e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED OCTOBER 30, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-34536
rue21, inc.
(Exact name of registrant as specified in its charter)
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DELAWARE
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25-1311645 |
(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
800 Commonwealth Drive
Suite 100
Warrendale, Pennsylvania 15086
(Address of principal executive office)
(724) 776-9780
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the Registrant was required to submit and post such files). Yes o
No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares outstanding of the Registrants common stock was 24,324,863 as of
December 1, 2010.
rue21, inc.
Form 10-Q
Quarter Ended October 30, 2010
INDEX
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
rue21, inc. and subsidiary
Condensed Consolidated Balance Sheets
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October 30, |
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January 30, |
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October 31, |
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2010 |
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2010 |
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2009 |
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(Unaudited) |
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(in thousands, except per share data) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
18,696 |
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$ |
26,751 |
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$ |
5,330 |
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Accounts receivable |
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8,464 |
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3,834 |
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4,522 |
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Merchandise inventory, net |
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113,247 |
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72,693 |
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87,182 |
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Prepaid expenses and other current assets |
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9,705 |
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6,783 |
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6,422 |
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Deferred tax assets |
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5,831 |
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4,286 |
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3,774 |
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Total current assets |
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155,943 |
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114,347 |
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107,230 |
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Property and equipment, net |
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89,303 |
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73,147 |
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70,836 |
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Other assets |
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940 |
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937 |
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1,682 |
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Total assets |
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$ |
246,186 |
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$ |
188,431 |
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$ |
179,748 |
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Liabilities and stockholders equity |
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Current liabilities: |
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Accounts payable |
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$ |
84,590 |
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$ |
59,963 |
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$ |
73,977 |
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Accrued expenses and other current liabilities |
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14,502 |
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14,384 |
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10,762 |
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Accrued payroll and related taxes |
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9,544 |
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10,486 |
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8,699 |
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Deferred rent and tenant allowances, current portion |
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6,815 |
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5,509 |
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5,256 |
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Accrued income and franchise taxes |
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4,165 |
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2,401 |
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532 |
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Total current liabilities |
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119,616 |
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92,743 |
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99,226 |
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Long-term liabilities: |
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Long-term debt |
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21,176 |
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Deferred rent, tenant allowances and other long-term liabilities |
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33,261 |
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23,991 |
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22,983 |
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Deferred tax liabilities |
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3,578 |
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4,249 |
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3,473 |
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Total long-term liabilities |
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36,839 |
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28,240 |
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47,632 |
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Total liabilities |
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156,455 |
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120,983 |
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146,858 |
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Commitments and Contingencies |
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Stockholders equity: |
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Common stock par value $0.001 per share; 200,000 shares
authorized; 24,325 and 24,237 shares issued and outstanding at
October 30, 2010 and January 30, 2010, respectively, par value
$0.004 per share; 50,000 shares authorized; 22,511 shares
issued and outstanding at October 31, 2009 |
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24 |
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24 |
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90 |
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Additional paid in capital |
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30,043 |
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27,115 |
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213 |
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Retained earnings |
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59,664 |
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40,309 |
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32,587 |
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Total stockholders equity |
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89,731 |
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67,448 |
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32,890 |
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Total liabilities and stockholders equity |
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$ |
246,186 |
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$ |
188,431 |
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$ |
179,748 |
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See accompanying notes to the unaudited condensed consolidated financial statements.
3
rue21, inc. and subsidiary
Condensed Consolidated Statements of Income
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Thirteen weeks ended |
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Thirty-nine weeks ended |
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October 30, |
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October 31, |
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October 30, |
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October 31, |
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2010 |
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2009 |
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2010 |
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2009 |
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(Unaudited) |
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(in thousands, except per share data) |
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Net sales |
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$ |
163,913 |
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$ |
137,110 |
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$ |
444,635 |
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$ |
370,214 |
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Cost of goods sold (includes certain buying,
occupancy and distribution center expenses) |
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103,860 |
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87,539 |
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277,807 |
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237,733 |
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Gross profit |
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60,053 |
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49,571 |
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166,828 |
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132,481 |
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Selling, general, and administrative expense |
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42,637 |
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35,135 |
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118,668 |
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96,217 |
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Depreciation and amortization expense |
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5,666 |
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4,420 |
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15,937 |
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12,194 |
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Income from operations |
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11,750 |
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10,016 |
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32,223 |
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24,070 |
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Interest expense, net |
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50 |
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136 |
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172 |
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433 |
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Income before income taxes |
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11,700 |
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9,880 |
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32,051 |
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23,637 |
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Provision for income taxes |
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4,557 |
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3,902 |
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12,696 |
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9,342 |
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Net income |
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$ |
7,143 |
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$ |
5,978 |
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$ |
19,355 |
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$ |
14,295 |
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Basic income per common share |
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$ |
0.29 |
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$ |
0.27 |
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$ |
0.80 |
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$ |
0.65 |
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Diluted income per common share |
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$ |
0.29 |
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$ |
0.26 |
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$ |
0.77 |
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$ |
0.63 |
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Weighted average basic common shares outstanding |
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24,310 |
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22,201 |
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24,267 |
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22,111 |
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Weighted average diluted common shares
outstanding |
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24,972 |
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23,058 |
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25,003 |
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22,828 |
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See accompanying notes to the unaudited condensed consolidated financial statements.
4
rue21, inc. and subsidiary
Condensed Consolidated Statements of Cash Flows
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Thirty-nine weeks ended |
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October 30, |
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October 31, |
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2010 |
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2009 |
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(Unaudited, in thousands) |
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Operating activities |
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Net income |
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$ |
19,355 |
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14,295 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation and amortization |
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16,033 |
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12,261 |
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Loss on fixed asset disposals |
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147 |
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Impairment of long-lived assets |
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123 |
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158 |
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Deferred taxes |
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(2,216 |
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893 |
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Share-based compensation |
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1,573 |
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193 |
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Excess tax benefits from share-based compensation activities |
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(1,010 |
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Changes in: |
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Accounts receivable |
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(4,630 |
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(1,995 |
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Merchandise inventory, net |
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(40,554 |
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(20,344 |
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Prepaid expenses and other current assets |
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(2,922 |
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215 |
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Accounts payable |
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24,627 |
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13,528 |
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Accrued payroll and related taxes |
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(907 |
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1,167 |
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Accrued expenses and other current liabilities |
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2,892 |
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482 |
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Deferred rent and tenant allowances |
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10,576 |
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5,642 |
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Other |
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(99 |
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(984 |
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Net cash provided by operating activities |
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22,988 |
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25,511 |
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Investing activities |
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Acquisition of property and equipment |
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(32,402 |
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(26,499 |
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Proceeds from the sale of property and equipment |
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4 |
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Net cash used for investing activities |
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(32,398 |
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(26,499 |
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Financing activities |
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Borrowings under revolver |
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85,791 |
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Payments under revolver |
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(84,091 |
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Excess tax benefits from share-based compensation activities |
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1,010 |
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Proceeds from stock options exercised |
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345 |
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7 |
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Net cash provided by financing activities |
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1,355 |
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1,707 |
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(Decrease) increase in cash and cash equivalents |
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(8,055 |
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719 |
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Cash and cash equivalents, beginning of period |
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26,751 |
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4,611 |
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Cash and cash equivalents, end of period |
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$ |
18,696 |
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$ |
5,330 |
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See accompanying notes to the unaudited condensed consolidated financial statements.
