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RUE > SEC Filings for RUE > Form 10-Q on 29-Nov-2012All Recent SEC Filings

Show all filings for RUE21, INC.

Form 10-Q for RUE21, INC.


29-Nov-2012

Quarterly Report


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 "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements other than those that are purely historical are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "anticipate," "estimate," "expect," "project," "plan," "intend," "believe," "may," "should," "can have," "likely" and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenues, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies, or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including, but not limited to the following:

our failure to identify and respond to new and changing fashion trends, customer preferences and other related factors;

our failure to successfully execute our growth strategy, due to delays in store growth and store conversions, difficulties executing sales and operating profit margin initiatives and inventory shrinkage prevention;

the failure of our new stores or the conversion of our existing stores to achieve sales and operating levels consistent with our expectations;

risks and challenges in connection with sourcing merchandise from third party domestic and foreign vendors, including the risk that current or prospective vendors may be unable or unwilling to supply us with adequate quantities of their merchandise in a timely manner or at acceptable prices;

our level of success in gaining and maintaining broad market acceptance of our exclusive brands;

our failure to protect our brand image;

economic conditions, and their effect on the financial and capital markets, our vendors and business partners, employment levels, consumer demand, spending patterns, inflation and the cost of goods;

our loss of key personnel or our inability to hire additional personnel;

seasonality of our business;

increases in costs of raw materials for our merchandise, fuel, or other energy, transportation or utilities costs and in the costs of labor and employment;

the impact of governmental laws and regulations and the outcomes of legal proceedings;

disruptions in our supply chain and distribution facility;

damage or interruption to our information systems, including system security risks;


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changes in the competitive environment in our industry and the markets in which we operate;

natural disasters, unusually adverse weather conditions, pandemic outbreaks, boycotts and geo-political events;

the incurrence of material uninsured losses or excessive insurance costs;

our failure to maintain effective internal controls; and

other factors discussed in other reports or filings filed by us with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended January 28, 2012.

Our Business

We operate on a fiscal year calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31 of the following year. For example, references to "fiscal year 2011" refer to the 52 week period ended January 28, 2012.

rue21 is a fast growing specialty apparel retailer offering the newest fashion trends for girls and guys at a great value. Although many of our customers are teenagers, we believe our merchandise appeals to anyone who wants to look or feel 21. Our product offerings fall into three categories: girls apparel; guys apparel and accessories; and girls accessories or our rue21 etc! category. As of October 27, 2012, we operated 862 stores in 47 states.

Performance Metrics

In order to monitor the Company's success, the Company's management monitors certain key performance metrics, including:

Net Sales

Net sales constitute gross sales net of any returns and merchandise discounts. Net sales consist of sales from comparable stores and non-comparable stores.

Comparable Store Sales

A store is included in comparable store sales on the first day of the sixteenth month after its opening, as new stores generally open with above run-rate sales volumes, which usually extend for a period of at least three months, and comparability generally is achieved twelve months after the initial three-month period of store opening. Comparable store sales include existing stores that have been converted to our rue21 etc! layout. When a store that is included in comparable store sales is in the process of being converted to our rue21 etc! layout, net sales from that store remain in comparable store sales. There may be variations in the way in which some of our competitors and other apparel retailers calculate comparable or "same store" sales. As a result, data in this Quarterly Report on Form 10-Q regarding our comparable store sales may not be comparable to similar data made available by other retailers. Non-comparable store sales include sales not included in comparable store sales and sales from closed stores.

Measuring the change in year-over-year comparable store sales allows us to evaluate how our store base is performing. Various factors affect comparable store sales, including:

consumer preferences, buying trends and overall economic trends;

our ability to identify and respond effectively to fashion trends and customer preferences;

competition;

changes in our merchandise mix;

pricing;

the timing of our releases of new merchandise and promotional events;

the level of customer service that we provide in our stores;


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our ability to source and distribute products efficiently; and

the number of stores we open, close and convert in any period.

