Case 1–2: True Religion Jeans: Flash in the Pants or Enduring Brand?

Founded in 2002 by Jeff Lubell, True Religion had become one of the largest premium denim brands in the United States by 2012. Although True Religion made its debut in upscale department stores and trendy boutiques a decade earlier, the company owned 86 full price retail stores and 36 outlet stores in the United States as well as 30 stores in international markets by the end of 2012. The company’s domestic retail store business accounted for about 60% of revenues and 64% of operating profit before unallocated corporate expenses in 2012. Just five years earlier, the U.S. retail store segment generated only 17% of sales and 25% of operating profit before unallocated corporate expenses.

Jeff Lubell’s vision of the company had come true—at least partly. The company had transformed itself from a jeans designer into an apparel retailer with it own brand à la Buckle and Diesel. At the same time, True Religion had managed to shift its product mix so that sportswear accounted for almost 35% of sales in its company-owned stores. Lubell felt these two ingredients were critical to establishing True Religion as a “lifestyle brand.” The ultimate in product differentiation, many companies attempt to create so-called “lifestyle” brands that transcend product category and inspire deep consumer loyalty. Lubell felt becoming a lifestyle brand was the key to insulating True Religion from the inevitable fluctuations in fashion trends.

Moreover, True Religion’s sales had grown at an average annual rate of almost 22% from 2007-2012. The company’s return on invested capital was an impressive 27% and its return on average assets was 12% in 2012. Despite these factors, press articles and analyst reports on True Religion described the company as, “the struggling maker of premium denim.”1 A New York Post article entitled “Escape From Hell for True Religion” described private equity firm, TowerBrook, as the company’s “savior,”2 when the company announced it had been acquired by TowerBrook in 2013. Other denim brands, such as Jeff Rudes’ J Brand, appeared to be usurping True Religion’s position as the “must have” denim brand for young consumers.

What had gone wrong at True Religion? Was the change in ownership the answer to the company’s problems? Was premium denim destined to go the way of Flash Dance legwarmers and Crocs as fast fashion from the likes of H&M became more mainstream? Private equity investors had snapped up stakes in both established and up-and-coming premium denim brands in the past five years—leaving just one publicly traded premium jeans maker, Joe’s Jeans. Should investors stay away from the industry?

A 2002 Income Statement for Anthony Industries, using a contribution margin approach, is shown below. Anthony makes only one product. 50,000 units were sold in 2002.

Data 1

Revenues                                                                                $650,000

Variable Costs:

Manufacturing costs                          $290,000

Selling costs                                        130,000

Total variable costs                                                                 420,000

Contribution margin                                                               $230,000

Fixed Costs:

Manufacturing costs                          $110,000

Administrative costs                             70,000

Total fixed costs                                                                    180,000

Net Income (before taxes)                                                     $50,000

Requirements: 2 points each part

Answer the following questions. Assume each situation is independent.  

a)     Determine the break-even point in dollars.

b)  Determine the number of units that must be sold to produce a before tax profit of $200,000 if the tax rate is 30%.    

c) Determine the number of units that must be sold to produce an after tax profit of $200,000 if the tax rate is 30%.    

d)  Calculate the expected change in a company’s net income if it undertakes an advertising program that costs $25,000 and increases sales $60,000.  

e)    Assume that the company is considering another product. They estimate that the product will have variable costs of $20 per unit and demand will be 25,000 units.  The fixed costs of developing the product will be $165,000. What is the lowest price the company should charge for the potential product given this information?

f)     What is the company’s degree of operating leverage? What percentage will profits increase if unit sales increase 10%?

Cindy moved to Seattle from Portland to work as a software engineer in 2002.  Assume she meets the duration test.  She incurs moving expenses of:  $10,000 for the movers (she could have paid $5,000 for a cheaper moving company); hotel fees of $1,000 on route to Seattle, $100 in meals while on route to Seattle, and closing costs of $3,000 for her new home.  All of these fees qualify for the moving expense deduction.True/False and Explain.

John bought a car three years ago for $20,000 for personal use.  In 2002, his car was totally destroyed by a tree that fell on the car.  John did not have insurance that covered this event.  The car’s fair market value before the tree came down was $9,000 and it was worth $0 after the accident.  He has no other personal casualty gains or losses and his AGI for the year was $50,000.  John’s personal casualty loss is $8,000. True/False and Explain.