5
rue2l, inc. and subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
Thirteen and Thirty-nine weeks ended October 30, 2010 and October 31, 2009
(Dollars in thousands unless otherwise indicated)
NOTE 1 Organization and Basis of Presentation
rue21, inc. (the Company or rue21) is a specialty retailer of girls and guys apparel and
accessories with 628, 535 and 534 stores as of October 30, 2010, January 30, 2010 and October 31,
2009, respectively, in various strip centers, regional malls and outlet centers throughout the
United States. Sales are generally transacted for cash or checks and through the acceptance of
third-party credit and debit cards.
On November 13, 2009, the Company completed an initial public offering of 7,780,252 shares of
common stock at a price to the public of $19.00 per share, of which 1,650,000 shares were sold by
the Company and 6,130,252 were sold by the selling shareholders (including 913,590 by members of
the Companys management). Upon completion of the offering, the Company received proceeds of
approximately $29,156, net of underwriters discounts and commissions.
The consolidated financial statements include all of the accounts of the Company and its
wholly-owned subsidiary, r services, llc. All intercompany transactions and balances have been
eliminated in consolidation. At October 30, 2010, the Company operated in one reportable segment.
In the opinion of management, the unaudited condensed consolidated financial statements include all
adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of
consolidated financial position, results of operations, and cash flows for the interim periods
presented. The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosure normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America (GAAP) have been condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures made are adequate to ensure that the information presented is
not misleading. Accordingly, these unaudited condensed consolidated financial statements and
related notes should be read in conjunction with the consolidated financial statements and notes
thereto for the fiscal year ended January 30, 2010 included in the Companys Annual Report on Form
10-K.
The results of operations for the thirteen and thirty-nine week periods ended October 30, 2010 are
not necessarily indicative of the operating results for the full fiscal year.
NOTE 2 Summary of Significant Accounting Policies
Fiscal Year
The Companys fiscal year is 52 or 53 weeks ending on the Saturday nearest to January 31 of the
following year. As used herein, the third quarter of 2010 and the third quarter of 2009 refer
to the thirteen week periods ending October 30, 2010 and October 31, 2009, respectively.
Year-to-date 2010 and year-to-date 2009 refer to the thirty-nine week periods ending October
30, 2010 and October 31, 2009, respectively.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America (GAAP) requires management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of net sales and expenses during the reporting period. Actual results could differ from those
estimates. On an ongoing basis, management reviews its estimates based on currently available
information. Changes in facts and circumstances may result in revised estimates.
Seasonality
Our business is seasonal and historically we have realized a higher portion of our net sales, net
income and operating cash flows in the second through the fourth fiscal quarters, attributable to
the impact of the back-to-school and holiday selling seasons. As a result, our working capital
requirements fluctuate during the year, increasing in mid-summer in anticipation of the
back-to-school selling season. Our business is also subject, at certain times, to calendar shifts
which may occur during key selling times such as school holidays,
6
rue2l, inc. and subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
Thirteen and Thirty-nine weeks ended October 30, 2010 and October 31, 2009
(Dollars in thousands unless otherwise indicated)
Easter and regional fluctuations
in the calendar during the back-to-school selling season.
Recent Accounting Standards
In June 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance in
connection with adding qualified special purpose entities into the scope of guidance for
consolidation of variable interest entities. This literature also modifies the analysis by which a
controlling interest of a variable interest entity is determined thereby requiring the controlling
interest to consolidate the variable interest entity. A controlling interest exists if a party to a
variable interest entity has both (i) the power to direct the activities of a variable interest
entity that most significantly impact the entitys economic performance and (ii) the obligation to
absorb losses of or receive benefits from the entity that could be potentially significant to the
variable interest entity. The guidance is effective as of the beginning of the first annual
reporting period beginning after November 15, 2009 and will be applied prospectively for interim
and annual periods upon adoption. The Company has adopted the guidance without any impact on the
consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Improving Disclosures
about Fair Value Measurements (ASU 2010-6). ASU 2010-6 amends the FASBs authoritative guidance
related to fair value measurements and disclosures to require additional disclosures related to
transfers between levels in the hierarchy of fair value measurements. ASU 2010-6 is effective for
interim and annual fiscal years beginning after December 15, 2009. The standard does not change how
fair values are measured. The Company has adopted the guidance without any impact on the
consolidated financial statements.
The FASB issues ASUs to amend the authoritative literature in Accounting Standards Codification
(ASC). There have been a number of ASUs to date that amend the original text of ASC. Except for the
ASU listed above, those issued to date either (i) provide supplemental guidance, (ii) are technical
corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant
impact on the Company.
Reclassifications
Certain reclassifications have been made to the prior periods condensed consolidated financial
statement amounts to conform to the current periods presentation.
NOTE 3 Earnings Per Share
Earnings per common share has been computed as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended |
|
|
Thirty-nine weeks ended |
|
|
|
October 30, |
|
|
October 31, |
|
|
October 30, |
|
|
October 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
7,143 |
|
|
$ |
5,978 |
|
|
$ |
19,355 |
|
|
$ |
14,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding |
|
|
24,310 |
|
|
|
22,201 |
|
|
|
24,267 |
|
|
|
22,111 |
|
Impact of dilutive securities |
|
|
662 |
|
|
|
857 |
|
|
|
736 |
|
|
|
717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding |
|
|
24,972 |
|
|
|
23,058 |
|
|
|
25,003 |
|
|
|
22,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share |
|
$ |
0.29 |
|
|
$ |
0.27 |
|
|
$ |
0.80 |
|
|
$ |
0.65 |
|
Diluted income per common share |
|
$ |
0.29 |
|
|
$ |
0.26 |
|
|
$ |
0.77 |
|
|
$ |
0.63 |
|
Equity awards to purchase 393, 311, 360 and 609 shares of common stock for the thirteen and
thirty-nine weeks ended October 30, 2010 and October 31, 2009, respectively, were outstanding, but
were not included in the computation of weighted average diluted common share amounts as the effect
of doing so would have been anti-dilutive.
