years of experience. I know, we are mentioning names, she’s been a friend of mine for many, many years, when I used to be in the textile business. And she is very talented. She used to work for one of the biggest brands here in the Los Angeles community. She both knows sportswear as well as denim as well as non-denim related sportswear, which will really, really help our brand both from a women’s initiative to fits, constructions, qualities, fabrics, body shapes and styles and all the things we plan to bring it forward to help and fix the women’s business for the future of our brand.

Eric Beder - Brean Capital

Okay. Thank you.

Jeffrey Lubell

Thanks Eric.

Operator

Thank you. Our next question is coming from Diana Katz from Lazard Capital Markets. Please proceed with your question.

Diana Katz - Lazard Capital Markets

Hi, good morning. Wanted to know if you could share with us your comp expectation for the fourth quarter?

Jeffrey Lubell

Right now, Diana, I would like to state, in the third quarter, we don’t know what the fourth quarter is going to look like based on the terrible storm that happened with Hurricane Sandy at this point. We would like to just stay within the quarter. If you have any questions regarding the third quarter, we would be happy to entertain those questions.

Diana Katz - Lazard Capital Markets

Sure. I was wondering if you could talk more about your increase in ASPs in the quarter, the $253 from $240 last year?

Pete Collins

Yes¸ Diana, it’s Pete. I think the bulk of that is really just a mix shift between men’s and women’s. We talked in the past that the men’s ASP typically is above our average while the women’s is below. And the trends by gender was pretty similar on a year-over-year, so that the average was really just a function of the sales mix shift as we talked about more of the business and our stores is being done in the men’s category.

Diana Katz - Lazard Capital Markets

Okay. Sure. And then, can you talk about what’s in the quarter then, the improvement you saw in men’s was in your comp or was – and also the inventory that you have left in your storage right now, do you have a lot of that non-local products still left in your own inventory?

Lynne Koplin

No, we were actually very successful in really taking that help of our inventories after Q2. So, that is not a problem anymore.

Diana Katz - Lazard Capital Markets

Okay. And within the comp this quarter, the decline, was it on both the men’s and women’s side or was it just a decline on the women’s side?

Jeffrey Lubell

Yes, the men’s business was positive, Diana, and in Lynne’s remarks, we talked about the categories that did well. So, it was the non-denim pants, especially corduroy, the tee shirts and the shorts. So, that was – those were really what that differentiated or those are the product categories that did the best in the quarter on the men’s side.

Diana Katz - Lazard Capital Markets

Okay. Thanks a lot. Best of luck.

Jeffrey Lubell

Thanks Diana.

Operator

Thank you. Your next question is coming from Susan Anderson from Citi. Please proceed with your question.

Susan Anderson - Citi

Good morning, everyone.

Jeffrey Lubell

Good morning.

Susan Anderson - Citi

Hi. I was wondering if you could maybe talk about the guidance a little bit more. Heading into the fourth quarter, obviously your sales expectations are a little bit higher now and earnings have based the same. So, should we expect similar trends in terms of the third quarter, flowing into the fourth quarter from the outlet impact on margins or is most of that coming out of SG&A?

Jeffrey Lubell

From an SG&A perspective, Susan, I think what you can see throughout the year is our trend has really been to have SG&A increases related to store count growth. As I called out in my remarks, our overhead spending in the core services segment has been well-controlled so far and we are than anticipating a change in that in the fourth quarter. So, I think the trends you have seen year-to-date in SG&A spending are what you are going to expect for the fourth quarter.

From a sales and gross margin perspective, there are really – you have got the shift from wholesale to more of a retail focus in the fourth quarter as you would expect, but other than that, really wouldn’t call it anything else but the change from Q4 this year versus Q4 of last year, other than maybe Lynne’s remarks about some improvement in the merchandise mix of design for outlet in the outlet stores.

Susan Anderson - Citi

Okay. Great, thanks. And then, in terms of international, you have lowered prices in Canada and the UK, which seems to be working, but still you need to get conversions out, what do you think you need to do to continue to drive improvement in those businesses?

