e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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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 JULY 30, 2011
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
(State or Other Jurisdiction of Incorporation or Organization)
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25-1311645
(I.R.S. Employer Identification No.) |
800 Commonwealth Drive
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 þ 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 þ
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Non-accelerated filer o
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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 24,459,873 as of August
24, 2011.
rue21, inc.
Form 10-Q
Quarter Ended July 30, 2011
INDEX
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
rue21, inc. and subsidiaries
Consolidated Balance Sheets
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July 30, |
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January 29, |
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July 31, |
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2011 |
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2011 |
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2010 |
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(Unaudited) |
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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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$ |
43,404 |
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$ |
50,111 |
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$ |
16,669 |
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Accounts receivable |
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13,777 |
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6,733 |
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10,825 |
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Merchandise inventory, net |
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137,364 |
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96,051 |
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109,645 |
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Prepaid expenses and other current assets |
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15,306 |
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10,580 |
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9,486 |
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Deferred tax assets |
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5,645 |
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5,024 |
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4,404 |
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Total current assets |
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215,496 |
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168,499 |
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151,029 |
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Property and equipment, net |
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107,280 |
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91,371 |
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81,134 |
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Other assets |
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980 |
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921 |
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976 |
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Total assets |
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$ |
323,756 |
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$ |
260,791 |
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$ |
233,139 |
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Liabilities and stockholders equity |
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Current liabilities: |
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Accounts payable |
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$ |
115,906 |
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$ |
82,075 |
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$ |
86,679 |
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Accrued expenses and other current liabilities |
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16,731 |
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15,616 |
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14,020 |
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Accrued payroll and related taxes |
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11,228 |
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12,053 |
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9,778 |
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Deferred rent and tenant allowances, current portion |
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8,212 |
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7,033 |
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6,461 |
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Accrued income and franchise taxes |
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1,999 |
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Total current liabilities |
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152,077 |
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118,776 |
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116,938 |
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Non-current liabilities: |
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Deferred rent, tenant allowances and other long-term liabilities |
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44,063 |
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34,235 |
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31,219 |
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Deferred tax liabilities |
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4,952 |
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5,651 |
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3,408 |
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Total non-current liabilities |
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49,015 |
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39,886 |
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34,627 |
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Commitments and Contingencies |
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Stockholders equity: |
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Common stock par value $0.001 per share; 200,000 shares
authorized; 24,459, 24,380 and 24,305 shares issued and
outstanding, respectively. |
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24 |
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24 |
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24 |
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Additional paid in capital |
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34,800 |
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31,552 |
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29,029 |
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Retained earnings |
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87,840 |
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70,553 |
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52,521 |
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Total stockholders equity |
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122,664 |
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102,129 |
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81,574 |
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Total liabilities and stockholders equity |
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$ |
323,756 |
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$ |
260,791 |
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$ |
233,139 |
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See accompanying notes to the unaudited consolidated financial statements.
3
rue21, inc. and subsidiaries
Consolidated Statements of Income
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Thirteen weeks ended |
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Twenty-six weeks ended |
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July 30, |
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July 31, |
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July 30, |
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July 31, |
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2011 |
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2010 |
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2011 |
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2010 |
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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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$ |
172,770 |
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$ |
142,950 |
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$ |
345,645 |
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$ |
280,722 |
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Cost of goods sold (includes certain buying,
occupancy and distribution center expenses) |
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105,141 |
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88,406 |
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210,769 |
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173,947 |
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Gross profit |
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67,629 |
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54,544 |
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134,876 |
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106,775 |
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Selling, general, and administrative expense |
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48,867 |
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38,737 |
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94,240 |
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76,031 |
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Depreciation and amortization expense |
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6,410 |
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5,352 |
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12,513 |
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10,336 |
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Income from operations |
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12,352 |
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10,455 |
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28,123 |
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20,408 |
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Interest (income) expense, net |
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(19 |
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30 |
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(41 |
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57 |
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Income before income taxes |
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12,371 |
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10,425 |
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28,164 |
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20,351 |
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Provision for income taxes |
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4,702 |
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4,034 |
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10,875 |
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8,139 |
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Net income |
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$ |
7,669 |
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$ |
6,391 |
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$ |
17,289 |
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$ |
12,212 |
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Basic income per common share |
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$ |
0.31 |
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$ |
0.26 |
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$ |
0.71 |
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$ |
0.50 |
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Diluted income per common share |
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$ |
0.31 |
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$ |
0.26 |
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$ |
0.69 |
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$ |
0.49 |
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Weighted average basic common shares outstanding |
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24,415 |
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24,277 |
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24,394 |
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24,257 |
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Weighted average diluted common shares outstanding |
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25,080 |
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25,044 |
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25,066 |
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25,038 |
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See accompanying notes to the unaudited consolidated financial statements.
