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RUE > SEC Filings for RUE > Form 10-K on 3-Apr-2013All Recent SEC Filings

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Form 10-K for RUE21, INC.


3-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion together with "Selected Consolidated Financial Data," and the historical consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Part I - Item 1A "Risk Factors". Our actual results may differ materially from those contained in or implied by any forward-looking statements.

We operate on a fiscal 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 2012" refer to the fiscal year ended February 2, 2013.

Overview

rue21 is a fast growing specialty apparel retailer offering the newest fashion trends for girls and guys at value prices. We were originally founded in 1976 as a value-focused specialty apparel retailer. In 1998, we were acquired by certain funds now advised by Apax Partners, through SKM Equity Fund II, L.P. and SKM Investment Fund II. In 2001, we began repositioning our company by aligning our stores under one brand name, strengthening our management team, honing our fashion value merchandise approach and refocusing our store growth strategy. In late 2006, we introduced our larger rue21 etc! store layout, which averages approximately 5,000 square feet and features a separate store-in-store for our rue21 etc! girls jewelry and accessories category. As of February 2, 2013, we operated 877 stores in 47 states, 749 of which featured the larger rue21 etc! store layout.

Our strong growth and operating results reflect the initiatives taken by our management team, as well as the increasing acceptance of our brand and merchandise. Our net sales increased from $391.4 million in fiscal year 2008 to $901.9 million in fiscal year 2012, a compound annual growth rate of 23.2%. Over the same period, we grew income from operations from $22.1 million to $68.5 million, a compound annual growth rate of 32.7%. Since the beginning of fiscal year 2008, we have increased our store base from 352 stores to 877 stores as of February 2, 2013. Our total square footage growth has outpaced our total store growth over this same period, reflecting the increasing size of our average store.

We expect to continue our strong growth in the future. We believe there is a significant opportunity to grow our store base to over 1,700 stores. We plan to open approximately 125 stores in fiscal year 2013. We expect to continue to drive our comparable store sales by refreshing our existing stores, increasing the penetration of our newer product categories, increasing our brand awareness, and continuing to provide our distinctive in-store experience to the rue21 etc! layout.

Our growth in total square footage is supported by our store economics, which we believe to be very attractive. As a result of our low store build-out costs, favorable lease terms and low-cost operating model, our stores generate strong returns on investment. We focus our real estate strategy on strip centers, regional malls and outlet centers, primarily in small and middle market communities, which we believe are underserved by traditional junior and young men's specialty apparel retailers. Our typical new store investment is approximately $180,000, which includes build-out costs, net of landlord tenant allowances and initial inventory, net of payables. New stores generate on average between $900,000 and $1.1 million in net sales per store in the first twelve months.

We continue to invest the capital necessary to support our future growth. In 2012 we made strategic investments in people and infrastructure that we believe will reap long-term benefits, including investments in planning and allocation systems, operations systems, and our e-commerce platform. In 2013 we will make further investments in people and infrastructure, primarily focused on the development of our e-commerce business and increasing our overall square footage growth.


How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing are net sales, comparable store and non-comparable store sales, gross profit margin and selling, general and administrative expense.

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 16th 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 after 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 Annual Report on Form 10-K 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. The comparable sales increase for the period ended February 2, 2013 is compared to the corresponding 52 week period in fiscal year 2011. The extra week in fiscal year 2012 has been excluded from the comparable store sales calculation.

Store Productivity

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, stock-based compensation and store expenses but excludes store occupancy costs and freight to stores. These expenses do not generally vary proportionally 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. Selling, general and administrative expense has increased significantly due to an increase in new store growth. Store count has increased approximately 64% to 877 stores from 535 stores since the beginning of fiscal year 2010.

Known Trends and Uncertainties

We are currently finalizing an amendment and restatement of our senior secured credit facility with Bank of America, due to mature on April 10, 2013. We expect that the facility, as amended and restated, will be a five-year $100 million senior secured revolving credit facility which is further expandable at our option in increments of $10 million up to a maximum of $130 million under certain defined conditions. As working capital has historically been the means by which the Company meets its material capital expenditure requirements, we anticipate that our cash position and net cash provided by operating activities will be sufficient to finance working capital needs and planned capital expenditures for at least the next twelve months even if we are unable to secure additional availability under the senior secured credit facility through the proposed amendment or if the senior secured credit facility matures according to its terms.