7
rue2l, inc. and subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
Thirteen and Thirty-nine weeks ended October 30, 2010 and October 31, 2009
(Dollars in thousands unless otherwise indicated)
NOTE 4 Share-Based Compensation
In November 2009, the Company adopted the 2009 Omnibus Incentive Plan (the 2009 Plan) in
connection with the Companys initial public offering, pursuant to which key employees, officers,
and directors shall be eligible to receive grants of stock options, stock appreciation rights,
restricted stock or restricted stock units to purchase or receive, as applicable, up to an
aggregate of 3,626,000 shares of common stock based on eligibility, vesting, and performance
standards established by the board of directors. Stock options granted are generally exercisable
ratably over four years, subject to certain employment terms and conditions. The stock options
generally expire ten years from the date of issuance. To date, 417,000 stock options have been
granted and no stock appreciation rights, restricted stock or restricted stock units have been
issued under the 2009 Plan.
Effective May 15, 2003, the Company adopted the 2003 Ownership Incentive Plan (the 2003 Plan)
pursuant to which key employees, officers, and directors were eligible to receive options to
purchase common stock for an aggregate of up to 19.8% of the number of shares of the common stock
outstanding upon adoption of the 2003 Plan based on eligibility, vesting, and performance standards
established by the board of directors. Upon adopting the 2009 Plan, the Company discontinued use of
the 2003 Plan and no further option grants will be made under the 2003 Plan.
The following table represents stock options granted, vested, and expired under the existing
share-based compensation plans for the thirty-nine weeks ended October 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
Common |
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Stock |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Options |
|
|
Price |
|
|
Term |
|
|
Value |
|
|
|
(in thousands) |
|
|
(per share) |
|
|
(in years) |
|
|
|
|
|
Outstanding January 31, 2010 |
|
|
1,170 |
|
|
$ |
7.84 |
|
|
|
8.13 |
|
|
$ |
23,615 |
|
Granted |
|
|
377 |
|
|
$ |
33.35 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(87 |
) |
|
$ |
3.94 |
|
|
|
|
|
|
|
|
|
Expired or forfeited |
|
|
(18 |
) |
|
$ |
12.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding October 30, 2010 |
|
|
1,442 |
|
|
$ |
14.69 |
|
|
|
7.95 |
|
|
$ |
19,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at October 30, 2010 |
|
|
606 |
|
|
$ |
5.35 |
|
|
|
6.72 |
|
|
$ |
12,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 30, 2010, the Company had 3,209,000 shares available for stock grants. The
Company recognized $610, $1,573, $169 and $193 in compensation expense related to stock options for
the thirteen and thirty-nine weeks ended October 30, 2010 and October 31, 2009, respectively. The
weighted average fair value of stock options at the grant date was $14.24, $18.18, $6.88 and $6.16
for the thirteen and thirty-nine weeks ended October 30, 2010 and October 31, 2009, respectively.
The intrinsic value of options exercised was $396, $2,394, $4,944 and $4,957 for the thirteen and
thirty-nine weeks ended October 30, 2010 and October 31, 2009, respectively. All outstanding vested
options are currently exercisable as of October 30, 2010.
The fair value of stock options was estimated at the date of grant using a Black-Scholes option
pricing model with the following range of assumptions:
8
rue2l, inc. and subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
Thirteen and Thirty-nine weeks ended October 30, 2010 and October 31, 2009
(Dollars in thousands unless otherwise indicated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended |
|
|
Thirty-nine weeks ended |
|
|
|
October 30, |
|
|
October 31, |
|
|
October 30, |
|
|
October 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Risk-free interest rate (1) |
|
|
1.5-1.9 |
% |
|
|
2.6 |
% |
|
|
1.5-3.4 |
% |
|
|
2.6 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility factors for the expected market price of the
Companys common stock (2) |
|
|
55.0 |
% |
|
|
60.0 |
% |
|
|
53.0-55.0 |
% |
|
|
60.0 |
% |
Weighted average expected term (3) |
|
6.4 years |
| |
6.3 years |
| |
6.3 years |
| |
6.3 years | |
|
|
|
(1) |
|
Based on the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of stock options. |
|
(2) |
|
Expected stock price volatility is based on comparable volatilities of peer companies within rue21s industry. |
|
(3) |
|
Represents the period of time options are expected to be outstanding. The weighted-average expected option term was determined using
the simplified method, as allowed by Staff Accounting Bulletin Topic 14. The expected term used to value a share option grant
under the simplified method is the midpoint between the vesting date and the contractual term of the share option. |
The following table summarizes information regarding non-vested outstanding stock options as
of October 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Averaged Fair |
|
|
|
|
|
|
|
Value at Grant |
|
|
|
Shares |
|
|
Date |
|
|
|
(in thousands) |
|
|
(per share) |
|
Non-vested as of January 31, 2010 |
|
|
689 |
|
|
$ |
4.70 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
377 |
|
|
$ |
18.18 |
|
Vested |
|
|
(212 |
) |
|
$ |
3.25 |
|
Cancelled |
|
|
(18 |
) |
|
$ |
7.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of October 30, 2010 |
|
|
836 |
|
|
$ |
11.14 |
|
|
|
|
|
|
|
|
As of October 30, 2010, there was $7,893 of unrecognized compensation expense related to
nonvested stock option awards that is expected to be recognized over a weighted-average period of
2.08 years. The total fair value of shares vested during the thirteen and thirty-nine weeks ended
October 30, 2010 and October 31, 2009, was $3,093, $6,525, $5,788 and $8,668, respectively.