4
rue21, inc. and subsidiaries
Consolidated Statements of Cash Flows
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Twenty-six weeks ended |
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July 30, |
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July 31, |
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2011 |
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2010 |
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(Unaudited, in thousands) |
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Operating activities: |
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Net income |
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$ |
17,289 |
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$ |
12,212 |
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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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12,513 |
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10,336 |
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Loss on fixed asset disposals |
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269 |
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83 |
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Impairment of long-lived assets |
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154 |
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123 |
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Deferred taxes |
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(1,320 |
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(959 |
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Stock based compensation |
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2,137 |
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963 |
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Excess tax benefits from stock-based compensation activities |
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(610 |
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(716 |
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Changes in: |
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Accounts receivable |
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(7,044 |
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(6,991 |
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Merchandise inventory, net |
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(41,313 |
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(36,952 |
) |
Prepaid expenses and other current assets |
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(4,726 |
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(2,703 |
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Accounts payable |
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33,831 |
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26,716 |
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Accrued payroll and related taxes |
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(825 |
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(677 |
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Accrued expenses and other current liabilities |
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1,115 |
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(364 |
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Deferred rent and tenant allowances |
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11,006 |
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8,180 |
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Accrued income and franchise taxes |
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(1,389 |
) |
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(1,685 |
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Other |
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(123 |
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(101 |
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Net cash provided by operating activities |
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20,964 |
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7,465 |
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Investing activities: |
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Acquisition of property and equipment |
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(28,781 |
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(18,502 |
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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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(28,781 |
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(18,498 |
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Financing activities: |
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Excess tax benefits from stock-based compensation activities |
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610 |
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716 |
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Proceeds from stock options exercised |
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500 |
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235 |
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Net cash provided by financing activities |
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1,110 |
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951 |
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Decrease in cash and cash equivalents |
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(6,707 |
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(10,082 |
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Cash and cash equivalents, beginning of period |
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50,111 |
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26,751 |
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Cash and cash equivalents, end of period |
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$ |
43,404 |
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$ |
16,669 |
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Supplemental disclosure of cash flow information |
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Cash paid for interest (line of credit fees) |
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$ |
150 |
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$ |
160 |
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Cash paid for income taxes |
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$ |
14,970 |
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$ |
11,822 |
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See accompanying notes to the unaudited consolidated financial statements.
5
rue2l, inc. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
Thirteen and Twenty-Six weeks ended July 30, 2011 and July 31, 2010
(Dollars in thousands unless otherwise indicated)
NOTE 1 Organization and Basis of Presentation
rue21, inc. and subsidiaries (the Company or rue21) is a specialty retailer of girls and guys
apparel and accessories with 710, 638 and 595 stores as of July 30, 2011, January 29, 2011 and July
31, 2010, 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.
The consolidated financial statements include all of the accounts of the Company and its
wholly-owned subsidiaries, r services, llc and rue services corporation. All intercompany
transactions and balances have been eliminated in consolidation. At July 30, 2011, the Company
operated in one reportable segment.
In the opinion of management, the unaudited 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 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 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 29, 2011 included in the Companys Annual Report on Form 10-K.