Results of Operations

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

                                                                Fiscal Year Ended
                                              February 2,          January 28,          January 29,
                                                2013(1)               2012                 2011
                                                      (in thousands, except operating data)
Net Sales                                    $     901,886        $     760,302        $     634,728
Cost of goods sold                                 556,368              473,662              399,896

Gross profit                                       345,518              286,640              234,832
Selling, general and administrative
expenses                                           244,096              197,176              163,006
Depreciation and amortization expense               32,961               26,618               21,980

Income from operations                              68,461               62,846               49,846
Interest (Income) expense, net                         (27 )                 (9 )                 74

Income before income taxes                          68,488               62,855               49,772
Provision for income taxes                          24,587               23,905               19,528

Net income                                   $      43,901        $      38,950        $      30,244


Operating Data (unaudited)
Number of stores open at the end of the
period                                                 877                  755                  638
Gross square feet at the end of the
period (in thousands)                                4,347                3,708                2,989
Comparable store sales change(2)                       0.7 %                0.4 %                2.1 %

--------------------------------------------------------------------------------
                                                                Fiscal Year Ended
                                             February 2,           January 28,           January 29,
                                                2013                  2012                  2011
Net Sales                                           100.0 %               100.0 %               100.0 %
Cost of goods sold                                   61.7 %                62.3 %                63.0 %

Gross profit                                         38.3 %                37.7 %                37.0 %
Selling, general and administrative
expenses                                             27.1 %                25.9 %                25.7 %
Depreciation and amortization expense                 3.7 %                 3.5 %                 3.5 %

Income from operations                                7.6 %                 8.3 %                 7.9 %
Interest (Income) expense, net                        0.0 %                 0.0 %                 0.0 %

Income before income taxes                            7.6 %                 8.3 %                 7.8 %
Provision for income taxes                            2.7 %                 3.1 %                 3.1 %

Net income                                            4.9 %                 5.1 %                 4.8 %

Note 1 - Except for the fiscal year ended February 2, 2013, which includes 53
weeks, all fiscal years presented include 52 weeks.

Note 2 - The comparable sales increase for the period ended February 2, 2013 is
compared to the corresponding 52 week period in fiscal year 2011. The extra week
in fiscal year 2012 has been excluded from the comparable store sales
calculation.

The following table summarizes the number of stores open at the beginning of the
period and at the end of the period.



                                               2012       2011       2010
               Stores at beginning of period     755        638        535
               Stores opened during period       125        120        105
               Stores closed during period        (3 )       (3 )       (2 )

               Stores at end of period           877        755        638


Fiscal Year 2012 Compared to Fiscal Year 2011

Net Sales

In fiscal year 2012 (53 weeks), our net sales increased 18.6%, or $141.6 million, to $901.9 million from $760.3 million in fiscal year 2011 (52 weeks). This increase in net sales was due to an increase of approximately 12.6% in the number of transactions and an increase in the average dollar transaction of approximately 5.5%. The average dollar value of transactions increased due to a higher average unit retail and slight increase in units per transaction. In fiscal year 2012, the 53rd week contributed $11.3 million in total sales. During fiscal year 2012, we opened 125 new stores and closed three stores compared to 120 new stores and three store closures in fiscal year 2011. Our comparable store sales increased 0.7% in fiscal year 2012 compared to an increase of 0.4% in fiscal year 2011. There were 724 comparable stores and 153 non-comparable stores open at February 2, 2013 compared to 611 and 144, respectively, at January 28, 2012.

In fiscal year 2012, net sales of girls apparel, girls accessories and guys apparel and accessories represented 57.5%, 23.6% and 18.9%, respectively, of total net sales compared to 56.6%, 25.0% and 18.4%, respectively, for fiscal year 2011. For fiscal year 2012, the girls apparel, girls accessories and guys apparel and accessories categories grew by approximately 20.5%, 12.2% and 22.0%, respectively, as compared to fiscal year 2011.

