News
True Religion Apparel Reports 2007 Fourth Quarter and Full-Year Financial Results
VERNON, Calif.-(Business Wire)-April 29, 2008 - True Religion Apparel, Inc. (Nasdaq:TRLG) today announced financial results for the fourth quarter and year ended December 31, 2007.
Fourth Quarter Financial Results
— Net sales were $52.7 million, an increase of 73.5% from $30.4 million in the 2006 fourth quarter. Net sales in the Company's U.S. wholesale segment increased 62.4% to $31.8 million from $19.6 million in the prior year. The Company's international wholesale business increased 21.3% to $9.2 million from $7.6 million in the 2006 fourth quarter. Net sales for the consumer direct segment, which includes the Company's branded retail stores and e-commerce site, increased 265.8% to $11.5 million from $3.1 million in the prior year. Fourth quarter net sales included $0.2 million of licensing revenue.
— Gross profit in the 2007 fourth quarter was $30.1 million, or 57.2% of net sales, compared to $16.6 million, or 54.6% of net sales, in the fourth quarter of 2006. The improvement in gross margin is primarily the result of the Company's higher margin consumer direct business generating a larger share of total net sales.
— Selling, general and administrative expenses for the 2007 fourth quarter increased 42.1% to $15.4 million from $10.8 million in the 2006 fourth quarter. Selling, general and administrative expenses for the fourth quarter of 2007 included $2.4 million of incremental operating costs for the expansion of the company's consumer direct business.
— Operating income for the 2007 fourth quarter increased 156.8% to $14.7 million, or 27.9% of net sales, compared to $5.7 million, or 18.9% of net sales, in the 2006 fourth quarter. The increase in operating margin is primarily due to higher sales and stronger margins generated in the Company's consumer direct business.
— True Religion's effective tax rate for the fourth quarter of 2007 was 41.0%.
— Net income for the 2007 fourth quarter was $8.9 million, or $0.37 per diluted share based on weighted average shares outstanding of 24.0 million, compared to $4.1 million, or $0.18 per diluted share based on weighted average shares outstanding of 23.6 million in the 2006 fourth quarter.
— On a Non-GAAP basis, adjusted net income for the fourth quarter of 2007 was $9.4 million, or $0.40 per diluted share based on 23.6 million weighted average shares outstanding. The Company's Non-GAAP adjusted EPS excludes approximately $395,000 of additional income taxes resulting from compensation recorded in the fourth quarter of 2007 that was not deductible and reflects a reduced weighted average share count by approximately 300,000 shares. The Company's weighted average share count for the fourth quarter and full year 2007 exceeded the share count used when the Company reiterated its full year 2007 guidance in September of 2007 by approximately 300,000 shares. This is due to a change in the anticipated future tax treatment of vested stock options. The change was identified in the review of the Company's accounting for stock options during the restatement process. For additional detail on the discussion and reconciliation of Non-GAAP financial measures, please see the reconciliation tables included herein, following the Company's Consolidated Financial Statements.
Full Year 2007 Financial Results
— Net sales were $173.3 million, an increase of 23.3% from $140.5 million in 2006. Net sales in the Company's U.S. wholesale segment increased 14.6% to $111.4 million from $97.2 million in 2006. The Company's international wholesale net sales declined 15.8% to $31.7 million from $37.7 million in 2006. Excluding Japan and the U.K., international wholesale net sales for the full year 2007 increased 11.5% over 2006. Net sales for the consumer direct segment increased 430.8% to $29.3 million from $5.5 million in the prior year. Net sales for the full year 2007 included $0.9 million of licensing revenues.
— Gross profit for 2007 was $98.8 million, or 57.0% of net sales, compared to $75.0 million, or 53.4% of net sales, in 2006.
— Selling, general and administrative expenses for 2007 increased 29.1% to $51.7 million from $40.0 million in 2006. The company's 2007 SG&A expenses included $8.2 million of incremental operating costs for the continued growth in the company's consumer direct business; and $2.7 million of severance and recruiting costs related to the replacements of two former executives and the termination of the strategic review with Goldman Sachs. The Company's 2006 SG&A expenses included a $2.1 million litigation settlement cost.
