True Religion Apparel Inc. might be coming apart at the seams.
Weighed down by debt amid declining sales as casual clothing tastes change, analysts expect the premium denim company, once a celebrity darling, to default on $471 million worth of notes in the next year and a half, raising questions about its future.
Moody’s Investors Service Inc. last month joined Standard & Poor’s Financial Services in downgrading the Vernon company, yet again, with Moody’s noting, “Ongoing earnings declines and unsustainable capital structure … have increased the company’s probability of default.”
True Religion had revenue of around $377 million for the year ended Oct. 30, according to the Moody’s report, issued Jan. 13.
Representatives of True Religion and its owner, TowerBrook Capital Partners, a New York investment firm with stakes in BevMo and women’s retailer J. Jill, declined to comment.
The news is a fall from grace for a company that used to count Kate Hudson and Jennifer Lopez among its customers.
“In the early 2000s, it was a hot brand,” said Raya Sokolyanska, a senior analyst at Moody’s who authored the report. “Celebrities were wearing it, rappers were rapping about it, it was really in. It was a status symbol. You could justify spending over $300 on jeans. Over time, the brand lost its appeal and it’s had a hard time regaining any of it.”
A highly leveraged capital structure made it hard for the company to face industrywide problems as consumer tastes shifted to athleisure wear and they became less willing to pay high prices for jeans.
Another hot L.A. premium jean company, 7 for All Mankind, was purchased for $775 million by V.F. Corp. in 2007. It was sold last year, along with clothiers Ella Moss and Splendid, for $120 million.
These and other brands have suffered as younger consumers are increasingly less drawn to labels, a shift that has helped drive the rise of fast-fashion retailers such as Zara and H&M.
“As consumers, millennials (started) shifting their spend away from apparel and toward experiences and electronics, they looked at apparel and said, I’m not going to spend this much,” said Mathew Christy, credit analyst at Standard & Poor’s Financial Services, who downgraded the company in 2015. “That affected True Religion earlier because of their high prices.”
Sewing it up
The company was founded in 2002 by husband and wife team Jeffrey Lubell and Kym Gold as Guru Denim Inc. in Los Angeles. Lubell had helped start several jean companies and decided to branch out on his own, making his signature jeans with embroidered designs and flaps on the back pockets.
Guru went public through a reverse merger with Gusana Explorations Inc., a shell company, in 2003 and that year reported $2.3 million in sales. Soon after, the name was changed to True Religion.
The company initially sold its product through its retail locations and department stores. In 2006, True Religion opened its first outlet store in Desert Hills.
Other local premium jean sellers also were on the rise. That same year, Boston private equity firm Berkshire Partners paid $250 million for a majority stake in Huntington Park’s Citizens of Humanity.
From 2007 to 2012, True Religion’s sales grew from $173 million to $467 million, according to Securities and Exchange Commission filings. In its last annual report, in March 2013, the company reported about 3,000 employees working at its stores, and corporate office and distribution center in Vernon. It could not be determined how many people work there now.
The recession dampened consumers’ willingness to shell out so much money on jeans, analysts said. True Religion was also slow to adapt to the skinny jean fad.
“I think stylistically, the big embellishment, kind of very loud styling, is on its way out,” said Mark Lynn, co-founder and co-chief executive of West Hollywood’s DSTLD, which sells premium jeans for $75 to $105 directly to the consumer through its website. “People are opting for less embellishment, crisper, cleaner, subtler styling.”
True Religion began exploring strategic alternatives around 2012. When Lubell’s contract as chief executive, chairman, and creative director came up for renewal in early 2013, the board declined to renew it, although Lubell stayed on as chairman emeritus and a creative consultant.
New outfit
Later that year, TowerBrook, which once owned upscale shoe brand Jimmy Choo, bought True Religion for $835 million, taking it private. Around that time, the athleisure trend toward yoga pants set in, according to Sokolyanska.
In 2015, TowerBrook promoted John Ermatinger, who had been serving as a senior vice president, to chief executive. Since then, the company has taken various cost-cutting initiatives, including closing 18 of its almost 150 stores last year and shifting its sourcing to outside the United States.
It also started refocusing on premium denim, launched an off-price website, and has undertaken digital marketing initiatives, according to Moody’s.
But those efforts weren’t enough, prompting S&P to downgrade the company in 2015.
“At that point, we saw their sales falling off,” said S&P’s Christy.
The company’s percentage of online sales falls in the low end of the industry’s 5 percent to 20 percent range, he said.
E-commerce companies such as DSTLD can sell a similar product to True Religion’s without the retail overhead, allowing them to charge less, said Lynn. He estimated that it costs $35 to $45 to make a high-quality pair of jeans in Los Angeles.
The transparency brought by the internet has made it harder for companies such as True Religion to do markups, noted Christy.
“Not only has the internet taken away consumer spend, it’s laid bare the industry’s pricing,” he said.
The company began discounting its products, which reduced its appeal, according to DSTLD’s Lynn.
“Customers who were early adapters don’t want to buy True Religion anymore,” he said. “To bolster revenues, they have to start selling at Nordstrom Rack at heavy discounts. It’s perpetuating the brand degradation cycle. It just ends up not as hot as it once was, not the cash cow it once was.”
That brand degradation led to poor third-quarter results, which Sokolyanska of Moody’s said resulted in her company downgrading True Religion.
Sokolyanska said she anticipates that earnings will increase slightly in the near term, but it won’t be enough to pay off the debt.
The retail market is expected to continue to see declines in customer traffic for the next year and a half, said Christy.
The analysts said True Religion could do a distressed exchange in which shareholders agree to lower returns or it could file for bankruptcy.
While Sokolyanska said she expects the athleisure trend to hold steady, she still sees some room for jeans.
“The premium denim category is going to be OK,” she said. “The question is which specific brands will recover better than others.”