(1 point) In 2002 the Supreme Court ruled that schools could require random drug tests of students participating in competitive after-school activities such as athletics. Does drug testing reduce use of illegal drugs? A study compared two similar high schools in Oregon. Wahtonka High School tested athletes at random and Warrenton High School did not. In a confidential survey, 4 of 131 athletes at Wahtonka and 20 of 114 athletes at Warrenton said they were using drugs. Regard these athletes as SRSs from the populations of athletes at similar schools with and without drug testing. (a) You should not use the large-sample confidence interval. Why not? (b) The plus four method adds two observations, a success and a failure, to each sample. What are the sample sizes and the numbers of drug users after you do this? Wahtonka sample size: Wahtonka drug users: Warrenton sample size: Warrenton drug users: (c) Give the plus four 90% confidence interval for the difference between the proportion of athletes using drugs at schools with and without testing. Interval: to

Sarbanes-Oxley Act (SOX) was introduced in 2002 by the United States Congress to fight corporate financial statement fraud. Since its implementation, there have been questions about its effectiveness. After reading the Dutillieux, Francis, and Willekens (2016) article, ”The Spillover of SOX on Earnings Quality in Non-US Jurisdictions (Links to an external site.)” discuss what earnings quality is and how the concern over that quality may have led to the enactment of SOX. How does SOX (a piece of U.S. Legislation) impact companies in other countries?  

random sample of congressional campaigns from 2002.

FUNDS: Total money raised for the campaign, in thousands of dollars DSIZE: Area of the candidate’s congressional district, in square miles FUNDCARD: 1 = campaign website allowed credit card donations, 0 = campaign website did not allow credit card donations We wanted to know if amount of money raised for a campaign depends on the how large the district is and whether the campaign accepted credit card donations on its website.

We ran a regression. Regression results Dependent variable: FUNDS Adjusted R Square: .154 Constant (a): 673.642 B coefficient FUNDCARD: 1908.063 (p = .000), Standardized Beta .361 B coefficient DSIZE: .007 (p = .019), Standardized Beta .183

Write the equation for the regression, using the format yhat = a + bx + bx, filling in the numbers for a and b, and the names of the variables in place of y and x. 9.

Write one sentence interpreting the b coefficient for FUNDCARD.

Write one sentence identifying and interpreting the p value for the b coefficient for FUNDCARD. Refer to the null hypothesis and show that you know what it means for this specific example.

Write one sentence interpreting the b coefficient for DSIZE.

Write one sentence identifying and interpreting the p value for the b coefficient for DSIZE. Refer to the null hypothesis and show that you know what it means for this specific example.

random sample of congressional campaigns from 2002.

FUNDS: Total money raised for the campaign, in thousands of dollars DSIZE: Area of the candidate’s congressional district, in square miles FUNDCARD: 1 = campaign website allowed credit card donations, 0 = campaign website did not allow credit card donations. We wanted to know if amount of money raised for a campaign depends on the how large the district is and whether the campaign accepted credit card donations on its website.

Write one sentence identifying and interpreting the Adjusted R Square statistic. Be specific to the example.

Which independent variable has the strongest association with the dependent variable? How do you know?

Candidate Smith’s district is 471 square miles. Her campaign website allows credit card donations. How much money is she predicted to raise for the campaign? Show your calculation and write one complete sentence that includes your answer.

Smith Family

Assume the Smith family of Philadelphia, Pennslyvania purchased their home in 2002 for $80,000.  Since then, comparable homes in their neighborhood have most recently sold for $200,000.  The cost to replace the home would be $180,000.  It is estimated that the house is one-third depreciated.  The Smith’s have a $175,000 (face amount coverage A)  Homeowners policy in force, similar to the policy shown in the Appendix.  Answer the following questions as if each question were a separate event.

1)  How much will the Smith’s collect for a total covered fire loss under coverage A?

2)  How much will be collected for a $20,000 partial loss under coverage A

3)  What would be your answers to questions 1 and 2 above if the Smith’s had only $80,000 of insurance of Coverage A?

a. question 1

On December 31, 2002, the equity section of spitz Company revealed the following data

Common Stock authorized    30000 shares

issued and outstanding 9000 shares $90000

APIC-Common    $116000

Treasury Stock 2000 Shares    $10000

Total Equity    $750000

On March 30, 2003 Spitz declared a 40% stock dividend when the FMV of the stock was $29 per share. For the 3 months ended March 31, 2003. Spitz sustained a net loss of 32000. The balance of Spitz retained earning as of March 31, 2003 should be

A. 554000

B. 449600

C.486000

D. 518000

E. None of the above