Gross Profit

Gross profit increased 20.5%, or $58.9 million, in fiscal year 2012 to $345.5 million from $286.6 million in fiscal year 2011. Gross margin increased 60 basis points to 38.3% for fiscal year 2012 from 37.7% for fiscal year


2011. This increase was attributable to a 50 basis point increase in merchandise margin, primarily due to an improvement in our initial mark-up rate in fiscal year 2012. Gross margin also improved by 10 basis points as a percent of sales due to store occupancy costs in fiscal year 2012 compared to fiscal year 2011.

Selling, General and Administrative Expense

Selling, general and administrative expense increased 23.8%, or $46.9 million to $244.1 million in fiscal year 2012 from $197.2 million in fiscal year 2011. As a percentage of net sales, selling, general and administrative expense increased 120 basis points to 27.1% in fiscal year 2012 as compared to 25.9% in fiscal year 2011.

Store operating expenses increased 21.4%, or $31.9 million to $180.9 million in fiscal year 2012 from $149.0 million in fiscal year 2011. Store operating expenses increased 50 basis points as a percentage of sales primarily due to salary and related expenses. Corporate administrative and general expenses increased 31.1%, or $15.0 million to $63.2 million in fiscal year 2012 from $48.2 million in fiscal year 2011. Corporate administrative expenses increased 70 basis points primarily due to a 50 basis point increase in stock based compensation, a 30 basis point increase due to a California wage and hour case settlement and related costs, and a 10 basis point increase for non-recurring professional fees. Corporate administrative and general expenses were offset by a 20 basis point decrease in salary and related expenses as a percentage of sales.

Depreciation and Amortization Expense

Depreciation and amortization expense increased to 3.7% as a percentage of net sales in fiscal year 2012 as compared to 3.5% in fiscal year 2011. Depreciation and amortization expense increased 23.8%, or $6.4 million, in fiscal year 2012 to $33.0 million from $26.6 million in fiscal year 2011, and was primarily due to the continued opening of new stores and conversions, investments in information technology and the completion of the distribution center expansion during fiscal year 2012.

Provision for Income Taxes

The increase in provision for income taxes of $0.7 million in fiscal year 2012 from fiscal year 2011 was due primarily to a $5.6 million increase in pre-tax income. The effective tax rate was at 35.9% in fiscal year 2012 as compared to 38.0% in fiscal year 2011. This rate decrease was primarily the result of corporate restructuring and discrete events, including various tax credit programs in fiscal year 2012.

Net Income

Net income increased 12.7%, or $4.9 million, to $43.9 million in fiscal year 2012 from $39.0 million in fiscal year 2011. This increase was due to the factors discussed above.

Fiscal Year 2011 Compared to Fiscal Year 2010

Net Sales

In fiscal year 2011, our net sales increased 19.8%, or $125.6 million, to $760.3 million from $634.7 million in fiscal year 2010. This increase in net sales was due to an increase of approximately 14.7% in the number of transactions and an increase in the average dollar transaction of approximately 4.2%. The average dollar value of transactions increased due to a higher average unit retail slightly offset by a decrease in units per transaction. During fiscal year 2011, we opened 120 new stores and closed three stores compared to 105 new stores and 2 store closures in fiscal year 2010. Our comparable store sales increased 0.4% in fiscal year 2011 compared to an increase of 2.1% in fiscal year 2010. There were 611 comparable stores and 144 non-comparable stores open at January 28, 2012 compared to 523 and 115, respectively, at January 29, 2011.

In fiscal year 2011, net sales of girls apparel, girls accessories and guys apparel and accessories represented 56.6%, 25.0% and 18.4%, respectively, of total net sales compared to 55.9%, 25.7% and 18.4%, respectively, for fiscal year 2010. For fiscal year 2011, the girls apparel, girls accessories and guys apparel and accessories categories grew by approximately 21.3%, 16.0% and 19.8%, respectively, as compared to fiscal year 2010.


Gross Profit

Gross profit increased 22.1%, or $51.8 million, in fiscal year 2011 to $286.6 million from $234.8 million in fiscal year 2010. Gross margin increased 70 basis points to 37.7% for fiscal year 2011 from 37.0% for fiscal year 2010. This increase was attributable to a 70 basis point increase in merchandise margin, primarily due to an improvement in our initial mark-up rate in fiscal year 2011. Gross margin as a percent of sales was not impacted by store occupancy, distribution and buying costs, as these costs were flat as a rate to net sales in fiscal year 2011 compared to fiscal year 2010.

