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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly report period ended September 30, 2010

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                         to                         

Commission File Number: 000-51483

TRUE RELIGION APPAREL, INC.

(Exact name of registrant specified in its charter)

2263 East Vernon Avenue, Vernon, CA 90058

(Address of Principal Executive Offices)

(323) 266-3072

Issuer’s telephone number, including area code

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   x       No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) (not yet applicable to the registrant).  Yes   o       No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   o   No   x

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

As of November 8, 2010 there were 25,458,778 shares of common stock outstanding.

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TRUE RELIGION APPAREL, INC.

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PART I — Financial Information

Item 1. Financial Statements (Unaudited)

TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value amounts)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

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TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands except per share data)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

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TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

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TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

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TRUE RELIGION APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — Description of the Business

True Religion Apparel, Inc. and subsidiaries (referred to in the Quarterly Report on Form 10-Q as “the Company,” “our,” “we,” or “True Religion”) designs, markets, sells and distributes premium fashion apparel, centered on our core denim products using the brand name “True Religion Brand Jeans.” Our products include jeans, pants, woven and knit tops, and outerwear made from denim, fleece, jersey and other fabrics. We are known for our unique fits, washes and styling details. Our products are distributed through multiple wholesale and retail segments on six continents, including North America, Europe, Asia, Australia, Africa and South America.

We operate in four primary business segments: U.S. Consumer Direct, U.S. Wholesale, International, and Other. We sell directly to consumers in the United States through full-price branded retail stores, branded outlet stores and through our retail internet site located at www.truereligionbrandjeans.com. Our U.S. Wholesale sales are made to leading upscale nationwide-retailers, boutiques and off-price retailers. The U.S. Wholesale segment includes our design, production, marketing, sales, distribution, credit, customer service, information technology and accounting departments. Our International sales are made through a variety of channels, including subsidiaries and joint ventures that operate retail stores and sell to wholesale customers who operate retail stores; distributors who warehouse products at their expense and ship to, and collect payment from, their customers; and directly to wholesale customers who operate retail stores. As of September 30, 2010, our International segment includes one full price and three outlet retail stores in Japan, one full price retail store in England and one full price retail store in Germany. In addition, we selectively license to third parties the right to use our various trademarks in connection with the manufacture and sale of designated products in specified geographical areas for specified periods. The licensing business is included in our Other segment.  Our corporate operations, which include the executive, legal, and human resources departments, are also included in our Other segment.

NOTE 2 — Summary of Significant Accounting Policies

Basis of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of True Religion Apparel, Inc., its subsidiaries and its majority owned subsidiary which operates according to a joint venture agreement with its noncontrolling interest holder. All intercompany accounts and transactions have been eliminated upon consolidation.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of True Religion Apparel, Inc. have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X for interim financial information issued by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements as permitted under applicable rules and regulations.  The accompanying condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC. The same accounting policies are followed for preparing quarterly and annual financial information. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements.  The results of operations for the three and nine months ended September 30, 2010, are not necessarily indicative of the results to be expected for the full year ending December 31, 2010.

Concentration of Credit Risks

During the nine months ended September 30, 2010, no sales to any one customer accounted for more than 10% of our net sales.  During the nine months ended September 30, 2009, sales to one customer accounted for approximately 15% of our net sales. As of September 30, 2010, the accounts receivable from two unaffiliated customers equaled 31% of our total net accounts receivable balance.  As of December 31, 2009, the accounts receivable from two of our unaffiliated customers equaled 37% of our total net accounts receivable balance.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and notes thereto. Actual results could differ materially from those estimates.

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Significant estimates inherent in the preparation of the accompanying condensed consolidated financial statements include reserves for customer returns; chargebacks; allowances for bad debts; inventory valuation; contingencies; fixed asset useful lives; income taxes and other tax contingencies; and the valuation of stock-based compensation and related forfeiture rates.

Reclassifications

We have reclassified certain prior period amounts to conform to the current year presentation.  We have revised our previously reported consolidated balance sheet for the year ended December 31, 2009 to combine the accounts receivable from factor with accounts receivable from customers into one line item called accounts receivable, net of allowances.  We have also revised our condensed consolidated statement of cash flows for the nine months ended September 30, 2009 to present the sales return provision as a component of changes in accounts receivable instead of as a component of the provision for bad debts. This revision resulted in a decrease in the provision for bad debts of $1.0 million, an increase in the change in accounts receivable of $1.1 million and a decrease in the change in accounts payable and accrued expenses of $0.1 million. These reclassifications are not considered material to the condensed consolidated financial statements.