As we continue to pursue our store growth strategy, we expect that a significant percentage of our net sales increase will continue to come from non-comparable store sales. Opening new stores is an important part of our growth strategy. Accordingly, comparable store sales is only one element we use to assess the success of our growth strategy.

The retail apparel industry is cyclical, and consequently our net sales are affected by general economic conditions. Purchases of apparel and accessories are sensitive to a number of factors that influence the levels of consumer spending, including economic conditions and the level of disposable consumer income, consumer debt, interest rates and consumer confidence.

Gross Profit

Gross profit is equal to our net sales minus our cost of goods sold. Gross margin measures gross profit as a percentage of our net sales. Cost of goods sold includes the direct cost of purchased merchandise, distribution center costs, all freight costs incurred to get merchandise to our stores, store occupancy costs and buying costs. The components of our cost of goods sold may not be comparable to those of other retailers.

Our cost of goods sold is substantially higher in higher volume quarters because cost of goods sold generally increases as net sales increase. Changes in the mix of our products, such as changes in the proportion of accessories, may also impact our overall cost of goods sold. We review our inventory levels on an ongoing basis in order to identify slow-moving merchandise, and generally use markdowns to clear that merchandise. The timing and level of markdowns are not seasonal in nature, but are driven by customer acceptance of our merchandise. If we misjudge the market for our products, we may be faced with significant excess inventories for some products and be required to mark down those products in order to sell them. Significant markdowns have reduced our gross profit in some prior periods and may have a material adverse impact on our earnings for future periods depending on the amount of the markdowns and the amount of merchandise affected.

Selling, General and Administrative Expense

Selling, general and administrative expense includes administration, share-based compensation and store expenses, but excludes store occupancy costs and freight to stores. These expenses do not generally vary proportionately with net sales. As a result, selling, general and administrative expense as a percentage of net sales is usually higher in lower volume quarters and lower in higher volume quarters. The components of our selling, general and administrative expense may not be comparable to those of other retailers. We expect that our selling, general and administrative expense will increase in future periods due to our continuing growth.


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Results of Operations

The following tables summarize key components of our results of operations for
the periods indicated, both in dollars and as a percentage of net sales:



                                            Thirteen weeks ended                      Thirty-nine weeks ended
                                      October 27,           October 29,          October 27,           October 29,
                                          2012                 2011                 2012                  2011
                                                                      (Unaudited)
                                                         (in thousands, except operating data)
Net sales                            $      225,158        $     194,761        $     632,832         $     540,406
Cost of goods sold                          140,052              123,361              388,514               334,130

Gross profit                                 85,106               71,400              244,318               206,276
Selling, general and
administrative expenses                      63,738               50,805              175,333               145,045
Depreciation and amortization
expense                                       8,522                6,843               24,067                19,356

Income from operations                       12,846               13,752               44,918                41,875
Interest income, net                            (12 )                 16                  (64 )                 (25 )

Income before income taxes                   12,858               13,736               44,982                41,900
Provision for income taxes                    4,693                4,995               16,124                15,870

Net income                           $        8,165        $       8,741        $      28,858         $      26,030

Net income per common share
Basic                                          0.34                 0.36                 1.18                  1.07
Diluted                                        0.33                 0.35                 1.15                  1.04
Weighted average common shares
outstanding
Basic                                        23,939               24,461               24,371                24,407
Diluted                                      24,555               25,066               24,990                25,057
Net sales                                     100.0 %              100.0 %              100.0 %               100.0 %
Cost of goods sold                             62.2 %               63.3 %               61.4 %                61.8 %

Gross margin                                   37.8 %               36.7 %               38.6 %                38.2 %
Selling, general and
administrative expenses                        28.3 %               26.1 %               27.7 %                26.8 %
Depreciation and amortization
expense                                         3.8 %                3.5 %                3.8 %                 3.6 %