Lynne Koplin

I think it comes through product planning to tell you the truth and product training. At this point, we have found some things that’s even down to the level of the right size, scales, etcetera in Western Canada versus Eastern Canada. It’s just a lot of product issues, and then also the time and planning that need to take place to get the product there on a timely basis, get to replenish, how do we replenish it quickly, how do we not deal with the logistical aspects of it. So, better product planning, I would say in the case of the UK, a lot of it’s timing and making sure that we really take into account what their seasonal shifts are as opposed to ours.

In California here, it’s 90 to 95 degrees today and yet in the UK, it’s a little chillier. So, there is a lot of individual differences that we need to take into account and put into our merchandising planning processes.

Susan Anderson - Citi

Okay. Great. And do you think it’s just a matter of getting it right over there, or do you need to beef up the team over there or do you think in order to implement better planning strategies.

Lynne Koplin

Yes, actually in the U.K. we brought a buyer on board about 2 weeks ago, so we’ll have a local buyer merchandiser on the ground who will report in on a dotted line basis to our team here. So that we will review weekly selling and assortments and they can weigh in on exactly what their needs are and when they need the product and how it should be priced competitively. So, we’re doing that in the U.K. now and they are also going to be doing that in Canada within the next 3 months.

Susan Anderson - Citi

Okay. Great. And then in terms of Korea and Asia, I think we’re cycling in the fourth quarter now, the beginning of the big decline. Do you expect then next year, what is your outlook as far as the business over there and how long do you think it is going to take to reposition the brand over there?

Jeffrey Lubell

Yes. Let me take that call Susan. In Korea, we had some problems with some parallel importers last year. I think you realize, we talked about that in the fourth quarter with two Giuliani SanToro[ph] joining the firm. He has noticed and has done a big summary for us regarding the Korean market place. The first step was to become the importer of records so we could control what product are into Korea, we took a very proactive approach to Korea. We brought down our sales both on the wholesale side of the business to manage this process so that we can be in the right avenues of distribution for the brand and it’s integrity and over the next two years we’ll see quite a substantial improvement both in that Korean market.

Susan Anderson - Citi

Great, thanks, that is very helpful. Thank you guys.

Jeffrey Lubell

Thanks Susan.

Operator

Thank you. Our next questions is coming from Scott D. Krasik from BB&T Capital Markets. Please proceed with your question.

Scott Krasik - BB&T Capital Markets

Thanks. Good morning everyone.

Jeffrey Lubell

Hey Scott, how are you?

Scott Krasik - BB&T Capital Markets

Okay, so Pete just a few things that you usually give us. So, first in retail, can you give us at least directionally the difference in the outlet comps versus the full price comps?

Pete Collins

They were pretty similar, nothing – no real significant distinction between the two charts.

Scott Krasik - BB&T Capital Markets

Okay and then in terms of the wholesale breakup, you usually give us the changes in major specialty in half price.

Pete Collins

Well, the half price was the largest increase. Asia was down for the quarter. The combination of specialty and major, what we look at as the full price category within the wholesale segment was up 19%. So, we really had good growth in the specialty’s offset reduction that we saw in the majors.

Scott Krasik - BB&T Capital Markets

And in terms of the specialty growth I think last quarter or the quarter before you talked about growing at some of these big e-commerce site, is there where it is coming from or there other customers coming back to the brand, what is the growth now?

Lynne Koplin

Yes, you are seeking some growth in e-commerce on the men’s side, not as much on the women’s side, but it is definitely coming from more of the traditional specialty store base, not e-commerce right now.

Scott Krasik - BB&T Capital Markets

So, that is new?

Lynne Koplin

Yes, it is actually – probably more penetration with an existing account and it is additional door count.

Scott Krasik - BB&T Capital Markets

Okay, that is all on the men’s side.

Lynne Koplin

Yes.

Scott Krasik - BB&T Capital Markets

Okay and then in terms of the dynamics, your gross margin should look good in the retail because you are pulling out, close out to be removing that into a wholesale, is that a phenomena, will continue in the Q4 and beyond. When did the wholesale margins then normalize for the shift because we have the shift the other way, now we have to shift back.