— Operating income for 2007 increased 34.8% to $47.1 million, or 27.2% of net sales, compared to $35.0 million, or 24.9% of net sales in 2006.
— True Religion recorded a greater than anticipated tax provision of 43.1% for the year ended December 31, 2007 versus its previously expected tax rate of 38% to 39%. This impacted the Company's 2007 net income by approximately $2.3 million. The greater than anticipated tax rate is largely due to a greater amount of compensation recorded in 2007, which was not fully tax-deductible. In addition, the Company incurred approximately $800,000 of incremental taxes related to miscellaneous adjustments which impacted the Company's income tax rate.
— Net income for the year ended 2007 was $27.8 million, or $1.16 per diluted share based on weighted average shares outstanding of 23.9 million, compared to 2006 net income of $21.7 million, or $0.92 per diluted share based on weighted average shares outstanding of 23.6 million.
— On a Non-GAAP basis, adjusted net income for the year was $30.5 million, or $1.29 per diluted share based on 23.6 million weighted average shares outstanding. The Company's Non-GAAP adjusted EPS excludes the severance and recruiting costs related to the replacements of two former executives, the termination of the strategic review with Goldman Sachs, the aggregate impact of the restatement to the Company's 2007 financial results as discussed below, the unanticipated change in the 2007 effective tax rate and the unanticipated increase in weighted average shares outstanding by approximately 300,000 shares. For additional detail on the discussion and reconciliation of Non-GAAP financial measures, please see the reconciliation tables included herein, following the Company's Consolidated Financial Statements.
Jeffrey Lubell, chairman and chief executive officer of True Religion Apparel, said: "Our fourth quarter financial results reflect strong brand momentum across both our wholesale and retail businesses and the success of our expanding product portfolio. We attribute our performance to the strength of our multi-segment distribution model as we continue to expand our points of presence to meet the growing worldwide demand for True Religion branded product. Our commitment to providing a comprehensive portfolio of innovative, fashion-forward denim and sportswear product continues to drive strong brand loyalty among True Religion customers."
Mr. Lubell continued, "During the fourth quarter, sales increased a record 74% and gross margins expanded to 57%, reflecting growth within our consumer direct business. As our consumer direct business becomes more significant as a percentage of total sales, we expect to further accelerate our top line sales growth and margin expansion."
Mr. Lubell concluded, "2007 was a transformational year for True Religion, characterized by an evolving distribution strategy, an expanded product assortment and accelerated growth in revenue and profitability. We will continue to build upon our momentum in 2008 by growing our product offering and by increasing our domestic and international footprint to further establish True Religion as a global aspirational brand."
Store Openings
During the 2007 fourth quarter, True Religion opened two new stores, bringing its total store count as of the end of the fourth quarter to 15 stores. The Company has opened 7 new stores to date in 2008. The Company anticipates opening at least 13 additional new stores before the end of the year, for a total of at least 35 stores by year end 2008.
Restatement of Previously Reported Financial Reports
The Company announced on November 7, 2007 that it would need to restate its previously issued consolidated financial statements for the fiscal years ended December 31, 2005 and 2006, including the quarters therein, and the quarters ended March 31, 2007 and June 30, 2007 due to certain accounting errors.
The Company's restatement is centered on three primary areas as identified below:
1. Income taxes: The Company's income tax expenses recorded in its previously issued financial statements were calculated incorrectly as the Company's compensation programs did not fully comply with the federal and state income tax regulations. The Company has recorded additional income tax expense of $1.5 million for 2007, $1.1 million for 2006, $0.6 million for 2005 and $0.1 million for 2004 to correct these errors. In addition, the Company has increased its income taxes payable by $2.7 million to recognize that tax deductions taken in prior years should have been limited; the benefit of these deductions was originally recorded as an increase to equity. As such, the restatement will result in a decrease in equity by the corresponding amount.
2. Restricted stock compensation: The Company has identified approximately $2.4 million of stock based compensation that was incorrectly booked in 2007 versus in 2006. To correct this error, the Company has shifted $2.4 million of pre-tax compensation from 2007 back into 2006.