The results of operations for the current and prior periods 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 second quarter of 2011 and the second quarter of 2010 refer
to the thirteen week periods ending July 30, 2011 and July 31, 2010, respectively. year-to-date
2011 and year-to-date 2010 refer to the twenty-six week periods ending July 30, 2011 and July
31, 2010, 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 at certain times of the year attributable to the impact of the
back-to-school and holiday selling seasons. As a result, our working capital requirements fluctuate
during the year. Our business is also subject, at certain times, to calendar shifts which may occur
during key selling times such as school holidays, Easter and regional fluctuations in the calendar
during the back-to-school selling season.
Recent Accounting Standards
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. No ASUs
during the current period (i) provide supplemental guidance, (ii) are
6
rue2l, inc. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
Thirteen and Twenty-Six weeks ended July 30, 2011 and July 31, 2010
(Dollars in thousands unless otherwise indicated)
technical corrections, (iii) are applicable to the Company or (iv) are expected to have a significant impact on the Company.
Reclassifications
Certain reclassifications have been made to the prior periods 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:
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Thirteen weeks ended |
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Twenty-six weeks ended |
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|
July 30, |
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|
July 31, |
|
|
July 30, |
|
|
July 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands, except per share data) |
|
Net income |
|
$ |
7,669 |
|
|
$ |
6,391 |
|
|
$ |
17,289 |
|
|
$ |
12,212 |
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Weighted average basic common shares outstanding |
|
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24,415 |
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|
|
24,277 |
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|
|
24,394 |
|
|
|
24,257 |
|
Impact of dilutive securities |
|
|
665 |
|
|
|
767 |
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|
|
672 |
|
|
|
781 |
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|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding |
|
|
25,080 |
|
|
|
25,044 |
|
|
|
25,066 |
|
|
|
25,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share |
|
$ |
0.31 |
|
|
$ |
0.26 |
|
|
$ |
0.71 |
|
|
$ |
0.50 |
|
Diluted income per common share |
|
$ |
0.31 |
|
|
$ |
0.26 |
|
|
$ |
0.69 |
|
|
$ |
0.49 |
|
Equity awards to purchase 666,919, and 561,138 shares of common stock during the second quarter of
2011 and year-to-date 2011, respectively, and 393,000 and 278,000 shares of common stock for the
second quarter of 2010 and year-to-date 2010, 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.
NOTE 4 Stock-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 three or four years, subject to certain employment terms and conditions. The stock
options generally expire ten years from the date of issuance. To date, 731,878 stock options and
154,057 restricted stock units have been granted and no stock appreciation rights or restricted
stock 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 equity awards have been or will
be made under the 2003 Plan.
The following table represents stock options granted, vested, and expired under the existing
share-based compensation plans during the year-to-date 2011 period.
7
rue2l, inc. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
Thirteen and Twenty-Six weeks ended July 30, 2011 and July 31, 2010
(Dollars in thousands unless otherwise indicated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
Common |
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Stock |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Options |
|
|
Price |
|
|
Term |
|
|
Value |
|
|
|
(in thousands) |
|
|
(per share) |
|
|
(in years) |
|
|
|
|
|
Outstanding January 29, 2011 |
|
|
1,441 |
|
|
$ |
15.63 |
|
|
|
7.83 |
|
|
$ |
21,349 |
|
Granted |
|
|
253 |
|
|
$ |