Lynne Koplin

I think it is really all going to stem from controlling inventories effectively and that is really in the shift from growing men’s business and supporting women’s but not trying to overestimate what we can do there and really tracking to how it is performing, that is going to have a margin impact overall. I think that we have just made the strategic decision to increase the amount of design for outlet product that we put in our outlet stores because we’ve seen just exceptional results there in terms of how we’ve diversified the product into sportswear etc., and really kind of created the second tear of TRLG in retail. So, what you are going to see on the half price wholesale side is just your kind of classic close out quantities that we have to do every season because we will remain a full price retail store concept and with that inventory management, I don’t think you’ll see the margins decline there because we will keep that a healthy business obviously mixed with DFO as well. So, I think we just need to control the inventory and I’ll keep the margins intact.

Scott Krasik - BB&T Capital Markets

Specifically for the fourth quarter, do you feel good about that inventory or we still have another quarter of that…

Lynne Koplin

No, I do feel much better about the inventory than we did in Q1 and Q2. Yeah, it is much better controlled at this point.

Scott Krasik - BB&T Capital Markets

And then Jeff, it is just you have made this decision that you wanted to choke the supply and pull out of half price and really establish the price point. Is this the little bit of a shift versus what you’ve imagined (inaudible) or something?

Pete Collins

Yes. Scott, yes let me take that call. How are you today? Good. Yes, we have taken – we looked at the outlet channel and every time we do a transfer from our full price retail to the outlet channel we found – our own outlet stores we found that it was hurting the margins in the outlet. So, I have made a decision here to do more design for outlook product, less transfers and move more of that towards the half price channel to clear merchandise that isn’t performing well in the full price retail stores while the wholesale channel and also some from the outlet stores. We found that in the third quarter, we were able to take some products at our outlet channel and move it to the half price channel and we gained some margin there. So, in seeing that I think this is something that we have to go back to was on the a four channel to clear merchandise, get rid of it and move forward with a much cleaner business. I’d like to control our inventory, I liked the fact that we have no debt and we need to do a better job just making sure that all things are working properly.

Scott Krasik - BB&T Capital Markets

Okay. Just last question, we only talk about the guidance a lot, but Pete or Lynne, if you go by regions. So, in the international, Europe, Asia, Canada, what are your assumptions in general for sales, for each of those regions, in general?

Pete Collins

Scott, let me take that call. We hate to talk about fourth quarter results right at this moment and I really would like to stay in the third quarter, the fourth quarter predominantly is the best quarter of the year. With the exception of this terrible storm that hit the east coast Sandy right now we’re hoping things trend better. They were doing everything that we can to help the people back there to get back into business. We’re looking forward to black Friday, we’re doing everything possible to make the holiday fourth quarter, the biggest quarter of the year both domestically and internationally both in the EMEA and Asia-Pacific regions.

Scott Krasik - BB&T Capital Markets

Okay. Alright, thanks guys.

Operator

Thank you. Our next question is coming from Ed Yruma from Keybanc Capital Markets. Please proceed with your question.

Ed Yruma - Keybanc Capital Markets

So, I just had a couple of questions. On the made for our outlet, you said your goal was to get to 70%, what is that percentage as it stands right now?

Jeffrey Lubell

Right now we’re planning for the fourth quarter a 70% DFO and a 30% transfers from full price stores. It is a clearly at that level in men’s, in women’s it is about 10 points shy which were correcting for the fourth quarter.

Ed Yruma - Keybanc Capital Markets

Okay, great. And then on the international, do you think that you’ll need to reduce pricing in Europe and Asia as you’ve done in Canada and the U.K. eventually?