3. Accounting for stock options: The Company has analyzed the accounting for all stock options since the Company's inception and determined that the accounting was not correct in certain situations. The Company has recorded additional pre-tax compensation expense of $0.3 million in 2007, $0.4 million in 2006, $0.3 million in 2005 and $0.4 million in 2004 to correct these errors.
In addition to the restatement adjustments identified, the Company has corrected other immaterial errors in its prior period financial statements and reclassified certain transactions within the 2006 and 2005 income statements. Additional detail will be available in the footnotes included in the amended 2006 10-K and the amended first and second quarter 2007 10-Q, which are expected to be filed on April 30, 2008.
Financial Report Filing Status
As previously announced, the Company received an extension to April 30, 2008 from the Nasdaq Listing Qualifications Panel to file its Annual Report on Form 10-K for the year ended December 31, 2007, its Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 and its restated financial reports for the fiscal years ended December 31, 2005 and 2006, including the quarters therein, and the quarters ended March 31, 2007 and June 30, 2007. The Company currently anticipates that the required reports will be filed on April 30, 2008.
Internal Control
In connection with the Company's assessment of internal controls as of December 31, 2007, the Company has determined that it had material weaknesses in internal control over financial reporting in the areas of income taxes, stock-based compensation and the financial close and reporting process. The Company has taken a number of actions over the past year to correct these weaknesses including strengthening the Company's finance and accounting organization and engaging new legal counsel and tax advisors. The Company is intently focused on improving its internal controls and intends to remedy identified internal control weaknesses by the end of 2008.
2008 Guidance
The Company will provide an update on its guidance for the fiscal year ended December 31, 2008 concurrent with its Q1 2008 earnings release on May 8, 2008.
Investor Conference Call
True Religion management will host a conference call to discuss the financial results and answer questions today at 4:30 p.m. ET. The conference call will be available to all interested parties through a live webcast at www.truereligionbrandjeans.com and www.earnings.com. Please visit the Web site at least 15 minutes prior to the start of the call to register and download any necessary software. For those unable to listen to the live broadcast, the call will be archived for a year at both sites. A telephone replay of the call will be available for approximately one week following the conclusion of the call by dialing (800-406-7325) (domestic) or (303) 590-3030 (international) and entering passcode: 3867519.
About True Religion Apparel, Inc.
True Religion Apparel, Inc. is a growing, design-based premium aspirational brand. The company designs, manufactures and markets True Religion Apparel products, including its premium True Religion Brand Jeans. Its expanding product line, which includes high quality distinctive styling and fit in denim, sportswear, and licensed products, may be found in premium department stores and boutiques in 50 countries around the world, including the United States, Canada, Germany, United Kingdom, Japan, Korea, France, Spain, Sweden, Greece, Italy, Mexico, Australia, South Africa and China. For more information, please visit www.truereligionbrandjeans.com.
This press release contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These statements are based upon our current expectations and speak only as of the date hereof. Our actual results may differ materially and adversely from those expressed in any forward-looking statements as a result of various factors and uncertainties, including uncertainties as to the nature of the apparel industry, including changing customer demand and tastes, seasonality, customer acceptance of new products, the impact of competitive products and pricing, dependence on existing management and general economic conditions. Our Annual Report on Form 10-K, recent and forthcoming Quarterly Reports on Form 10-Q, recent Current Reports on Form 8-K, and other SEC filings discuss some of the important risk factors that may affect our business, results of operations and financial condition. The Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason. -0- *T TRUE RELIGION APPAREL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share