California Apparel News

True Religion, the high-end Los Angeles denim company, is paving the way for a sale by deciding not to renew the contract of Jeffrey Lubell, the company’s founder, chairman of the board, chief executive and creative director.

In a filing with the Securities and Exchange Commission, the $463.7 million company announced that Lubell’s contract expires on June 30, and it will not be renewed.

Even though Lubell founded the company in late 2002, he owned, as of Dec. 31, only 2 percent of the company’s stock, which means he has little strength to overturn the board’s decision. In 2012, his salary and compensation totaled nearly $9 million.

“In October 2012, we announced our board of directors had formed a special committee comprised of its non-management directors to explore and evaluate potential strategic alternatives [possible sale] available to us,” said documents filed with the SEC on March 1. “In light of this continuing review, we believe that it would not be appropriate to renew Mr. Lubell’s existing employment agreement for an additional three-year period at this time. We further informed Mr. Lubell that our board would like the opportunity to explore an alternative arrangement with him.”

The documents said the special committee’s review of strategic alternatives, such as a sale to a private-equity company, is ongoing.

“No decision has been made to engage in a transaction or transactions, and there can be no assurance that any transaction or any other strategic alternative will occur,” SEC documents said.

Many analysts thought Lubell’s departure indicates that talks are ongoing with a potential buyer.

“This is just my own interpretation, but the reason the contract was not renewed is the fact that the board is still exploring strategic alternatives,” said Jeffrey Van Sinderen, a retail analyst with B. Riley & Co. “If they are going to enter into some kind of a deal, they wouldn’t want that contract in place.”

But other analysts said the board believes it needs to attack its management problems to get the company sold. “The board may not feel this guy is fixing the business the way it should be fixed,” said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York retail consulting and investment banking–services firm.

Others noted that when True Religion was put up for sale a few years ago under the aegis of Michael Egeck, the company’s president from 2010 to 2011, Lubell was a barrier because he wanted a higher price than many were offering. “He was in the way of making a deal,” said one source, who asked not to be named.

Financially, True Religion is a sound company. In 2012, its net sales totaled $467.3 million, up from $420 million the previous year. Its 2012 net income was $46 million in 2012, an increase from $45 million in 2011.

But True Religion has had a few fashion missteps. The company didn’t jump on the skinny-jeans trend quickly enough and saw its women’s business slip away to other brands.

There has also been steep competition from lower-priced, fast-fashion clothing.

The average True Religion denim pant retails for $243, down from 2011, when the average jean was priced at $255. A pair of trendy H&M jeans can cost as little as $32.

In 2012, menswear made up 57 percent of True Religion’s sales, and womenswear accounted for 39 percent of the business. The rest was filled in with childrenswear.

In 2011, menswear made up 53 percent of sales, and womenswear accounted for 44 percent of business. Childrenswear was 3 percent of sales.

True Religion executives are not unfamiliar with the chipping away of its women’s business. In its annual report, the Los Angeles denim company said its 2013 business plan was to reverse the fall in womenswear sales.

It also plans to introduce a new “core denim” (cheaper) assortment to attract a larger number of clients.

The company, which has 122 stores in the United States, plans to open another 14 retail outposts in the U.S.