Pete Collins

Yes. Let me take that question. What we are planning to do, last several weeks I have been working on opening up a product line specifically for the European Union, the EMEA especially, where we will cut, sew, make, watch, trim denims in Europe especially in Italy for that marketplace and we are in the process of setting that up right now. We are already currently making sportswear products, sweaters, some outer wear, mitts, tees, hoody things like that right now in the region in Germany, but we want to be more competitive in Europe and we also want to be more competitive with Asia as we are here in the United States. So, I am looking at setting up infrastructure both international marketplaces to meet the needs of those territories, put a very small tight team in place, designer, merchant, a production man and all fits will be done back here in the U.S.A., all patterns will be made here for that marketplace and then send that out, and do a similar concept to the way I started my business which was a full package business where we hand them a garment, they buy the fabrics, the trims, the zippers, the labeling, etc., and we’ll be able to avoid the shipping costs, freight, the VAT and the duties in going into those territories and be more competitive in those market places.

Ed Yruma - Keybanc Capital Markets

Great, that was helpful. When do you think you would begin to get that product in, in the stores or in the distribution channel?

Pete Collins

It probably won’t be until the third quarter of next year, but we’re already on the ground, we’re already working on it. We’ve already got product designed for the EMEA, it has been trending very nicely on the sportswear side with the German product and now we’re moving more into a bottom’s classification for that area, for the future and I think that you’ll start seeing product. We may be able to start getting some product in there in the second quarter, I’m not sure at this point, but definitely the third quarter of next year.

Ed Yruma - Keybanc Capital Markets

Okay, great, thanks, that was very helpful.

Operator

Thank you. Our next question is coming from Ronald Bookbinder from The Benchmark Company, please proceed with your question.

Ronald Bookbinder - The Benchmark Company

Good afternoon,

Jeffrey Lubell

Hi Ron, how are you?

Ronald Bookbinder - The Benchmark Company

Pretty good, how are you. Following on that question, what sort of price reduction do you think we could see in Europe?

Jeffrey Lubell

Well, I have been working with Giuliani on this and we’re looking at cost that are much more effective, they are somewhere around €29 to €32 for a very similar product that we’re running here in the United States, which could be a tremendous savings for us in that area.

Ronald Bookbinder - The Benchmark Company

So, is it valid at 25% cost reduction that would be reflecting?

Jeffrey Lubell

You know, I like to under promise and over deliver being very cautiously optimistic right now, but I think that we could save a substantial amount of money of being in that region and making product for that region.

Ronald Bookbinder - The Benchmark Company

And the whole idea is that it would be a much more competitively priced product?

Jeffrey Lubell

Right, and I think that we could do more business in that market place, and the quality is amazing. We are buying from the best supplier of fabric over there in Italy. I planned to make this project in Italy, I am not looking at Turkey, I am not looking at Croatia or South America or other places I think it would be very brand enhancement to have a made in Italy product for True Religion.

Ronald Bookbinder - The Benchmark Company

Okay. On Japan, Japan used to be a very substantial portion of your business. I think this is the third country manager for Japan. What are you planning different this time than in the past.

Jeffrey Lubell

Ron, over the years we had a Japanese distributor over there who used to be in United States of America, I think you remember Tony Shibata for many many years ago and when he was just a distributor he lived here in Los Angeles, he would come into the factory, look at the product line, buy the line, give me substantial quantities for the Japanese market and then at one point happened where he decided to open up a showroom in Japan and try to cut out the distributors both on the department side and the specialty store side in Japan and he wasn’t really able to manage that business quite up to its potential. And then we took over that business and we’ve had, let’s call a dog a dog. We’ve had nothing but problems with Japan over there, but now we have a brand new country manager who we feel is going to do a great job over there where we’re being very careful about that marketplace and we’re hoping that this was the guide that is going be able to transform that Japanese market.

Lynne Koplin

His background is retail. He has a denim background and we’ve gone through some cuts in terms of head account. So, we are outsourcing the financial support, logistical support and getting the costs under control and really taking kind of a very slow and steady approach to the wholesale and really focusing on getting our retail stores performing again.

Ronald Bookbinder - The Benchmark Company

And are you going to have to rebuild the brand or does the brand still carry some cash in Japan?

Lynne Koplin

No, actually, it’s interesting. Through the last six-month process of hiring consultants over there, we have actually done some focus groups, and the brand actually does still carry a lot of weight over there. We have just kind of mishandled it, we have had a lot of different management, as you said. This is actually our fourth country manager, but we really needed to transition as we have had to in many international markets from wholesale into retail, from a distributor model to a retail management team. So, we are doing that really globally, but starting in smaller markets, obviously where we have retail store, we have retail employees, and we need to kind of spread the word in terms of product knowledge in getting the product right locally for the market, and this guy is a product guy, the retail guys, the denim guy and I think we never really had that before.