NOTE 3 — Cash Equivalents and Marketable Securities

As of September 30, 2010, we held $119.6 million of cash equivalents measured at fair value using quoted prices in active markets (Level 1 input).

We previously held auction rate securities (“ARS”) which are variable rate bonds whose interest rate is periodically reset, typically every seven, 28, or 35 days. The underlying securities had contractual maturities from 2034 through 2039. These securities are collateralized by higher education funded student loans and are supported by the federal government as part of the Federal Family Education Loan Program (FFELP).

The Dutch auction process that periodically resets the applicable interest rate was intended to provide liquidity to the holder of the auction rate securities by matching buyers and sellers within a market context, enabling the holder to gain immediate liquidity by selling such interests at par or rolling over their investment. If there was an imbalance between buyers and sellers, the risk of a failed auction existed. The auction rate securities that we held began to experience failed auctions in 2008. In October 2008, we were notified that the two brokers who sold ARS to us would purchase the ARS at a price of par plus accrued interest. We accepted the offers from these brokers, providing us rights related to our ARS (the “Rights”). The first portion of the ARS, with a par amount of $4.9 million, was purchased by one broker in January 2009 at par plus accrued interest.  During the nine months ended September 30, 2010, the second broker purchased the remaining ARS with a par amount of $5.0 million at par plus accrued interest.

The ARS and put option represented Level 3 assets. The ARS were recorded at fair value using broker quotes. The fair value of the put option was determined by an internally developed discounted cash flow model. The following table provides a summary of changes in fair value of our Level 3 financial assets during the nine months ended September 30, 2010 and 2009 (amounts in thousands):

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NOTE 4 — Accounts Receivable

We recorded the following allowances against our accounts receivable (amounts in thousands):

In addition to the above reserves, we recorded an allowance for trade discounts of $0.5 million as of September 30, 2010 and $0.6 million as of December 31, 2009.

NOTE 5 — Inventory

Inventory consisted of the following (amounts in thousands):

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NOTE 6 — Property and Equipment, net

Property and equipment consisted of the following (amounts in thousands):

Construction in progress as of September 30, 2010 and December 31, 2009 represents the capital expenditures for leasehold improvements that will be used in our new branded retail stores. When these projects are completed, these balances are transferred to the appropriate property and equipment category and depreciated according to their estimated useful lives.

Depreciation expense, which is included as a component of selling, general and administrative expenses in the accompanying condensed consolidated statements of income, was $2.5 million and $1.8 million for the three months ended September 30, 2010 and 2009, respectively.  For the nine months ended September 30, 2010 and 2009, depreciation expense was $7.1 million and $4.4 million, respectively.

NOTE 7—Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following (amounts in thousands):

NOTE 8 — Stock-based Compensation

On April 7, 2009, our Board of Directors approved the True Religion Apparel, Inc. 2009 Equity Incentive Plan (the “2009 Incentive Plan”) which was approved by the shareholders at our Annual Shareholder Meeting on June 2, 2009.  Upon approval of the 2009 Incentive Plan by the shareholders, grants under the Company’s 2005 Stock Incentive Plan (the “2005 Incentive Plan”) were discontinued and any shares available for issuance under the 2005 Incentive Plan were rolled into the 2009 Incentive Plan.

We recognize stock-based compensation expense either on the straight-line or the graded attribution (accelerated) method over the requisite service period. The following tables summarize our stock-based compensation expense, which is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income (amounts in thousands):

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Shares awarded under the 2009 and 2005 Incentive Plans entitle the shareholder to all the rights of common stock ownership except that the shares may not be sold, transferred, pledged, exchanged or otherwise disposed of during the restriction period. The restriction period is determined by the Compensation Committee of the Board of Directors and may not exceed 10 years. Restricted stock awards have generally been granted with vesting periods of up to three years. Subject to employment agreements entered into with senior executives, all unvested restricted shares are forfeited if the recipient of the restricted stock award no longer provides services, as defined, to us.

During the nine months ended September 30, 2010 and 2009, we awarded 686,616 and 1,124,194 shares, respectively, of restricted stock to employees, officers and directors, which vest over a period of up to three years. Included in the shares awarded in 2010 are 411,739 shares that may vest in 2011 and 2012 if the Company achieves certain earnings targets in the year that will end on December 31, 2010. The fair value of the restricted shares awarded during the nine months ended September 30, 2010 and 2009, based on the price of our common stock at the date of grant, was $18.9 million and $12.7 million, respectively. Our policy for attributing the value of graded vesting share-based payments is the straight-line single option approach for grants with only service conditions and the graded attribution (accelerated) method for grants with performance conditions.