9
rue2l, inc. and subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
Thirteen and Thirty-nine weeks ended October 30, 2010 and October 31, 2009
(Dollars in thousands unless otherwise indicated)
NOTE 5 Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30, |
|
|
January 30, |
|
|
October 31, |
|
|
|
2010 |
|
|
2010 |
|
|
2009 |
|
Furniture and fixtures |
|
$ |
70,960 |
|
|
$ |
58,518 |
|
|
$ |
55,761 |
|
Leasehold improvements |
|
|
71,451 |
|
|
|
54,715 |
|
|
|
51,854 |
|
Computer equipment, software and other |
|
|
17,522 |
|
|
|
15,937 |
|
|
|
15,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,933 |
|
|
|
129,170 |
|
|
|
122,671 |
|
Less accumulated depreciation and amortization |
|
|
(70,630 |
) |
|
|
(56,023 |
) |
|
|
(51,835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
89,303 |
|
|
$ |
73,147 |
|
|
$ |
70,836 |
|
|
|
|
|
|
|
|
|
|
|
In accordance with the FASBs authoritative guidance related to the impairment or disposal of
long-lived assets, impairment losses may be recorded on long-lived assets used in operations when
events and circumstances indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of those assets. If
such a condition occurs, the assets are adjusted to their estimated fair value, which is determined
based upon prices for similar assets. Impairment charges of $0, $123, $33 and $158 were recognized
for the thirteen and thirty-nine weeks ended October 30, 2010 and October 31, 2009, respectively,
for assets related to stores to be converted and are recorded in selling, general, and
administrative expense in the accompanying Condensed Consolidated Statements of Income.
NOTE 6 Fair Value
The FASBs authoritative guidelines require the categorization of assets and liabilities into
three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1
provides the most reliable measure of fair value, whereas Level 3 generally requires significant
management judgment. The three levels are defined as follows:
|
|
|
Level 1: Unadjusted quoted prices in active markets for identical
assets and liabilities. The Companys cash and cash equivalents of
$18,696, $26,751 and $5,330 as of October 30, 2010, January 30, 2010
and October 31, 2009, respectively, are reported at fair value
utilizing Level 1 inputs. |
|
|
|
|
Level 2: Observable inputs other than those included in Level 1. For
example, quoted prices for similar assets or liabilities in active
markets or quoted prices for identical assets or liabilities in
inactive markets. The Company determined that the fair value
measurements related to the impaired long lived assets disclosed in
Note 5 are derived from significant other observable inputs. These
non-financial assets are measured on a non-recurring basis when events
and circumstances warrant. |
|
|
|
|
Level 3: Unobservable inputs reflecting managements own assumptions
about the inputs used in pricing the asset or liability. The Company
has no significant assets or liabilities measured using Level 3
inputs. |
As of October 30, 2010, January 30, 2010 and October 31, 2009, respectively, management believes
that the carrying amounts of cash and cash equivalents, receivables, and payables approximate fair
value because of the short maturity of these financial instruments. Additionally, management
believes the fair value of the long-term debt approximates carrying value as of October 31, 2009,
as the debt instrument has a variable interest rate that resets quarterly.
NOTE 7 Income Taxes
The provision for income taxes is based on the current estimate of the annual effective tax
rate and is adjusted as necessary for discrete events occurring in a particular period. The
effective income tax rate for the thirteen weeks ended October 30, 2010 was 38.9% as compared to
39.5% for the thirteen weeks ended October 31, 2009. The lower effective income tax rate for the
third quarter of 2010 was primarily due to a state income tax credit, deductions related to
disqualifying dispositions of employee incentive stock options and
10
rue2l, inc. and subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
Thirteen and Thirty-nine weeks ended October 30, 2010 and October 31, 2009
(Dollars in thousands unless otherwise indicated)
a lower forecasted annual
effective state income tax rate for fiscal year 2010 as compared to fiscal year 2009.
The year-to-date 2010 effective income tax rate was 39.6% as compared to 39.5% for the year-to-date
2009 period. The higher effective income tax rate was principally due to the non-deductibility of
expenses related to the Companys secondary offering of common stock completed in March. The
non-deductibility of these expenses increased the effective tax rate by approximately 0.6% for the
year-to-date 2010 period. The impact of this item was recorded as a discrete event for the thirteen
weeks ended May 1, 2010. This item was principally offset by the completion of a state income tax
audit during the second quarter of 2010 and a lower forecasted annual effective state income rate
for fiscal year 2010 as compared to fiscal year 2009.
The Company classifies interest and penalties as an element of tax expense. The amount of tax
related interest and penalties for the
thirteen and thirty-nine weeks ended October 30, 2010 and October 31, 2009, respectively, was not
material.
The Company recognizes income tax liabilities related to unrecognized tax benefits in accordance
with the FASBs authoritative guidance related to uncertain tax positions and adjusts these
liabilities when its judgment changes as the result of the evaluation of new information. The
Company does not anticipate any significant changes to the unrecognized tax benefits recorded at
the balance sheet date within the next 12 months.
NOTE 8 Commitments and Contingencies
From time to time, the Company is involved in litigation relating to claims arising out of the
normal course of business. As of the date hereof, the Company is involved in no litigation that the
Company believes will have a material adverse effect on its consolidated financial condition,
results of operation, or liquidity.
11
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our Annual Report on Form 10-K for the
year ended January 30, 2010. The statements in this discussion regarding industry outlook, our
expectations regarding our future performance, liquidity and capital resources and other
non-historical statements are forward-looking statements. These forward-looking statements are
subject to numerous risks and uncertainties, including, but not limited to, the risks and
uncertainties described in Risk Factors and Forward-Looking Statements. Our actual results may
differ materially from those contained in or implied by any forward-looking statements.
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 2010 refer to the fiscal year ended
January 29, 2011.
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, will, 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:
|
|
|
failure to successfully execute our growth strategy, including 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 domestic and foreign
vendors; |
|
|
|
|
our level of success in gaining and maintaining broad market acceptance of our exclusive
brands; |
|
|
|
|
our failure to protect our brand image; |
|
|
|
|
economic conditions, including 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 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; |
|
|
|
|
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; and our
failure to maintain effective internal controls. |
12
Our Business
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. In late 2006, we introduced our larger rue21 etc! store layout, which averages
approximately 4,700 square feet and features a separate store-in-store for our rue21 etc!
merchandise. After 2008 we opened only the rue21 etc! format stores and since that time have been
strategically converting existing stores into the rue21 etc! format by expanding our existing
stores or relocating existing stores within the same center or to a nearby center. Each conversion
involves enlarging the square footage of an existing store. As of October 30, 2010, we operated 628
stores in 44 states, 439 of which feature the larger rue21 etc! store layout.
We believe that there is a significant opportunity to grow our store base to more than
1,000 stores over the next five years. We plan to open 105 stores in fiscal year 2010, and to that
end we opened 95 new stores (and closed two stores) in the thirty-nine weeks ended October 30,
2010. We also plan to continue to convert our existing stores into the larger rue21 etc! layout,
and in the thirty-nine weeks ended October 30, 2010, we converted 31 existing stores into the
larger rue21 etc! format.
Performance Metrics
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 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 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; |
|
|
|
|
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.
13
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.
Our business is seasonal and as a result, our net sales fluctuate from quarter to
quarter. Net sales are usually higher in the second through fourth fiscal quarters, and
particularly in the months of August and December, as customers make back-to-school and holiday
purchases.
