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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly report period ended June 30, 2011

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 July 28, 2011 there were 25,749,460 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 Core Services. 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. 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 then ship to, and collect payment from, their customers; and directly to wholesale customers who operate retail stores. As of June 30, 2011, our international segment includes one full price and two outlet retail stores in Japan, one full price retail store in the United Kingdom, two full price and one outlet retail stores in Canada, and two full price retail stores 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 the Core Services segment.  Our corporate operations, which include the design, production, marketing, distribution, credit, customer service, information technology, accounting, executive, legal, and human resources departments, are also included in the Core Services 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 an operating 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, 2010, 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.  The results of operations for the three and six months ended June 30, 2011, are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.

Concentration of Credit Risks

As of June 30, 2011, 24% of our net accounts receivable were due from one customer. As of December 31, 2010, 27% of our net accounts receivable was due from one customer.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“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.

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.

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Gift Cards

We sell gift cards with no expiration dates to customers.  We recognize income from gift cards when they are redeemed by the customer.  In addition, we may recognize income from gift cards in the future when we determine that the likelihood of the gift card being redeemed is remote and that we have no legal obligation to remit the unredeemed gift card to relevant jurisdictions.  We will utilize historical redemption patterns to consider the likelihood of gift card redemption.

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  This ASU clarifies existing fair value measurement and disclosure requirements, amends certain fair value measurement principles and requires additional disclosures about fair value measurements.  Adoption of these provisions of this ASU, which is effective for us as of the beginning of 2012, is not expected to have a material impact on our consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income: Presentation of Comprehensive Income.  This ASU increases the prominence of the other comprehensive income in the financial statements.  Adoption of the provision of this ASU, which is effective for us as of the beginning of 2012, is not expected to have a material impact of our consolidated financial statements.

Reclassifications

Beginning in the fourth quarter of 2010, we reclassified certain prior period segment information to conform to the current year presentation.  The segment that was formerly titled “Other” was renamed as “Core Services.”  And, we have reclassified the design, production, marketing, distribution, credit, customer service, information technology and accounting departments from the U.S. Wholesale segment to the Core Services segment because these functions support our overall business.  As a result of this change, we have reclassified certain selling, general & administrative expenses (SG&A) previously presented in the U.S. Wholesale segment to Core Services in order to conform to the revised presentation.  We made the change to our reportable segments to more closely align them with how management reviews and monitors the performance of our operating segments.  Total consolidated SG&A expenses and total consolidated operating income were not changed as a result of these reclassifications.  The reclassifications had no impact upon previously reported consolidated net sales and consolidated gross profit by reportable segment. Additionally, these reclassifications did not impact the condensed consolidated balance sheets, statements of income, or statements of cash flows.

NOTE 3 — Cash Equivalents

As of June 30, 2011 and December 31, 2010, we held $163.1 million and $133.6 million, respectively, of cash equivalents measured at fair value using quoted prices in active markets (Level 1 input).

NOTE 4 — Accounts Receivable

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

In addition to the above reserves, we recorded an allowance for trade discounts of $0.4 million as of June 30, 2011 and December 31, 2010.

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NOTE 5 — Inventories

Inventories consisted of the following (amounts in thousands):

NOTE 6 — Property and Equipment, net

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

Construction in progress at June 30, 2011 and December 31, 2010 primarily represents the capital expenditures for branded retail stores that have not opened or information technology projects that have not been completed as of the balance sheet date.  When the stores are opened or the projects are completed, these balances are transferred to the appropriate property and equipment category and depreciated according to their estimated useful life.

Depreciation expense, which is included as a component of selling, general and administrative expenses in the accompanying condensed consolidated statements of income, was $6.3 million and $4.5 million for the six months ended June 30, 2011 and 2010, respectively.

NOTE 7—Accounts Payable and Accrued Expenses

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

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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. The 2009 Incentive Plan reserves for issuance an aggregate of 1,000,000 shares of common stock, increased by 613,761 shares that rolled into the plan from the 2005 Incentive Plan.

The following table summarizes 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):

Restricted Stock Awards

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 the Company.

Non-vested performance-based awards

During the six months ended June 30, 2011 and 2010, we awarded performance-based restricted stock to executive officers, which are subject to certain performance and service conditions.  Upon achieving the performance condition, the non-vested performance awards partially vest on the first anniversary of the grant date and the remainder on the second anniversary of the grant date for a combined service period of two years.  In order for these performance awards to vest, the Company’s annual adjusted earnings before interest and income tax expenses (Adjusted EBIT) must exceed a minimum amount; depending upon the Company’s actual annual Adjusted EBIT, additional restricted stock may be earned, up to a maximum number.

The following table summarizes our non-vested performance-based restricted stock activities for the six months ended June 30, 2011:

Our policy for attributing the value of graded vesting to these share-based payments is the graded attribution (accelerated) method.  The estimated fair value of the performance-based stock awarded is based on the price of our common stock at the date of grant and an assumed forfeiture rate of 4.4% as of June 30, 2011; this forfeiture rate assumption is based on historical experience.  The fair value of the performance-based shares awarded in the six months ended June 30, 2011 and 2010 was $11.6 million and $12.9 million, respectively.  The total fair value of performance-based stock vested during the six months ended June 30, 2011 and 2010 was $7.9 million and $9.1 million, respectively.  As of June 30, 2011, the total unamortized stock-based compensation expense related to the performance-based stock was $8.8 million, which is expected to be recognized over a weighted average period of 1.6 years.