Income from operations                          5.7 %                7.1 %                7.1 %                 7.7 %
Interest income, net                            0.0 %                0.0 %                0.0 %                 0.0 %

Income before income taxes                      5.7 %                7.1 %                7.1 %                 7.7 %
Provision for income taxes                      2.1 %                2.6 %                2.5 %                 2.9 %

Net income                                      3.6 %                4.5 %                4.6 %                 4.8 %

Effective Tax Rate                             36.5 %               36.4 %               35.8 %                37.9 %

Operating Data (unaudited)

Number of stores open at the end
of the period                                   862                  740                  862                   740
Comparable store sales change                   0.2 %                0.0 %                0.8 %                 1.5 %


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The approximate percentage of our net sales derived from our product categories, based on our internal merchandising system, is as follows:

                                            Thirteen weeks ended                        Thirty-nine weeks ended
                                     October 27,            October 29,          October 27,              October 29,
                                         2012                  2011                  2012                    2011
Girls
Apparel                                       59.1 %                57.7 %                58.9 %                   58.3 %
Accessories                                   21.4 %                23.7 %                22.6 %                   24.1 %
Guys Apparel and Accessories                  19.5 %                18.6 %                18.5 %                   17.6 %

Total                                        100.0 %               100.0 %               100.0 %                  100.0 %

Third quarter of 2012 Compared to Third quarter of 2011

Net Sales

During the third quarter of 2012, our net sales increased 15.6%, or $30.4 million, to $225.2 million as compared to $194.8 million in the third quarter of 2011. Net sales also increased primarily due to an increase of 8.4% in the average dollar value of transactions. The average dollar value of transactions increased due to higher units per transaction and, to a lesser extent by an increase in average unit retail. This increase in net sales was also due to an approximate 7% increase in the number of transactions, driven by new store openings during the third quarter of 2012. During the third quarter of 2012, we opened 29 new stores and closed 1 store compared to 30 new stores in the third quarter of 2011. Our comparable store sales increased 0.2% in the third quarter of 2012 compared to flat in the third quarter of 2011. There were 698 comparable stores and 164 non-comparable stores open at October 27, 2012 compared to 580 and 160, respectively, at October 29, 2011.

During the third quarter of 2012, net sales from the girls apparel, girls accessories and guys apparel and accessories categories grew by approximately 18%, 4% and 21%, respectively, as compared to the third quarter of 2011.

Gross Profit

Gross profit increased 19.2%, or $13.7 million, in the third quarter of 2012 to $85.1 million as compared to $71.4 million in the third quarter of 2011. Gross margin increased 110 basis points to 37.8% for the third quarter of 2012 from 36.7% for the third quarter of 2011. Merchandise margin for the third quarter of 2012 contributed the entire gross margin improvement offset slightly by other cost of goods sold as compared to third quarter of 2011. The offset in gross margin related to other cost of goods sold was attributable to higher store rent costs and distribution center costs driven by our recent distribution center physical plant infrastructure expansion.

Selling, General and Administrative Expense

Selling, general and administrative expense increased 25.5%, or $12.9 million, to $63.7 million in the third quarter of 2012 as compared to $50.8 million in the third quarter of 2011. As a percentage of net sales, selling, general and administrative expense increased to 28.3% in the third quarter of 2012 as compared to 26.1% in the third quarter of 2011.

Store operating expenses increased by $8.0 million in the third quarter of 2012 as compared to the third quarter of 2011 due primarily to the operation of 862 stores as of October 27, 2012 compared to the operation of 740 stores as of October 29, 2011. As a percentage of net sales, store operating expenses increased to 20.5% for the third quarter of 2012 as compared to 19.5% for the third quarter of 2011, primarily due to increased store salaries and benefits.