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 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. We expect that our selling, general and
administrative expense will increase in future periods due to our continuing store growth and in
part to additional legal, accounting, insurance and other expenses we expect to incur as a result
of being a public company. Among other things, we expect that compliance with the Sarbanes-Oxley
Act and related rules and regulations will result in significant legal and accounting costs.
Selected Third Quarter and Year-to-date Highlights:
|
|
|
Net sales increased 19.5% to $163.9 million in the third quarter of 2010,
compared to $137.1 million in the third quarter of 2009. Comparable store sales increased
by 1.8% in the third quarter of 2010 as compared to an increase of 13.5% in the third
quarter of 2009. For the year-to-date 2010 period, net sales increased 20.1% to $444.6
million, as compared to $370.2 million in the year-to-date 2009 period. Comparable store
sales increased by 2.4% in the year-to-date 2010 period as compared to an increase of 7.4%
in the year-to-date 2009 period. |
|
|
|
|
In the third quarter of 2010 net income increased 19.5% to $7.1 million from
$6.0 million in the third quarter of 2009. For the year-to-date 2010 period, net income
increased 35.4% to $19.4 million, as compared to $14.3 million in the year-to-date 2009
period. |
|
|
|
|
Diluted income per common share was $0.29 in the third quarter of 2010
compared to diluted income per common share of $0.26 in the third quarter of 2009. For the
year-to-date 2010 period, diluted income per common share was $0.77, as compared to $0.63
in the year-to-date 2009 period. |
14
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 30, |
|
|
October 31, |
|
|
October 30, |
|
|
October 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
(in thousands, except operating data) |
|
Net sales |
|
$ |
163,913 |
|
|
$ |
137,110 |
|
|
$ |
444,635 |
|
|
$ |
370,214 |
|
Cost of goods sold |
|
|
103,860 |
|
|
|
87,539 |
|
|
|
277,807 |
|
|
|
237,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
60,053 |
|
|
|
49,571 |
|
|
|
166,828 |
|
|
|
132,481 |
|
Selling, general and administrative expenses |
|
|
42,637 |
|
|
|
35,135 |
|
|
|
118,668 |
|
|
|
96,217 |
|
Depreciation and amortization expense |
|
|
5,666 |
|
|
|
4,420 |
|
|
|
15,937 |
|
|
|
12,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
11,750 |
|
|
|
10,016 |
|
|
|
32,223 |
|
|
|
24,070 |
|
Interest expense, net |
|
|
50 |
|
|
|
136 |
|
|
|
172 |
|
|
|
433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
11,700 |
|
|
|
9,880 |
|
|
|
32,051 |
|
|
|
23,637 |
|
Provision for income taxes |
|
|
4,557 |
|
|
|
3,902 |
|
|
|
12,696 |
|
|
|
9,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,143 |
|
|
$ |
5,978 |
|
|
$ |
19,355 |
|
|
$ |
14,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.29 |
|
|
|
0.27 |
|
|
|
0.80 |
|
|
|
0.65 |
|
Diluted |
|
|
0.29 |
|
|
|
0.26 |
|
|
|
0.77 |
|
|
|
0.63 |
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
24,310 |
|
|
|
22,201 |
|
|
|
24,267 |
|
|
|
22,111 |
|
Diluted |
|
|
24,972 |
|
|
|
23,058 |
|
|
|
25,003 |
|
|
|
22,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
63.4 |
% |
|
|
63.8 |
% |
|
|
62.5 |
% |
|
|
64.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
36.6 |
% |
|
|
36.2 |
% |
|
|
37.5 |
% |
|
|
35.8 |
% |
Selling, general and administrative expenses |
|
|
26.0 |
% |
|
|
25.6 |
% |
|
|
26.7 |
% |
|
|
26.0 |
% |
Depreciation and amortization expense |
|
|
3.5 |
% |
|
|
3.2 |
% |
|
|
3.6 |
% |
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
7.1 |
% |
|
|
7.3 |
% |
|
|
7.2 |
% |
|
|
6.5 |
% |
Interest expense, net |
|
|
0.0 |
% |
|
|
0.1 |
% |
|
|
0.0 |
% |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
7.1 |
% |
|
|
7.2 |
% |
|
|
7.2 |
% |
|
|
6.4 |
% |
Provision for income taxes |
|
|
2.8 |
% |
|
|
2.8 |
% |
|
|
2.9 |
% |
|
|
2.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
4.3 |
% |
|
|
4.4 |
% |
|
|
4.3 |
% |
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate |
|
|
38.9 |
% |
|
|
39.5 |
% |
|
|
39.6 |
% |
|
|
39.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores open at the end of the period |
|
|
628 |
|
|
|
534 |
|
|
|
628 |
|
|
|
534 |
|
Total gross square feet at the end of the
period (in thousands) |
|
|
2,934 |
|
|
|
2,382 |
|
|
|
2,934 |
|
|
|
2,382 |
|
Comparable store sales increase |
|
|
1.8 |
% |
|
|
13.5 |
% |
|
|
2.4 |
% |
|
|
7.4 |
% |
15
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 30, |
|
|
October 31, |
|
|
October 30, |
|
|
October 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Girls |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apparel |
|
|
57.7 |
% |
|
|
58.3 |
% |
|
|
57.7 |
% |
|
|
58.1 |
% |
Accessories |
|
|
24.2 |
% |
|
|
22.3 |
% |
|
|
24.5 |
% |
|
|
23.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guys Apparel and Accessories |
|
|
18.1 |
% |
|
|
19.4 |
% |
|
|
17.8 |
% |
|
|
18.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended October 30, 2010 Compared to Thirteen Weeks Ended October 31, 2009
Net Sales
In the thirteen weeks ended October 30, 2010, our net sales increased 19.5%, or $26.8 million, to
$163.9 million as compared to $137.1 million in the thirteen weeks ended October 31, 2009. This
increase in net sales was due to an increase of approximately 21% in the number of transactions,
primarily driven by new store openings during fiscal year 2010. The increase in the number of
transactions was offset by a decrease of approximately 1.5% in the average dollar value of
transactions per store. During the thirteen weeks ended October 30, 2010, we opened 33 new stores
with no store closures compared to 29 new stores and no store closures in the thirteen weeks ended
October 31, 2009. Our comparable store sales increased 1.8% in the thirteen weeks ended October 30,
2010 compared to an increase of 13.5% in the thirteen weeks ended October 31, 2009. Comparable
store sales increased by $2.3 million and non-comparable store sales increased by $24.5 million in
the thirteen weeks ended October 30, 2010 compared to the thirteen weeks ended October 31, 2009.