amounts) (Unaudited) Three Months Ended Year Ended December 31, December 31, 2007 2006 2007 2006 ———- ———— ———— ———— Restated Restated Net sales $52,714 $ 30,378 $173,256 $140,489 Cost of sales 22,585 13,803 74,429 65,476 ———— ————- ————- ————- Gross profit 30,129 16,575 98,827 75,013 ———— ————- ————- ————- Selling, General, and Administrative Expenses 15,396 10,837 51,685 40,036 ———— ————- ————- ————- Operating income 14,733 5,738 47,142 34,977 ———— ————- ————- ————- Other Income: Other expense (income) - (148) - (274) Interest income, net (382) (232) (1,803) (530) ———— ———— ————- ———— Total other income (382) (380) (1,803) (804) ———— ————- ————- ————- Income before provision for income taxes 15,115 6,118 48,945 35,781 Provision for income taxes 6,202 1,985 21,100 14,035 ———— ————- ————- ————- Net Income $ 8,913 $ 4,133 $ 27,845 $ 21,746 ======== ========= ========= ========= Earnings per share: Basic $ 0.39 $ 0.18 $ 1.21 $ 0.97 ======== ========= ========= ========= Diluted $ 0.37 $ 0.18 $ 1.16 $ 0.92 ======== ========= ========= ========= Weighted average shares outstanding: Basic 23,023 22,608 22,964 22,496 ======== ========= ========= ========= Diluted 24,026 23,604 23,949 23,608 ======== ========= ========= ========= *T -0- *T TRUE RELIGION APPAREL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Amounts in thousands) (Unaudited) 12/31/2007 12/31/2006 —————- —————- ASSETS Restated Current Assets: Cash and cash equivalents $ 28,686 $ 44,878 Marketable securities, available for sale 5,345 - Accounts receivable, net of allowances: From factor 14,709 9,532 From customers 13,189 6,498 Inventory 20,771 9,294 Deferred income tax assets 4,707 2,632 Prepaid expenses and other current assets 2,305 1,190 —————- —————- Total current assets 89,712 74,024 Property and equipment, net 11,579 5,008 Marketable securities 10,200 - Deferred income tax asset 561 - Other assets 1,206 719 —————- —————- TOTAL ASSETS $ 113,258 $ 79,751 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 9,597 $ 9,866 Accrued salaries, wages and benefits 4,059 1,909 Income taxes payable 3,210 3,404 —————- —————- Total current liabilities 16,866 15,179 Long-term deferred rent 1,145 425 —————- —————- Total liabilities 18,011 15,604 —————- —————- Stockholders' Equity: Preferred stock, $0.0001 par value, 20,000,000 shares authorized, 0 shares issued and outstanding - - Common stock, $0.0001 par value, 80,000,000 shares authorized, 23,586,703 and 23,253,529 issued and outstanding, respectively 2 2 Additional paid-in capital 26,491 20,159 Retained earnings 68,754 43,986 Accumulated other comprehensive income - - —————- —————- Total stockholders' equity 95,247 64,147 —————- —————- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 113,258 $ 79,751 =========== =========== *T -0- *T TRUE RELIGION APPAREL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS (Amounts in thousands) (Unaudited) Year Ended December 31, 2007 2006 ——————- ————- CASH FLOWS FROM OPERATING ACTIVITIES Restated Net income $ 27,845 $ 21,746 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,044 451 Provision for bad debt (285) 273 Shares issued for third-party services - 2,104 Stock-based compensation 5,731 6,721 Tax benefit from stock-based compensation 1,303 1,758 Excess tax benefit on stock-based compensation (1,270) (1,612) Deferred income taxes (2,636) (1,067) Changes in operating assets and liabilities: Accounts receivable - customers (6,756) 1,117 Accounts receivable - factor (4,828) (2,809) Inventory (11,477) 759 Prepaids and other (1,608) (895) Accounts payable, accrued expenses and other (29) 2,395 Accrued salaries, wages and benefits 2,150 1,873 Income taxes payable (1,094) (1,156) Lease liability and property incentives 720 425 ——————- ————- Net cash provided by operating activities 9,810 32,083 ——————- ————- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (8,765) (4,468) Purchase of short-term marketable securities (17,505) (60,162) Sales of short-term marketable securities 2,105 63,135 Other (228) - ——————- ————- Net cash used in investing activities (24,393) (1,495) ——————- ————- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 198 244 Tax withholding payment for stock-based compensation (3,077) - Excess tax benefit on stock-based compensation 1,270 1,612 ——————- ————- Net cash (used in) provided by financing activities (1,609) 1,856 ——————- ————- Net (decrease) increase in cash (16,192) 32,444 Cash and cash equivalents, beginning of year 44,878 12,434 ——————- ————- Cash and cash equivalents, end of year $ 28,686 $ 44,878 ============= ========= *T