And plus, we have a new managing director in APAC in Giuliano. So, we have got a team that supports a local country management structure that really I think will work for us now.

Ronald Bookbinder - The Benchmark Company

Okay. And lastly on licensing, licensing continues to decline as you pulled back some of the licenses. How do you see licensing going forward and using that to help build the brand?

Jeffrey Lubell

You know, licensing is very important to the True Religion brand. We are only down to a few licensees right now, which we started back in about 2005, I think it was, and we had a very, let’s not say, it wasn’t a very top tier licensing department, both for True Religion and the people that we were partnering out with.

So, we have changed that whole process. The fragrance now is being carried by Elizabeth Arden, in the first six weeks of selling, it’s sold out on the women’s side. And we are looking for much more licensees. The girl that I hired to do the licensing at True Religion, she has tremendous amount of background in the area, with a relationship. She did all of the license product for a company I think that you are pretty fond of, which was Juicy Couture. She was recommended to me by the head of licensing from Michael Kors and we are very excited that she’s on our team and we are moving forward. She is going to be spending some time in New York. As soon as things clear up there a little bit, and she can start reaching out to some of her relationships, and not that she hasn’t been doing that at this point, but we would like to have meetings, we are going to go back east, we are going to meet with a lot of people, and we are going to see if we can get to some more top tier licensing agreements. We are looking at badge, we are looking at all sorts of categories for the True Religion brand.

Ronald Bookbinder - The Benchmark Company

Okay. Great. Good luck in the fourth quarter.

Jeffrey Lubell

Okay, thank you very much.

Pete Collins

Thanks Ron.

Operator

Thank you. Our next question is coming from Janine Stitcher from Telsey. Please proceed with your question.

Janine Stitcher - Telsey

Good morning. I was wondering if you could just talk a little bit about on the women’s side, what you are seeing in terms of color and print? It seems like color was a pretty big catalyst for the industry overall for the last two quarters or so, or maybe now seems to be slowing and shifting a little bit more towards printed and going back towards more basic style. So, can you just comment a little bit on where you are seeing on the product side?

Pete Collins

Yes, I think that you are going to find in 2013, the shift back to really premium denim. I think these whole color situation has been prevalent in the market for the last couple of years, is going to come to a standstill because you are finding that it’s in the lower tier brands at this point. Not to mention what those brands are, but I think recently, I noticed a commercial on television for Jordache jeans. I am not sure if you have seen it, with Heidi Klum dancing around in the color denim. And that’s for Wal-Mart.

So, being that the product is now in the more matched market. We are moving back to the True Religion way of doing business and putting a lot more emphasis on denim and the right denim-related sportswear. I mean, we will continue with colored bottoms, but it’s won’t be 12 different colors of a particular bottom, maybe one or two.

Janine Stitcher - Telsey

Thank you.

Pete Collins

You are welcome.

Operator

Thank you. Our next question is coming from Dorothy Lakner from Caris. Please proceed with your question.

Dorothy Lakner - Caris

Thanks, good morning everyone. Wanted to come back again to the merchandising side of things. And a couple of things that Lynne, you were saying during your presentation. One, on the men’s side of the business, which has really been the strength, especially on the denim side, I think you mentioned denim slowing and I wondered if that was just something you were seeing in the quarter because of the warmer weather, or whether it’s something on an ongoing basis. And then just under women’s side, where are you seeing this move back to denim? And Jeff, you just mentioned it as well. What gives you confidence that the colored denim or colored cords kind of goes away and the move is back to premium denim which you have always been known for. What are you seeing in the women’s product that you have got now that gives you confidence that things are kind of moving back to your side of the court?