There were 493 comparable stores and 135 non-comparable stores open at October 30, 2010 compared to
386 and 148, respectively, at October 31, 2009.
In the thirteen weeks ended October 30, 2010, net sales of girls apparel, girls accessories and
guys apparel and accessories represented 57.7%, 24.2% and 18.1%, respectively, of total net sales
as compared to 58.3%, 22.3% and 19.4%, respectively, for the thirteen weeks ended October 31, 2009.
In the thirteen weeks ended October 30, 2010, the girls apparel, girls accessories and guys apparel
and accessories categories grew by approximately 18%, 30% and 12%, respectively, as compared to the
thirteen weeks ended October 31, 2009. The increase in girls accessories as a percentage of total
net sales was due to management efforts to expand the number of items in the girls accessories
category.
Gross Profit
Gross profit increased 21.1%, or $10.5 million, in the thirteen weeks ended October 30, 2010 to
$60.1 million as compared to $49.6 million in the thirteen weeks ended October 31, 2009. Gross
margin increased 40 basis points to 36.6% for the thirteen weeks ended October 30, 2010 from 36.2%
for the thirteen weeks ended October 31, 2009. This increase in gross margin was primarily
attributable to a 60 basis point increase in merchandise margin, primarily due to an improvement in
our initial mark-up as compared to the thirteen weeks ended October 31, 2009. Gross margin was
negatively impacted by a 20 basis point increase in store occupancy, freight and buying costs, as
these costs increased at a rate higher than net sales.
Selling, General and Administrative Expense
Selling, general and administrative expense increased 21.4%, or $7.5 million, to $42.6 million in
the thirteen weeks ended October 30, 2010 as compared to $35.1 million in the thirteen weeks ended
October 31, 2009. As a percentage of net sales, selling, general and administrative expense
increased to 26.0% in the thirteen weeks ended October 30, 2010 as compared to 25.6% in the
thirteen weeks
16
ended October 31, 2009. During the thirteen weeks ended October 30, 2010, we
incurred $0.7 million of public company expenses and $0.6 million in share-based compensation
expense. During the thirteen weeks ended October 31, 2009, we incurred $0.2 million in share-based
compensation expense and an immaterial amount of public company expenses. Excluding the impact of
these items, selling, general and administrative expenses as a percentage of net sales, would have
decreased 30 basis points in the thirteen weeks ended October 30, 2010.
Store operating expenses increased by $5.2 million in the thirteen weeks ended October 30, 2010 as
compared to the thirteen weeks ended October 31, 2009, due primarily to the operation of 628 stores
as of October 30, 2010 compared to the operation of 534 stores as of October 31, 2009. As a
percentage of net sales, store operating expenses increased to 18.8% for the thirteen weeks ended
October 30, 2010 as compared to 18.6% in the thirteen weeks ended October 31, 2009, primarily as a
result of these costs increasing at a higher rate than our increase in net sales.
Administrative and general expenses increased as a percentage of net sales to 7.3% for the thirteen
weeks ended October 30, 2010 as compared to 7.0% in the thirteen weeks ended October 31, 2009, due
primarily to the incremental public company and share-based compensation expenses incurred during
the thirteen weeks ended October 30, 2010 as discussed above. Excluding the impact of the
incremental public company and share-based compensation expenses, administrative and general
expenses as a percentage of net sales, would have decreased to 6.5% in the thirteen weeks ended
October 30, 2010 as compared to 6.8% in the thirteen weeks ended October 31, 2009.
Depreciation and Amortization Expense
Depreciation and amortization expense increased as a percentage of net sales to 3.5% for the
thirteen weeks ended October 30, 2010 as compared to 3.2% in the thirteen weeks ended October 31,
2009, or $1.2 million. The increase in depreciation and amortization expense 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 2010.
Interest Expense, Net
Interest expense decreased to $0.1 million, for the thirteen weeks ended October 30, 2010 as a
result of the Company having no borrowings under the senior secured credit facility during the
thirteen weeks ended October 30, 2010.
Provision for Income Taxes
The increase in the provision for income taxes of $0.7 million in the thirteen weeks ended October
30, 2010 from $3.9 million in the thirteen weeks ended October 31, 2009 was due primarily to the
$1.8 million increase in pre-tax income. The effective tax rates were 38.9% and 39.5% for the
thirteen weeks ended October 30, 2010 and the thirteen weeks ended October 31, 2009, respectively.
The lower effective income tax rate was primarily due to a state income tax credit, deductions
related to disqualifying dispositions of employee incentive stock options and a lower forecasted
annual effective state income tax rate for fiscal year 2010 as compared to fiscal year 2009.
Net Income
Net income increased 19.5%, or $1.2 million, to $7.1 million for the thirteen weeks ended October
30, 2010 as compared to $6.0 million in the thirteen weeks ended October 31, 2009. This increase
was due to the factors discussed above.
Thirty-nine Weeks Ended October 30, 2010 Compared to Thirty-nine Weeks Ended October 31, 2009
Net Sales
Net sales increased 20.1%, or $74.4 million, to $444.6 million for the thirty-nine weeks ended
October 30, 2010 from $370.2 million for the thirty-nine weeks ended October 31, 2009. The increase
in net sales was due to an increase of approximately 20% in the number of transactions, primarily
driven by new store openings. During the thirty-nine weeks ended October 30, 2010, we opened 95
new stores and closed 2 stores as compared to 85 new stores and no store closures in the
thirty-nine weeks ended October 31, 2009.
Comparable store sales increased 2.4% for the thirty-nine weeks ended October 30, 2010 compared to
an increase of 7.4% for the thirty-nine weeks ended October 31, 2009. Comparable store sales
increased by $8.2 million and non-comparable store sales increased by $66.2 million. There were 493
comparable and 135 non-comparable stores open at October 30, 2010 compared to 386 and 148,
respectively, at October 31, 2009.
17
In the thirty-nine weeks ended October 30, 2010, net sales of girls apparel, girls accessories and
guys apparel and accessories represented 57.7%, 24.5% and 17.8%, respectively, of total net sales
as compared to 58.1%, 23.7% and 18.2%, respectively, for the thirty-nine weeks ended October 31,
2009. In the thirty-nine weeks ended October 30, 2010, the girls apparel, girls accessories and
guys apparel and accessories categories grew by approximately 19%, 24% and 18%, respectively, as
compared to the thirty-nine weeks ended October 31, 2009. The increase in girls accessories as a
percentage of total net sales was due to management efforts to expand the number of items in the
girls accessories category.