30.25 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(80 |
) |
|
$ |
6.28 |
|
|
|
|
|
|
|
|
|
Expired or forfeited |
|
|
(39 |
) |
|
|
23.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding July 30, 2011 |
|
|
1,575 |
|
|
$ |
18.25 |
|
|
|
7.75 |
|
|
$ |
23,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at July 30, 2011 |
|
|
672 |
|
|
$ |
9.97 |
|
|
|
6.60 |
|
|
$ |
15,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 30, 2011, the Company had 2,740,065 shares available for stock grants. The Company
recognized $1.3 million and $2.1 million in compensation expense related to stock options during
the second quarter of 2011 and year-to-date 2011, respectively, and $0.6 million and $1.0 million
in compensation expense related to stock options for the second quarter of 2010 and year-to-date
2010, respectively. The weighted average fair value of stock options at the grant date was $16.24
and $16.23 during the second quarter of 2011 and year-to-date 2011, respectively, and $18.19 and
$18.43 for the second quarter 2010 and year-to-date 2010, respectively. The intrinsic value of
options exercised was $1.7 million and $2.1 million during the second quarter of 2011 and
year-to-date 2011, respectively, $1.0 million and $1.8 million for the second quarter of 2010 and
year-to-date 2010, respectively. All outstanding vested options are currently exercisable as of
July 30, 2011.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended |
|
|
Twenty-six weeks ended |
|
|
|
July 30, |
|
|
July 31, |
|
|
July 30, |
|
|
July 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Risk-free interest rate (1) |
|
|
2.7 |
% |
|
|
2.8 |
% |
|
|
2.1%-2.9 |
% |
|
|
2.8%-3.4 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility factors for the
expected market price of the
Companys common stock (2) |
|
|
55.0 |
% |
|
|
53.0 |
% |
|
|
55.0 |
% |
|
|
53.0 |
% |
Weighted average expected term (3) |
|
6.0 years |
|
|
6.3 years |
|
|
6.0 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 July 30, 2011:
8
rue2l, inc. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
Thirteen and Twenty-Six weeks ended July 30, 2011 and July 31, 2010
(Dollars in thousands unless otherwise indicated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Averaged Fair |
|
|
|
|
|
|
|
Value at Grant |
|
|
|
Shares |
|
|
Date |
|
|
|
(in thousands) |
|
|
(per share) |
|
Non-vested as of January 29, 2011 |
|
|
881 |
|
|
$ |
11.16 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
253 |
|
|
$ |
16.23 |
|
Vested |
|
|
(192 |
) |
|
$ |
11.33 |
|
Cancelled |
|
|
(39 |
) |
|
|
13.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of July 30, 2011 |
|
|
903 |
|
|
$ |
12.76 |
|
|
|
|
|
|
|
|
As of July 30, 2011, there was $11.5 million of unrecognized compensation expense related to
non-vested stock option awards that is expected to be recognized over a weighted-average period of
1.43 years. The total fair value of shares vested during the second quarter of 2011 and
year-to-date 2011 was $0.6 million and $2.2 million, respectively, and $3.1 million and $3.4
million for the second quarter of 2010 and year-to-date 2010, respectively.
Restricted Stock Units
Time-based restricted stock unit awards vest generally over three years.
The following table summarizes information regarding non-vested outstanding restricted stock units
as of July 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Averaged Fair |
|
|
|
|
|
|
|
Value at Grant |
|
|
|
Shares |
|
|
Date |
|
|
|
(in thousands) |
|
|
(per share) |
|
Non-vested as of January 29, 2011 |
|
|
25 |
|
|
$ |
30.49 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
130 |
|
|
$ |
28.51 |
|
Vested |
|
|
(1 |
) |
|
$ |
29.82 |
|
Cancelled |
|
|
(3 |
) |
|
|
30.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of July 30, 2011 |
|
|
151 |
|
|
$ |
28.80 |
|
|
|
|
|
|
|
|
As of July 30, 2011, there was $4.4 million of unrecognized compensation expense related to
non-vested restricted stock unit awards that is expected to be recognized over a weighted-average
period of 1.67 years. The total fair value of shares vested during the second quarter of 2011 and
year-to-date 2011 was $15 for both respective periods. For the second quarter of 2010 and
year-to-date 2010, no restricted stock units vested.