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During the quarter ended June 30, 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 for a portion of his unvested 2010 performance share award.  As a result of this separation agreement, we recorded an additional $3.2 million in stock-based compensation expense during the quarter ended June 30, 2010 due to the modification of these awards.

Non-vested service-based awards

During the six months ended June 30, 2011 and 2010, we awarded service-based restricted stock to employees, officers and directors that vest over a period of up to three years.

The following table summarizes our non-vested service-based restricted stock activities for the six months ended June 30, 2011:

Our policy for attributing the value of graded vesting of these share-based payments is the straight-line single option approach.  The estimated fair value of the non-vested service-based stock awarded is based on the price of our common stock at the date of grant and an assumed forfeiture rate of 4.4% as of June 30, 2011; this forfeiture rate assumption is based on historical experience.  The fair value of service-based stock awarded in the six months ended June 30, 2011 and 2010 was $3.2 million and $5.9 million, respectively.  The total fair value of service-based stock vested during the six months ended June 30, 2011 and 2010 was $3.6 million and $2.9 million, respectively.  As of June 30, 2011, the total unamortized stock-based compensation expense related to the non-vested service-based stock was $4.9 million, which is expected to be recognized over a weighted average period of 1.7 years.

We have a practice of withholding common shares, upon an employee’s request, to satisfy employee and director minimum statutory income tax withholdings for restricted shares when they vest. During the six months ended June 30, 2011 and 2010, we withheld 226,579 and 387,287 shares for a total value of $5.4 million and $9.5 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.

NOTE 9 — Commitments and Contingencies

Leases

We lease our headquarters facility and retail store locations under operating lease agreements expiring on various dates through August 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 June 30, 2011, we had 135 long-term lease agreements, which consisted of 112 retail stores in the U.S., 11 international retail stores, our headquarters facility in Vernon, California, which includes a parking annex, two showrooms in the U.S., and administrative offices and showrooms in Japan, South Korea, Hong Kong, Germany, Italy and Switzerland. Our leased properties aggregate 405,000 square feet of space, which consists of 153,000 square feet for our headquarters, international administrative and distribution facilities, 237,000 square feet of retail space and 15,000 square feet of showroom space.  Our lease agreements for 104 of the retail stores leases require payment of a percentage of sales, ranging from 4% to 18%, if our net sales at the retail store exceed a defined threshold.

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Rent expense was $14.3 million and $10.9 million for the six months ended June 30, 2011 and 2010, respectively. These amounts include contingent rental expense of $1.5 million and $1.0 million for the six months ended June 30, 2011 and 2010, respectively. 

Future minimum lease payments under these operating leases as of June 30, 2011 are summarized as follows (amounts in thousands):

Legal Proceedings

From time to time, we are involved in various legal proceedings arising in the ordinary course of business. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities.  In June 2011, we recorded a $1.5 million reserve for a settlement of a pending litigation claim against the Company.  As of the date of this report, we do not believe there are any additional currently identified claim, proceeding or litigation, either alone or in the aggregate, that will have a material impact on our results of operations, financial position or cash flows.  Since these matters are subject to inherent uncertainties, our view of them may change in the future.

NOTE 10 —Redeemable Noncontrolling Interest

We calculated the fair value of the redeemable noncontrolling interest by discounting the future cash flows of our majority-owned subsidiary, True Religion Brand Jeans Germany GmbH (TRBJ Germany), and determined that the fair value of the noncontrolling interest approximated the carrying value as of June 30, 2011.

The following table presents a reconciliation of the redeemable noncontrolling interest (amounts in thousands):

NOTE 11 — 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 six months ended June 30, 2011, 503,286 and 260,031 weighted 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 six months ended June 30, 2010, 369,498 and 200,409 weighted 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.

NOTE 12 — Segment Information

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

NOTE 13 — Supplemental Disclosure of Cash Flow Information

During the six months ended June 30, 2011 and 2010, we paid income taxes in the amount of $14.7 million and $11.8 million, respectively.

As of June 30, 2011, and 2010, we had recorded the purchase of $1.1 million and $0.6 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 on-going 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;

·                                          increases in the price of raw materials or their reduced availability; 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 July 28, 2011, and we undertake no duty to update this information.  Shareholders and prospective investors can find information filed with the SEC after July 28, 2011 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 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. As of June 30, 2011, we had 102 retail stores in the United States compared to 94 as of December 31, 2010 and 81 as of June 30, 2010.  As of June 30, 2011 we had nine international stores compared to seven as of December 31, 2010 and five as of June 30, 2010.

Second Quarter 2011 Compared to Second Quarter 2010

The following table summarizes results of operations for the three months ended June 30, 2011 and 2010 (dollar amounts in thousands, except per share data):