Gross Profit
Gross profit increased 25.9%, or $34.3 million, in the thirty-nine weeks ended October 30, 2010 to
$166.8 million from $132.5 million in the thirty-nine weeks ended October 31, 2009. Gross margin
increased 170 basis points to 37.5% for the thirty-nine weeks ended October 30, 2010 from 35.8% for
the thirty-nine weeks ended October 31, 2009. This increase to gross margin was attributable to a
170 basis point increase in merchandise margin, primarily due to an improvement in our initial
mark-up as compared to the thirty-nine weeks ended October 31, 2009.
Selling, General and Administrative Expense
Selling, general and administrative expense increased 23.3%, or $22.5 million, to $118.7 million in
the thirty-nine weeks ended October 30, 2010 from $96.2 million for the thirty-nine weeks ended
October 31, 2009. As a percentage of net sales, selling, general and administrative expense
increased to 26.7% in the thirty-nine weeks ended October 30, 2010 from 26.0% in the thirty-nine
weeks ended October 31, 2009. During the thirty-nine weeks ended October 30, 2010, we incurred $2.6
million in public company expenses, which includes $0.6 million for the Companys secondary
offering completed in the first quarter of 2010 and share-based compensation expense of $1.6
million. During the thirty-nine weeks ended October 31, 2009, we incurred $0.2 million in
share-based expense and an immaterial amount of public company expenses. Excluding the impact of
these items, selling, general and administrative expenses as a percentage of net sales, would have
decreased 10 basis points in the thirty-nine weeks ended October 30, 2010.
Store operating expenses increased by $14.5 million primarily resulting from the operation of 628
stores as of October 30, 2010 compared to the operation of 534 stores as of October 31, 2009. As a
percentage of net sales, store operating expenses increased to 19.2% in the thirty-nine weeks ended
October 30, 2010 from 19.1% in the thirty-nine weeks ended October 31, 2009.
Administrative and general expenses increased as a percentage of net sales to 7.5% for the
thirty-nine weeks ended October 30, 2010 as compared to 6.9% in the thirty-nine weeks ended October
31, 2009 due primarily to the incremental public company and share-based compensation expenses
incurred during the thirty-nine weeks ended October 30, 2010 as discussed above. Excluding the
impact of the incremental public company and share-based compensation expenses, administrative and
general expenses as a percentage of net sales, would have decreased to 6.6% in the thirty-nine
weeks ended October 30, 2010 as compared to 6.8% in the thirty-nine weeks ended October 31, 2009.
Depreciation and Amortization Expense
Depreciation and amortization expense increased as a percentage of net sales to 3.6% for the
thirty-nine weeks ended October 30, 2010 compared to 3.3% for the thirty-nine weeks ended October
31, 2009, or $3.7 million. The increase in depreciation and amortization expense 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 2010.
Interest Expense, Net
Interest expense, net decreased to $0.2 million for the thirty-nine weeks ended October 30, 2010 as
a result of the Company having no borrowings under the senior secured credit facility during the
thirty-nine weeks ended October 30, 2010.
Provision for Income Taxes
The increase in the provision for income taxes of $3.4 million in the thirty-nine weeks ended
October 30, 2010 from the thirty-nine weeks ended October 31, 2009 was due primarily to the $8.4
million increase in pre-tax income. The effective tax rates were 39.6% and 39.5% for the
thirty-nine weeks ended October 30, 2010 and the thirty-nine weeks ended October 31, 2009,
respectively. The
higher effective income tax rate was principally due to the non-deductibility of expenses related
to the Companys secondary offering
18
of common stock completed in March. The non-deductibility of
these expenses increased the effective tax rate by approximately 0.6% for the year-to-date 2010
period. The impact of this item was recorded as a discrete event for the thirteen weeks ended May
1, 2010. This item was principally offset by the completion of a state income tax audit during the
second quarter of 2010 and a lower forecasted annual effective state income rate for fiscal year
2010 as compared to fiscal year 2009.
Net Income
Net income increased 35.4%, or $5.1 million, to $19.4 million for the thirty-nine weeks ended
October 30, 2010 from $14.3 million for the thirty-nine weeks ended October 31, 2009. This increase
was due to the factors discussed above.
Liquidity and Capital Resources
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, and the additional
working capital required for the related increase in merchandise inventories. Cash is also required
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
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 days to pay our vendors.
As of October 30, 2010, we had cash and cash equivalents totaling $18.7 million. Our cash and cash
equivalents consist of cash on deposit and credit and debit card transactions. Our cash and cash
equivalents balance at October 30, 2010 decreased by $8.1 million from $26.8 million at January 30,
2010. Components of this change in cash for the thirty-nine weeks ended October 30, 2010, as well
as for change in cash for the thirty-nine weeks ended October 31, 2009, 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 30, |
|
|
October 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Provided by operating activities |
|
$ |
22,988 |
|
|
$ |
25,511 |
|
Used for investing activities |
|
|
(32,398 |
) |
|
|
(26,499 |
) |
Provided by financing activities |
|
|
1,355 |
|
|
|
1,707 |
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
$ |
(8,055 |
) |
|
$ |
719 |
|
|
|
|
|
|
|
|
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.
19
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine weeks ended |
|
|
|
October 30, |
|
|
October 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Net income |
|
$ |
19,355 |
|
|
$ |
14,295 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
16,033 |
|
|
|
12,261 |
|
Deferred taxes |
|
|
(2,216 |
) |
|
|
893 |
|
Share-based compensation |
|
|
1,573 |
|
|
|
193 |
|
Merchandise inventory |
|
|
(40,554 |
) |
|
|
(20,344 |
) |
Accounts payable |
|
|
24,627 |
|
|
|
13,528 |
|
Other working capital components |
|
|
4,910 |
|
|
|
4,527 |
|
All other |
|
|
(740 |
) |
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
22,988 |
|
|
$ |
25,511 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities was $23.0 million and $25.5 million for the
thirty-nine weeks ended October 30, 2010 and the thirty-nine weeks ended October 31, 2009,
respectively. The decrease of $2.5 million in the thirty-nine weeks ended October 30, 2010 as
compared to the thirty-nine weeks ended October 31, 2009 was primarily due to an increase in
merchandise inventory ($20.2 million) and a decrease in the net deferred tax liability ($3.1
million). These cash outflows were principally offset by an increase in net income ($5.1 million),
increased share-based compensation expense ($1.4 million), an increase in accounts payable ($11.1
million) and higher non-cash depreciation and amortization ($3.8 million) expense.
Investing Activities
Investing activities consist entirely of capital expenditures for new and converted stores, as well
as investment in information technology and our distribution facility enhancements.