Selling, General and Administrative Expense

Selling, general and administrative expense increased 21.0%, or $34.2 million to $197.2 million in fiscal year 2011 from $163.0 million in fiscal year 2010. As a percentage of net sales, selling, general and administrative expense increased 20 basis points to 25.9% in fiscal year 2011 as compared to 25.7% in fiscal year 2010.

Store operating expenses increased 30 basis points as a percentage of sales primarily due to salary and related expenses. Corporate administrative and general expenses decreased 10 basis points primarily due to a decrease to salary and related expenses offset by a 30 basis point increase in stock based compensation.

Depreciation and Amortization Expense

Depreciation and amortization expense was flat as a percentage of net sales at 3.5% in fiscal year 2011 and fiscal year 2010, respectively. Depreciation and amortization expense increased 21.1%, or $4.6 million, in fiscal year 2011 to $26.6 million from $22.0 million and was primarily due to the continued opening of new stores and conversions, investments in information technology and the completion of the home office expansion during fiscal year 2011.

Provision for Income Taxes

The increase in provision for income taxes of $4.4 million in fiscal year 2011 from fiscal year 2010 was due primarily to a $13.1 million increase in pre-tax income. The effective tax rate was at 38.0% in fiscal year 2011 as compared to 39.2% in fiscal year 2010. This rate decrease was primarily the result of corporate restructuring and discrete events in fiscal year 2011.

Net Income

Net income increased 28.8%, or $8.8 million, to $39.0 million in fiscal year 2011 from $30.2 million in fiscal year 2010. This increase was due to the factors discussed above.

Liquidity and Capital Resources

Our primary source of liquidity is cash flows from operations. Our primary cash needs are generally for capital expenditures incurred in connection with the opening of new stores, the refreshing existing stores and the related increase in merchandise inventories. Cash is also required for investment in information technology, home office and distribution facility infrastructure 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 working capital position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within several days of the related sale, and we typically have up to 75 to 90 days to pay our vendors.

As of February 2, 2013, we had cash, cash equivalents and short term investments totaling $63.5 million. Our cash and cash equivalents consist of cash on deposit and investments with a maturity of 90 days or less. Our cash, cash equivalents and short term investments balance at February 2, 2013 decreased by $8.5 million from $72.0 million at January 28, 2012. Components of this change in cash for fiscal year 2012, as well as for change in cash for the fiscal years 2011 and 2010, are provided below in more detail.


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

                                                               Fiscal Year Ended
                                             February 2,          January 28,          January 29,
                                                2013                 2012                 2011
                                                                (in thousands)
Provided by operating activities            $      74,979        $      74,200        $      61,643
Used for investing activities                     (50,127 )            (83,552 )            (40,480 )
(Used for) Provided by financing
activities                                        (23,293 )              1,201                2,197

Increase (Decrease) in cash and cash
equivalents                                       $ 1,559        $      (8,151 )      $      23,360

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.



                                                                Fiscal Year Ended
                                              February 2,          January 28,          January 29,
                                                 2013                 2012                 2011
                                                                 (in thousands)
Net income                                   $      43,901        $      38,950        $      30,244
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization                       32,961               26,618               21,980
Deferred taxes                                      (2,749 )              5,837                  664
Share-based compensation                            10,480                4,943                2,240
Merchandise inventory                              (26,133 )            (35,085 )            (23,358 )
Accounts payable                                     4,847               22,287               21,821
Other working capital components                    12,448               10,652                9,157
All other                                             (776 )                 (2 )             (1,105 )

Net cash provided by operating
activities                                   $      74,979        $      74,200        $      61,643

During fiscal year 2012, we generated $75.0 million in cash from operating activities. Our major source of cash from operations was attributable to net income of $43.9 million offset by merchandise inventory required by operations of $26.1 million. Non-cash charges included depreciation and amortization of $33.0 million and stock compensation of $10.5 million.

During fiscal year 2011, we generated $74.2 million in cash from operating activities. Our major source of cash from operations was attributable to net income of $39.0 million and an increase in accounts payable of $22.3 million. Net cash was reduced for additional merchandise inventory required by operations of $35.1 million. Non-cash charges included depreciation and amortization of $26.6 million and stock compensation of $4.9 million.

During fiscal year 2010, we generated $61.6 million in cash from operating . . .

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