9
rue2l, inc. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
Thirteen and Twenty-Six weeks ended July 30, 2011 and July 31, 2010
(Dollars in thousands unless otherwise indicated)
NOTE 5 Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, |
|
|
January 29, |
|
|
July 31, |
|
|
|
2011 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Furniture and fixtures |
|
$ |
83,501 |
|
|
$ |
73,635 |
|
|
$ |
65,743 |
|
Leasehold improvements |
|
|
91,375 |
|
|
|
75,445 |
|
|
|
63,404 |
|
Computer equipment, software and other |
|
|
19,476 |
|
|
|
18,044 |
|
|
|
17,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194,352 |
|
|
|
167,124 |
|
|
|
146,167 |
|
Less accumulated depreciation and amortization |
|
|
(87,072 |
) |
|
|
(75,753 |
) |
|
|
(65,033 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
107,280 |
|
|
$ |
91,371 |
|
|
$ |
81,134 |
|
|
|
|
|
|
|
|
|
|
|
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 are recorded in selling, general, and
administrative expense in the accompanying 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
$43.4 million, $50.1 million and $16.7 million as of July 30, 2011,
January 29, 2011 and July 31, 2010, 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. |
|
|
|
Level 3: Unobservable inputs reflecting managements own assumptions
about the inputs used in pricing the asset or liability. 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. |
In accordance with ASC 820, the following tables represent the fair value hierarchy for the
Companys financial assets (cash equivalents) measured at fair value on a recurring basis as of
July 30, 2011 and July 31, 2010:
10
rue2l, inc. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
Thirteen and Twenty-Six weeks ended July 30, 2011 and July 31, 2010
(Dollars in thousands unless otherwise indicated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at July 30, 2011 |
|
|
|
|
|
|
|
Quoted Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in Active |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
Carrying |
|
|
Identical Assets |
|
|
Observable |
|
|
Inputs |
|
|
|
Amount |
|
|
(Level 1) |
|
|
Inputs (Level 2) |
|
|
(Level 3) |
|
Cash and cash
Equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
43,404 |
|
|
$ |
43,404 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
43,404 |
|
|
$ |
43,404 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at July 31, 2010 |
|
|
|
|
|
|
|
Quoted Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in Active |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
Carrying |
|
|
Identical Assets |
|
|
Observable |
|
|
Inputs |
|
|
|
Amount |
|
|
(Level 1) |
|
|
Inputs (Level 2) |
|
|
(Level 3) |
|
Cash and cash
Equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
16,669 |
|
|
$ |
16,669 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,669 |
|
|
$ |
16,669 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 second quarter of 2011 was 38.0% as compared to 38.7% for the
second quarter of 2010. The lower effective income tax rate was primarily due to state income tax
credits taken in the current year. The Company classifies interest and penalties as an element of
tax expense. The amount of tax related interest and penalties for the second quarter and
year-to-date of 2011 and 2010, respectively, was not material.
The year-to-date 2011 effective income tax rate was 38.6% as compared to 40.0% for the year-to-date
2010 period. The lower effective income tax rate was principally due to state income tax credits,
disqualifying dispositions of stock options as well as reduced permanent tax differences in the
current year.
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 consolidated balance sheet date within the next 12 months.
11
rue2l, inc. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
Thirteen and Twenty-Six weeks ended July 30, 2011 and July 31, 2010
(Dollars in thousands unless otherwise indicated)
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 not involved in any litigation at
this time that the Company believes will have a material adverse effect on its consolidated
financial condition, results of operation, or liquidity.