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine weeks ended |
|
|
|
October 30, |
|
|
October 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Capital expenditures, net of tenant
allowances and proceeds from the sale
of property and equipment |
|
$ |
(19,948 |
) |
|
$ |
(19,097 |
) |
Tenant allowances |
|
|
(12,450 |
) |
|
|
(7,402 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
(32,398 |
) |
|
$ |
(26,499 |
) |
|
|
|
|
|
|
|
For the thirty-nine weeks ended October 30, 2010 capital expenditures, net of tenant allowances and
proceeds from the sale of
property and equipment increased $0.9 million as compared to the thirty-nine weeks ended October
31, 2009. During the thirty-nine weeks ended October 30, 2010, we opened 95 new stores and
converted 31 existing stores as compared to 85 new stores and 25 store conversions in the
thirty-nine weeks ended October 31, 2009, respectively. Capital expenditures for the new stores and
conversions of existing stores increased $3.4 million to $13.3 million during the thirty-nine weeks
ended October 30, 2010 as compared to $9.9 million in the comparable prior year period.
Additionally, the capital expenditures for store fixtures increased $1.4 million during the
thirty-nine weeks ended October 30, 2010 as compared to the twenty-six weeks ended October 31,
2009. These increases were offset by lower capital expenditures for the distribution center of $2.2
million and for information technology of $1.9 million versus the comparable prior year period.
20
Financing Activities
Financing activities consist principally of proceeds from the exercise of employee stock options
and excess tax benefits from share-based award activities, along with net borrowings under our
credit facilities in the comparable prior year period.
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine weeks ended |
|
|
|
October 30, |
|
|
October 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Net borrowings under revolver |
|
$ |
|
|
|
$ |
1,700 |
|
Proceeds from stock options exercised |
|
|
345 |
|
|
|
7 |
|
Excess tax benefits from stock-based
award activities |
|
|
1,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
$ |
1,355 |
|
|
$ |
1,707 |
|
|
|
|
|
|
|
|
Net cash of $1.4 million was provided by financing activities in the thirty-nine weeks ended
October 30, 2010, which was primarily utilized to fund general corporate activities in the current
fiscal year.
Senior Secured Credit Facility
Effective April 10, 2008, we established a five-year $60.0 million senior secured credit facility
with Bank of America, N.A., which was amended on November 24, 2009. Key provisions of the amendment
included an increase in the borrowing ceiling to $85 million from $60 million, which is further
expandable at our option in increments of $5 million up to a maximum of $100 million under certain
defined conditions. Interest accrues at the higher of the Federal Funds rate plus .50%, the prime
rate or the adjusted LIBOR rate plus 1.00% plus the applicable margin which ranges from 1.25% to
3.00%. Availability under our senior secured credit facility is collateralized by a first priority
interest in all of our assets.
Our senior secured credit facility accrues interest at the Bank of America N.A. base rate, defined
at our option as the prime rate or the Eurodollar rate plus applicable margin, which ranges from
1.25% to 3.00%, set quarterly depending upon average net availability under our senior secured
credit facility during the previous quarter. The weighted-average interest rate under our senior
secured credit facility for the thirty-nine weeks ended October 30, 2010 and the thirty-nine weeks
ended October 31, 2009 was 0% and 2.51%, respectively. We had $85.0 million and $38.8 million of
availability under our senior secured credit facility as of October 30, 2010 and October 31, 2009,
respectively, excluding our option to expand the facility.
Our senior secured credit facility includes a fixed charge covenant applicable only if net
availability falls below a 10% threshold. We are in compliance with all covenants under our senior
secured credit facility as of October 30, 2010 and expect to remain in compliance for the next
twelve months.
We believe that our cash position, net cash provided by operating activities and availability under
our senior secured credit facility will be adequate to finance working capital needs and planned
capital expenditures for at least the next twelve months. While there can be no assurance that
current expectations will be realized, the Company expects capital expenditures, net of tenant
allowances to total approximately $27 to $29 million in fiscal year 2010.
Off Balance Sheet Arrangements
We are not a party to any off balance sheet arrangements.
Contractual Obligations
There have been no significant changes to our contractual obligations and commercial commitments as
disclosed in our Annual Report on Form 10-K for the fiscal year ended January 30, 2010, other than
those which occur in the normal course of business.
21
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted
in the United States of America requires management to adopt accounting policies and make
significant judgments and estimates to develop amounts reflected and disclosed in the financial
statements. In many cases, there are alternative policies or estimation techniques that could be
used. We maintain a process to review the application of our accounting policies and to evaluate
the appropriateness of the many estimates that are required to prepare the consolidated financial
statements. There have been no significant changes to our critical accounting policies and
estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended January 30,
2010.
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures about Market Risk |
There have been no material changes to the quantitative and qualitative information concerning our
market risk since the end of the most recent fiscal year. For further information, see Item 7A of
the Companys Annual Report on Form 10-K for the year ended January 30, 2010.
|
|
|
Item 4. |
|
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures, as defined in Rule 13(a)-15(e), as of the end of the period covered by this Quarterly
Report on Form 10-Q pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange
Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures as of the end of the period covered by this
Quarterly Report on Form 10-Q are effective in ensuring that information required to be disclosed
in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner
and (2) accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect
that our disclosure controls and procedures will prevent or detect all error and all fraud. While
our disclosure controls and procedures are designed to provide reasonable assurance of their
effectiveness, because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting during the quarter ended
October 30, 2010 that have materially affected, or that are reasonably likely to materially affect,
our internal control over financial reporting.
PART IIOTHER INFORMATION
|
|
|
Item 1. |
|
Legal Proceedings |
From time to time, the Company is involved in litigation relating to claims arising out of the
normal course of business. As of the date hereof, the Company is involved in no litigation that the
Company believes will have a material adverse effect on its consolidated financial condition,
results of operation, or liquidity.
There have been no significant changes in our risk factors from those disclosed in our Annual
Report on Form 10-K for the fiscal year ended January 30, 2010.
22
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of rue21, inc. (Section
302 of the Sarbanes-Oxley Act of 2002) |
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of rue21, inc.
(Section 302 of the Sarbanes-Oxley Act of 2002) |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer of rue21, inc. pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of the Chief Financial Officer of rue21, inc. pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
rue21, inc.
|
|
Date: December 8, 2010 |
By |
/s/ Robert Fisch
|
|
|
|
Robert Fisch |
|
|
|
Chairman and Chief Executive Officer |
|
|
|
|
|
Date: December 8, 2010 |
By |
/s/ Keith McDonough
|
|
|
|
Keith McDonough |
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
24