Administrative and general expense increased $4.9 million in the third quarter of 2012 as compared to the third quarter of 2011. The increase was largely attributable to a prospective California wage and hour case settlement and related costs of $2.9 million. As a percentage of sales, the wage and hour case settlement and related costs were 1.3% in the third quarter of 2012. Additionally, stock compensation expense increased 79%, or $1.1 million, to $2.5 million in the third quarter of 2012 as compared to $1.4 million in the third quarter of 2011. As a percentage to sales, stock compensation expense increased 40 basis points to 1.1% in the third quarter of 2012 as compared to 0.7% in the third quarter of 2011.


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Depreciation and Amortization Expense

Depreciation and amortization expense increased by $1.7 million to $8.5 million in the third quarter of 2012 as compared to $6.8 million in the third quarter of 2011. Depreciation and amortization expense increased as a percentage of net sales to 3.8% in the third quarter of 2012 as compared to 3.5% in the third quarter of 2011. This increase was driven primarily by capital expenditures related to new store openings.

Provision for Income Taxes

The provision for income taxes decreased $0.3 million to $4.7 million in the third quarter of 2012 as compared to $5.0 million in the third quarter of 2011. The effective tax rates were 36.5% and 36.4% for the third quarter of 2012 and 2011, respectively.

Net Income

Net income decreased 6.6%, or $0.5 million, to $8.2 million for the third quarter of 2012 as compared to $8.7 million in the third quarter of 2011. This decrease was due to the factors discussed above.

Year-to-date 2012 Compared to Year-to-date 2011

Net Sales

Net sales increased 17.1%, or $92.4 million, to $632.8 million for the Year-to-date 2012 period from $540.4 million for the Year-to-date 2011 period. The increase in net sales was due to an approximately 11% increase in the number of transactions, primarily driven by new stores opened in 2012. Net sales also increased due to an increase of 5.8% in the average dollar value of transactions. The average dollar value of transactions increased due to a higher average unit retail and units per transaction to a lesser extent. During the Year-to-date 2012 period, we opened 108 new stores and closed 1 store as compared to 103 new stores and one closure in the Year-to-date 2011 period. Our comparable store sales increased 0.8% for the Year-to-date 2012 period compared to an increase of 1.5% for the Year-to-date 2011 period. There were 698 comparable and 164 non-comparable stores at October 27, 2012 compared to 580 and 160, respectively, at October 29, 2011.

During Year-to-date 2012, net sales from the girls apparel, girls accessories and guys apparel and accessories categories grew by approximately 19%, 10% and 23%, respectively, as compared to the Year-to-date 2011 period.

Gross Profit

Gross profit increased 18.4%, or $38.0 million, in the Year-to-date 2012 period to $244.3 million as compared to $206.3 million in the Year-to-date 2012 period. Gross margin increased 40 basis points to 38.6% for the Year-to-date 2012 period from 38.2% for the Year-to-date 2011 period. The increase in gross margin was attributable to increased merchandise margin.

Selling, General and Administrative Expense

Selling, general and administrative expense increased 20.9%, or $30.3 million, to $175.3 million in the Year-to-date 2012 period as compared to $145.0 million in the Year-to-date 2011 period. As a percentage of net sales, selling, general and administrative expense increased 90 basis points to 27.7% in the Year-to-date 2012 period as compared to 26.8% in the Year-to-date 2011 period.

Store operating expenses increased by $20.1 million in the Year-to-date 2012 period as compared to the Year-to-date 2011 period due primarily to the operation of 862 stores as of October 27, 2012 compared to the operation of 740 stores as of October 29, 2011. As a percentage of net sales, store operating expenses increased 30 basis points to 20.4% in the Year-to-date 2012 period as compared to 20.1% in the Year-to-date 2011 period, primarily related to increased salary costs.