We have a practice of withholding common shares, upon an employee’s request, to satisfy employee minimum statutory income tax withholdings for restricted shares when they vest.  During the nine months ended September 30, 2010 and 2009, we withheld 391,409 and 220,615 shares for a total value of $9.6 million and $3.0 million, respectively. These amounts are considered a financing activity and recorded as statutory tax withholding payment for stock-based compensation in the accompanying condensed consolidated statements of cash flows.

During May 2010, we entered into a Separation Agreement with our former president which accelerated the vesting of his unvested 2009 performance share award and modified the service period requirement on a portion of his unvested 2010 performance share award.  As a result of this separation agreement, we recorded an additional $3.1 million in stock-based compensation expense during the nine months ended September 30, 2010 due to the modification of these awards.

The following table summarizes our restricted stock activities for the nine months ended September 30, 2010 (dollar amounts in thousands except per share data):

As of September 30, 2010 and 2009, we estimated a forfeiture rate of 4.9% and 3.4%, respectively, based on historical experience.  The aggregate intrinsic value of restricted stock outstanding as of September 30, 2010 and 2009, adjusted for estimated forfeitures, was $18.0 million and $32.7 million, respectively.  As of September 30, 2010, the total unamortized stock-based compensation expense related to the restricted shares was $9.5 million, which is expected to be recognized over a weighted average period of 1.2 years.  The total grant date fair value of restricted stock vested during the nine months ended September 30, 2010 and 2009 was $12.2 million and $9.6 million, respectively.

NOTE 9 — Commitments and Contingencies

Leases

We lease our headquarters facility and retail store locations under operating lease agreements expiring on various dates through January 2022.  Some of these leases require us to make periodic payments for property taxes, utilities and common area operating expenses. Certain leases include lease incentives, rent abatements and fixed rent escalations, for which the effects are being recorded and amortized over the initial lease term on a straight-line basis. We have options to renew certain leases under various terms as specified within each lease agreement. We have no capitalized lease obligations.

As of September 30, 2010, we had 116 long-term lease agreements, which consisted of 98 retail stores in the U.S., seven international retail stores, our headquarters facility in Vernon, California, which includes a parking annex, four showrooms in the U.S., and administrative offices in Japan, South Korea, Hong Kong and Germany. Our leased properties aggregate 368,000 square feet of space, which consists of 150,000 square feet for our administrative and distribution facilities, 205,000 square feet of retail space and 13,000 square feet of showroom space.  Our lease agreements for 94 of the retail stores require payment of a percentage of sales, ranging from 4% to 18%, if our net sales at the retail store exceed a defined threshold. As of September 30, 2010, we had 89 retail stores that were open in the U.S., nine stores in the U.S. that had not been opened yet, four open retail stores in Japan, one open retail store in the U.K, one open retail store in Germany and one store in Canada that had not been opened yet.

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Rent expense was $6.2 million and $4.6 million for the three months ended September 30, 2010 and 2009, respectively.  These amounts include contingent rental expense of $0.7 million and $0.4 million for the three months ended September 30, 2010 and 2009. Rent expense was $17.2 million and $11.6 million for the nine months ended September 30, 2010 and 2009, respectively. These amounts include contingent rental expense of $1.7 million and $0.9 million for the nine months ended September 30, 2010 and 2009, respectively.

Future minimum lease payments under these operating leases as of September 30, 2010 are summarized as follows (amounts in thousands):

Legal Proceedings

From time to time, we are involved in various legal proceedings, which are incidental to the ordinary course of business. We do not believe that these routine matters are material to our business or financial condition.

