True religion's net income drops due to major expenses; fashion: denim maker gets reality check amid rollout of retail concept.

MANHATTAN Beach-based True Religion Apparel Inc., a darling of the high-end denim market and Wall Street, seems to be getting a dose of reality.

The company has been rolling out a retail concept in key cities to strong responses, and its proprietary back pocket designs with thick white thread are still as ubiquitous in Los Angeles as film scripts.

But the firm reported a sharp drop in first quarter net income last week, down 35 percent to $4.2 million from $6.5 million a year ago. Accounting charges, retail rollout expenses and the separation with former co-founder, designer and chief financial officer Kymberly Lubell were all cited as major expenses.

Nonetheless, the company reiterated its full-year guidance, which predicts 20 percent sales growth.

Eric Beder, analyst with Brean Murray Carret & Co. LLC, is one of the only analysts with a buy rating on the stock. He said the problem for True Religion is that Wall Street is impatient by nature.

"It took Guess almost 25 years to be more than a denim company and it took Diesel more than a decade, but they expect True Religion to do it in five years," he said.

There has been a cloud over the company since it missed third quarter projections, while still growing the company. Company stock hit its 52-week high of 23.88 back in October and has been trading in the mid to high teens since November. Stock closed at $15.65 on Wednesday, May 9.

"We are off to a strong start for the year," said Jeffrey Lubell, chief executive of True Religion. "Our business is on plan, and we believe we have made the right investments over the past six months to further secure our foothold as a denim-inspired icon brand."

Beder expects things for the company to fall into place in the fall, when new clothing lines will be released and the licensed products--including footwear, headwear and outerwear--hit the stores. The company's staff has also grown rapidly in recent months, and Beder said the benefit of those moves should also be reflected this fall.

"This company has built the infrastructure for a much larger firm," Beder said. "That hurt results, but now they've caught up and you'll see it in the last half of this year. You can't just hire a designer and expect a new line in five minutes."

The company has also been in the news in recent months following the marital separation of founders Jeff and Kymberly Lubell, who designed most of the women's clothing.

"I think that would have been a disaster about two years ago when they had four or five designers," Beder said. "Things should just keep moving forward."

Staff reporter Emily Bryson York can be reached at [phone], ext. 235, or at [e-mail].