12
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. All statements other than those
that are purely historical are forward-looking statements. Forward-looking statements give our
current expectations and projections relating to our financial condition, results of operations,
plans, objectives, future performance and business. You can identify forward-looking statements by
the fact that they do not relate strictly to historical or current facts. These statements may
include words such as anticipate, estimate, expect, project, plan, intend, believe,
may, 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:
|
|
|
our failure to identify and respond to new and changing fashion trends, customer
preferences and other related factors; |
|
|
|
|
our failure to successfully execute our growth strategy, due to delays in store growth
and store conversions, difficulties executing sales and operating profit margin initiatives
and inventory shrinkage prevention; |
|
|
|
|
the failure of our new stores or the conversion of our existing stores to achieve sales
and operating levels consistent with our expectations; |
|
|
|
|
risks and challenges in connection with sourcing merchandise from third party domestic
and foreign vendors, including the risk that current or prospective vendors may be unable or
unwilling to supply us with adequate quantities of their merchandise in a timely manner or
at acceptable prices; |
|
|
|
|
our level of success in gaining and maintaining broad market acceptance of our exclusive
brands; |
|
|
|
|
our failure to protect our brand image; |
|
|
|
|
economic conditions, and their effect on the financial and capital markets, our vendors
and business partners, employment levels, consumer demand, spending patterns, inflation and
the cost of goods; |
|
|
|
|
our loss of key personnel or our inability to hire additional personnel; |
|
|
|
|
seasonality of our business; |
|
|
|
|
increases in costs of raw materials for our merchandise, fuel, or other energy,
transportation or utilities costs and in the costs of labor and employment; |
|
|
|
|
the impact of governmental laws and regulations and the outcomes of legal proceedings; |
|
|
|
|
disruptions in our supply chain and distribution facility; |
|
|
|
|
damage or interruption to our information systems; |
|
|
|
|
changes in the competitive environment in our industry and the markets in which we
operate; |
|
|
|
|
natural disasters, unusually adverse weather conditions, pandemic outbreaks, boycotts and
geo-political events; |
|
|
|
|
the incurrence of material uninsured losses or excessive insurance costs; |
|
|
|
|
our failure to maintain effective internal controls; and |
|
|
|
|
other factors discussed in other reports or filings filed by us with the Securities and
Exchange Commission, including our Annual Report on Form 10-K for the year ended January 29,
2011. |
13
Our Business
We operate on a fiscal year calendar widely used by the retail industry that results in a
given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January
31 of the following year. For example, references to fiscal year 2010 refer to the fiscal year
ended January 29, 2011.
rue21 is a fast growing specialty apparel retailer offering the newest fashion trends for
girls and guys at a great value. Although many of our customers are teenagers, we believe our
merchandise appeals to anyone who wants to look or feel 21. Our product offerings fall into three
categories: girls apparel; guys apparel and accessories; and girls accessories or our rue21 etc!
category. As of July 30, 2011, we operated 710 stores in 46 states.
Performance Metrics
In order to monitor the Companys success, the Companys management monitors certain key
performance metrics, including:
Net Sales
Net sales constitute gross sales net of any returns and merchandise discounts. Net sales
consist of sales from comparable stores and non-comparable stores.
Comparable Store Sales
A store is included in comparable store sales on the first day of the sixteenth month
after its opening, as new stores generally open with above run-rate sales volumes, which usually
extend for a period of at least three months, and comparability generally is achieved twelve months
after the initial three-month period 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. 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:
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consumer preferences, buying trends and overall economic trends; |
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|
|
our ability to identify and respond effectively to fashion trends and customer
preferences; |
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|
|
competition; |
|
|
|
|
changes in our merchandise mix; |
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|
pricing; |
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|
|
the timing of our releases of new merchandise and promotional events; |
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|
|
the level of customer service that we provide in our stores; |
|
|
|
|
our ability to source and distribute products efficiently; and |
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|
|
the number of stores we open, close and convert in any period in any particular market. |
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
14
conditions and the level
of disposable consumer income, consumer debt, interest rates and consumer confidence.
Our business is seasonal and historically we have realized a higher portion of our net
sales, net income and operating cash flows at certain times of the year attributable to the impact of the back-to-school and holiday
selling seasons. As a result, our working capital requirements fluctuate during the year. Our
business is also subject, at certain times, to calendar shifts which may occur during key selling
times such as school holidays, Easter and regional fluctuations in the calendar during the
back-to-school selling season.
Gross Profit
Gross profit is equal to our net sales minus our cost of goods sold. Gross margin
measures gross profit as a percentage of our net sales. Cost of goods sold includes the direct cost
of purchased merchandise, distribution center costs, all freight costs incurred to get merchandise
to our stores, store occupancy costs and buying costs. The components of our cost of goods sold may
not be comparable to those of other retailers.