Reconciliation and Discussion of Non-GAAP Financial Measures
Excluding the aggregate impact of the aforementioned restatement items, the expenses associated with the termination of the strategic review process and severance of two former executives, the greater than anticipated 2007 tax rate, and the unanticipated increase in weighted average shares outstanding by approximately 300,000 shares, the Company's non-GAAP adjusted net income for the year was $30.5 million or $1.29 per diluted share, compared to the Company's previously issued guidance of $1.24 to $1.27 per diluted share. A reconciliation of the Company's fourth quarter and full year 2007 net income to the Company's non-GAAP fourth quarter and full year 2007 adjusted net income is highlighted below: -0- *T TRUE RELIGION APPAREL, INC. AND SUBSIDIARY 2007 FOURTH QUARTER EARNINGS RELEASE RECONCILIATION OF NET EARNINGS TO ADJUSTED NET EARNINGS (Amounts in thousands) Year Ended Three Months Ended December 31, 2007 December 31, 2007 ————————- ————————— Net Earnings $27,845 $8,913 Impact of Restatement Adjustments: Restricted stock compensation (1) (2,366) - Stock-option compensation (2) 320 - Other (57) - Income tax on non-deductible executive compensation (3) 1,459 395 Other Significant Items: Separation costs (4) $2,748 $ 205 Other income tax exceeding plan (5) 793 (17) ————————- ————————— Income Tax Impact of the Foregoing (214) (80) Adjusted Net Earnings $30,528 $9,416 ================= ================== (1) Restricted stock compensation that was expected to be recorded in 2007 that has been properly included in the restated 2006 results (2) Errors identified in the Company's accounting for stock option grants (3) Additional income taxes resulting from executive compensation recorded in 2007 that was not fully deductible for income tax purposes (4) Includes $2.4 million of severance and recruiting costs related to the replacements of two former executives and $0.3 million of costs associated with the termination of the strategic review with Goldman Sachs (5) Actual tax rate of 43.1% versus prior estimate of 38% - 39% *T -0- *T TRUE RELIGION APPAREL, INC. AND SUBSIDIARY 2007 FOURTH QUARTER EARNINGS RELEASE RECONCILIATION OF DILUTED EARNINGS PER SHARE TO ADJUSTED DILUTED EARNINGS PER SHARE (Amounts in thousands, except per share amounts) Year Ended Three Months Ended December 31, 2007 December 31, 2007 ————————- ————————— Diluted Earnings per share $ 1.16 $0.37 Impact of Restatement Adjustments Restricted stock compensation (0.10) - Stock-option compensation 0.01 - Other (0.00) - Income tax on non-deductible executive compensation 0.06 0.02 Other Significant Items Separation costs 0.11 0.01 Other income tax exceeding plan 0.03 (0.00) Income Tax Impact of the Foregoing (0.01) (0.00) Reduction of shares outstanding (1) 0.02 (0.00) ————————- ———— Adjusted Diluted EPS $ 1.29 $ 0.40 ================= ======== Shares Used in Computation of Diluted EPS 23,649 23,649 (1) Reflects share count used when 2007 Non-GAAP adjusted EPS guidance was reiterated in November 2007; Actual weighted average share count exceeds weighted average share count indicated above by approximately 300,000 shares due to a change identified in the Company's review for stock option accounting *T
In addition to disclosing results determined in accordance with generally accepted accounting principles, or GAAP, True Religion Apparel, Inc. ("the Company") also discloses adjusted or non-GAAP results of operations that exclude certain items. By disclosing this non-GAAP information, management intends to provide investors with additional information to further analyze the Company's performance and underlying trends. In order to better assess operating trends, management utilizes a measure of adjusted net income and adjusted net income per diluted common share on a non-GAAP basis that excludes these specified items, net of tax effects.
Management uses this information internally for forecasting, budgeting and evaluating the effectiveness of the Company's operations strategies. Management believes it is important to provide investors with the same metrics used by management to measure operating performance, which assists investors in analyzing the underlying trend in the Company's business over time.
Non-GAAP information should not be viewed as a substitute for, or superior to, net income or other data prepared in accordance with GAAP as measures of the Company's profitability or liquidity. Users of this information should consider the types of events and transaction for which adjustments have been made.
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