Administrative and general expense increased $10.2 million in the Year-to-date 2012 period as compared to Year-to-date 2011 period due primarily to higher stock compensation expense and a prospective California wage and hour case settlement and related costs. As a percentage of sales, administrative and general expense for the Year-to date period of 2012 increased 60 basis points to 7.3% as compared to 6.7% in the Year-to-date 2011 period. As a percentage to sales, stock compensation expense increased 50 basis points to 1.2% in the Year-to-date period 2012 as compared to 0.7% in the Year-to-date period of 2011. As a percentage of sales, the wage and hour case settlement and related costs increased for the Year-to-date 2012 period by 46 basis points.

Depreciation and Amortization Expense

Depreciation and amortization expense increased by $4.7 million to $24.1 million in the Year-to-date 2012 period as compared to $19.4 million in the Year-to-date 2011 period. Depreciation and amortization expense increased as a percentage of net sales to 3.8% in the Year-to-date 2012 period as compared to 3.6% in the Year-to-date 2011 period. This increase was driven primarily by capital expenditures relating to new store openings.


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Provision for Income Taxes

The provision for income taxes increased $0.2 million to $16.1 million in the Year-to-date 2012 period as compared to $15.9 million in the Year-to-date 2011 period. This increase was due primarily to the $3.1 million increase in pre-tax income. The effective tax rates were 35.8% and 37.9% for the Year-to-date 2012 and 2011 periods, respectively. The lower effective income tax rate in the Year-to-date 2012 period was due to corporate restructuring, federal and state income tax credits, disqualifying dispositions of stock options as well as increased permanent tax differences in the current year.

Net Income

Net income increased 10.9%, or $2.9 million, to $28.9 million for the Year-to-date 2012 period as compared to $26.0 million in the Year-to-date 2011 period. This increase was due to the factors discussed above.

Liquidity and Capital Resources

We believe that internally generated funds, current cash on hand, and available borrowings under our existing credit facility will be adequate to meet foreseeable liquidity needs. Our primary sources of liquidity are cash flows from operations and availability under our senior secured credit facility. Our primary cash needs are for capital expenditures in connection with opening new stores and converting existing stores to the rue21 etc! format, including the additional working capital required for the related increase in merchandise inventories. Cash has been and may again be required for repurchases of our common stock, as well as for investment in information technology and distribution facility enhancements and funding normal working capital requirements. The most significant components of our working capital are cash and cash equivalents, merchandise inventories, accounts payable and other current liabilities. Our operations are seasonal in nature and consist of two principal selling seasons: Spring (the first and second quarters) and Fall (the third and fourth quarters). Generally, our highest sales volume occurs in the fourth quarter, which includes the holiday selling season. Accordingly, cash requirements are highest in the third quarter as our inventories build in advance of the holiday season. In addition, our quarterly results can be affected by the timing of new store openings and store closings, the amount of sales contributed by new and existing stores and the timing of certain holidays.

As of October 27, 2012, we had cash, cash equivalents, and short term investments totaling $44.3 million. Our cash and cash equivalents consist of cash on deposit, credit and debit card transactions and investments with a maturity of 90 days or less. Our cash, cash equivalents and short term investments balance at October 27, 2012 decreased by $27.6 million from $72.0 million at January 28, 2012. Components of this change in cash for the Year-to-date 2012 period, as well as for change in cash for the Year-to-date 2011 period, are provided below in more detail.

A summary of operating, investing and financing activities are shown in the following table:

                                                     Thirty-nine weeks ended
                                                 October 27,         October 29,
                                                     2012               2011
                                                          (in thousands)
   Provided by operating activities              $     39,025       $      28,406
   Used for investing activities                      (52,774 )           (43,595 )
   (Used for) provided by financing activities        (20,864 )             1,149

   Decrease in cash and cash equivalents         $    (34,613 )     $     (14,040 )

Operating Activities

Operating activities consist primarily of net income adjusted for non-cash items, including depreciation and amortization, deferred taxes, the effect of working capital changes and tenant allowances received from landlords.


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                                                             Thirty-nine weeks ended
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