Redeemable Noncontrolling Interest

In July 2010, we entered into a joint venture agreement through our newly formed wholly owned subsidiary, True Religion Brand Jeans Germany GmbH (TRBJ Germany), with our former German distributor, UNIFA Premium GmbH (“UP”) for the wholesale and retail distribution of True Religion Brand Jeans products in Germany, Switzerland, Austria, the Netherlands, Belgium and Luxembourg. In connection with the joint venture agreement, we canceled the distribution agreement with UP and entered into a new distribution agreement with TRBJ Germany and we entered into an agreement with UP whereby we purchased certain assets, including inventory and fixed assets, of UP for an immaterial cash payment and UP obtained a redeemable noncontrolling interest in TRBJ Germany. We own a controlling 60% interest in TRBJ Germany, and UP owns a 40% interest. We have accounted for the transaction as a business combination and have allocated the preliminary consideration consisting of cash and the 40% interest in TRBJ Germany to the tangible assets and noncontrolling interest. Determination of the fair value of the 40% interest in TRBJ Germany transferred to UP and final allocation of the consideration will be finalized during the Company’s fourth quarter using fair value techniques.  An increase in consideration transferred may result in a purchase price excess and recognition of goodwill. The business of TRBJ Germany operates according to a joint venture agreement that includes a call option and put option on UP’s 40% redeemable noncontrolling interest, allowing us to purchase UP’s shares (the call option) or UP to sell us their shares (the put option) at a purchase price equal to the fair market value of UP’s shares at the time of delivery of the call or put option. Both options can be exercised beginning on the five year anniversary of the joint venture agreement and on every anniversary date thereafter. Additionally, the exercise of such options may be accelerated upon the occurrence of certain changes in control as defined in the joint venture agreement. As the redeemable interest is considered probable of becoming currently redeemable in the future, the redeemable interest will be adjusted to its estimated fair value in future periods.

NOTE 10 — Earnings Per Share

The following is a reconciliation of the shares used to compute basic and diluted earnings per share attributable to True Religion Apparel, Inc. (in thousands, except per share information):

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For the three and nine months ended September 30, 2010, 411,739 and 271,888 weighted average shares, respectively, of restricted stock awards which are subject to performance conditions that have not been achieved were excluded from the calculation of dilutive shares. For the three and nine months ended September 30, 2009, 908,287 and 722,395 weighted average shares, respectively, of restricted stock awards which were subject to performance conditions that had not been achieved were excluded from the calculation of dilutive shares.

NOTE 11 — Segment Information

Summarized financial information concerning our reportable segments is shown in the following table (amounts in thousands):

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NOTE 12 — Supplemental Disclosure of Cash Flow Information (amounts in thousands)

During the nine months ended September 30, 2010 and 2009, we paid income taxes in the amount of $12.0 million and $21.1 million, respectively.

As of September 30, 2010, and 2009, we had recorded the purchase of $0.5 million and $1.8 million, respectively, of property and equipment that had not yet been paid for.  These amounts have been excluded from “Purchases of property and equipment” and “Accounts payable and accrued expenses” in the accompanying condensed consolidated statements of cash flows.

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ITEM 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We generally identify forward-looking statements in this report using words like “believe,” “intend,” “expect,” “estimate,” “may,” “plan,” “should plan,” “project,” “contemplate,” “anticipate,” “predict,” “potential,” “continue,” or similar expressions.  You may find some of these statements below and elsewhere in this Quarterly Report.  These forward-looking statements are not historical facts and are inherently uncertain and outside of our control.  Any or all of our forward-looking statements in this report may turn out to be wrong.  They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties.  Many factors mentioned in our discussion in this report will be important to determining future results.  Consequently, no forward-looking statement can be guaranteed.  Actual future results may vary materially.  Factors that may cause our plans, expectations, future financial condition and results to change are described throughout this report and in our Annual Report on Form 10-K, particularly in “Risk Factors,” Part 1, Item 1A of that report, and include the following:

·                                          the current downturn in the United States economy and in particular, the decline in consumer spending generally and in the apparel industry more specifically;

·                                          our ability to predict fashion trends;

·                                          our ability to continue to maintain our brand image and reputation;

·                                          competition from companies with significantly greater resources than ours; and

·                                          our ability to continue and control our expansion plans.

The forward-looking information set forth in this quarterly report on Form 10-Q is as of November 8, 2010, and we undertake no duty to update this information.  Shareholders and prospective investors can find information filed with the SEC after November 8, 2010 at our website at www.truereligionbrandjeans.com or at the SEC website at www.sec.gov.

RESULTS OF OPERATIONS

We design, market, distribute and sell premium apparel, centered on our core denim products using the brand name “True Religion Brand Jeans.” Our products include jeans, pants, woven and knit tops, and outerwear made from denim, fleece, jersey and other fabrics. We are known for our unique fits, washes and styling details. Our products are distributed through multiple wholesale and retail segments on six continents, including North America, Europe, Asia, Australia, Africa and South America. As of September 30, 2010, we had 89 retail stores in the U.S. and six international retail stores, compared to 70 retail stores in the U.S. and three international retail stores as of December 31, 2009 and 66 retail stores in the U.S. and three international retail stores as of September 30, 2009.

Third Quarter 2010 Compared to Third Quarter 2009

The following table summarizes our results of operations (dollar amounts in thousands, except per share data):