Lynne Koplin

I will start that. Basically, Dorothy, in Q3, we saw just a – Q3, which is summer essentially and then it becomes later every year, the heat did not help. I mean it’s 95 here today. So, what we saw and we really tried to time the introduction of all a little bit later every year. I mean, we are not a traditional fall brand, it’s not like we have heavy winter coats or sweaters, but denim, we just see it the new fall product in denim, just starts a little bit later year, and summer continues and it kind of went on for a couple of more months. And then, we were better prepared I think in terms of other non-denim categories.

Our corduroy is very, very light. It’s now a year-around fabric for us and that continued to sell largely due to the fact that we offered a pretty broad color assortment in it and it was priced well, it was priced under $200, which the summer shopper is a bit more price sensitive. They are buying things that not necessarily for investment purposes, but for wear-now purposes. And we also had a very big tee shirt swing. I mean our t-shirt business was phenomenal, and I think largely due to the fact that we offered a broader assortment, it seemed to shift from woven shifts into tee shirts this season and again probably more weather-related.

And then, in shorts, we had about 300% increase in shorts. And to the point where we think we really need to run shorts all the way through the year, regionally, it works in south and the hot weather stores, and we have just seen that continue to sell year around. So, we will really be set up for fall of next year as well to offer something new.

In women’s I think we did not have the non-denim categories that we needed like men’s to really sustain a bit of a short-fall in the denim. And we are working on that for next Q2 to really offer a broader assortment of sportswear. That is the main focus, as Jeff said, with the new design director coming on board for the women’s, to really round out the assortments, so that we can use the same thing in women’s that we did in men’s.

Dorothy Lakner - Caris

Yes, and just in terms of the denim trends, are you seeing something now that makes you feel like things are moving back in the right direction.

Jeffrey Lubell

Yes, I do. We are seeing a lot more, from our partnered stores and people around the world, my German JV partner that the return to denim is very, very important for fall of next year in all different looks and you know, shapes and sizes. One thing that we are doing here is we are getting a little more narrow-focused in deep on the denim side and the denim-related sportswear side, so we can get more people and involve with less product. And I think that’s a big thing, you know. Sometimes the collections get too big, too vast and you get too many different orders from around the world and things that you really can’t produce. So, we are taking a really merchandise look at the offerings, both for the United States, Canada, the EMEA, Europe as well as Asia. And really tightening up the offerings so that everybody can sort of piggyback to same product in the different fits that they want.

Here in the United States, the fits seem to be slimmer on the men’s side and the women’s side, skinny stiller very important in Europe, skinnys are very, very important for men’s. The women’s business, we are actually seeing some more flares and bell-bottoms on the European side, which is – I haven’t seen in my 10 years for a long time. And then, in Asia, we are making – we are very focused on making much shorter in-seams and a more of a petite body style, with a very narrow focus in deep collection for the APAC area.

Dorothy Lakner - Caris

Okay. Thanks. That’s really helpful. And then, just one question on the fourth quarter guidance. Again, going back to inventories, you are saying you feel better about inventory, you have got less slower moving product than you did. So, would it be correct to assume that you should see less off-price sales because you don’t have that bulge in inventory that you entered into this quarter with.

Jeffrey Lubell

Yes, I am sorry. I didn’t mean to interrupt, Dorothy. Actually to non-denim related sportswear, we are always going to have product that we are going to need to move, because it’s more seasonal, whether it be outerwear or sweaters or down jackets or Leatherman jackets or any of the other product that we do, you know, full plaids, panel plaids, yarn dyes, hoodies, hookups, sweatshirts, all different tee shirts. So, if you remember back in the days when there was 95% denim and 5% sportswear, we really didn’t have that kind of problem. And now, that we are doing more sportswear and it’s more seasonal where we are going to have to definitely be to find a way to control our inventory and to move sportswear that is seasonal from time-to-time, from quarter-to-quarter.

So, I don’t think it’s something that’s going to stop, it’s just something that we need to manage better, make sure we do the right amount of buying, planning and allocation of that product, and hopefully it moves through better at retail, if you plan better. And then, we won’t have as much product to clear if the sales aren’t there.

Operator

Thank you. We have reached end of our question-and-answer session. And that also concludes the teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

Jeffrey Lubell

Okay.

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