Our cost of goods sold is substantially higher in higher volume quarters because cost of
goods sold generally increases as net sales increase. Changes in the mix of our products, such as
changes in the proportion of accessories, may also impact our overall cost of goods sold. We review
our inventory levels on an ongoing basis in order to identify slow-moving merchandise, and
generally use markdowns to clear that merchandise. The timing and level of markdowns are not
seasonal in nature, but are driven by customer acceptance of our merchandise. If we misjudge the
market for our products, we may be faced with significant excess inventories for some products and
be required to mark down those products in order to sell them. Significant markdowns have reduced
our gross profit in some prior periods and may have a material adverse impact on our earnings for
future periods depending on the amount of the markdowns and the amount of merchandise affected.
Selling, General and Administrative Expense
Selling, general and administrative expense includes administration, share-based
compensation and store expenses, but excludes store occupancy costs and freight to stores. These
expenses do not generally vary proportionately with net sales. As a result, selling, general and
administrative expense as a percentage of net sales is usually higher in lower volume quarters and
lower in higher volume quarters. The components of our selling, general and administrative expense
may not be comparable to those of other retailers. We expect that our selling, general and
administrative expense will increase in future periods due to our continuing 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, the Dodd-Frank Wall Street Reform and Consumer Protection Act and related rules and
regulations will result in significant legal and accounting costs.
Selected Second Quarter and Year-to-Date Highlights:
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|
Net sales increased 20.9% to $172.8 million in the second quarter of 2011,
compared to $143.0 million in the second quarter of 2010. Comparable store sales decreased
by 0.3% in the second quarter of 2011 as compared to a decrease of 1.6% in the second
quarter of 2010. For the year-to-date 2011 period, net sales increased 23.1% to $345.6
million, as compared to $280.7 million in the year-to-date 2010 period. Comparable sales
increased by 2.4% in the year-to-date 2011 period as compared to an increase of 2.8% in the
year-to-date 2010 period. |
|
|
|
|
In the second quarter of 2011, gross margin increased 90 basis points to 39.1%
from 38.2% in the second quarter of 2010. Gross margin year-to-date increased 100 basis
points to 39.0% in the year-to-date 2011 period as compared to 38.0% in the year-to-date
period of 2010. |
|
|
|
|
Diluted net income per common share was $0.31 in the second quarter of 2011
compared to diluted income per common share of $0.26 in the second quarter of 2010. For the
year-to-date, diluted income was $0.69, as compared to $0.49 in the year to date 2010
period. |
15
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:
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|
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|
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Thirteen weeks ended |
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Twenty-six weeks ended |
|
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July 30, |
|
|
July 31, |
|
|
July 30, |
|
|
July 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except operating data) |
|
|
|
|
|
Net sales |
|
$ |
172,770 |
|
|
$ |
142,950 |
|
|
$ |
345,645 |
|
|
$ |
280,722 |
|
Cost of goods sold |
|
|
105,141 |
|
|
|
88,406 |
|
|
|
210,769 |
|
|
|
173,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
67,629 |
|
|
|
54,544 |
|
|
|
134,876 |
|
|
|
106,775 |
|
Selling, general and administrative expenses |
|
|
48,867 |
|
|
|
38,737 |
|
|
|
94,240 |
|
|
|
76,031 |
|
Depreciation and amortization expense |
|
|
6,410 |
|
|
|
5,352 |
|
|
|
12,513 |
|
|
|
10,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
12,352 |
|
|
|
10,455 |
|
|
|
28,123 |
|
|
|
20,408 |
|
Interest (income) expense, net |
|
|
(19 |
) |
|
|
30 |
|
|
|
(41 |
) |
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
12,371 |
|
|
|
10,425 |
|
|
|
28,164 |
|
|
|
20,351 |
|
Provision for income taxes |
|
|
4,702 |
|
|
|
4,034 |
|
|
|
10,875 |
|
|
|
8,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,669 |
|
|
$ |
6,391 |
|
|
$ |
17,289 |
|
|
$ |
12,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.31 |
|
|
|
0.26 |
|
|
|
0.71 |
|
|
|
0.50 |
|
Diluted |
|
|
0.31 |
|
|
|
0.26 |
|
|
|
0.69 |
|
|
|
0.49 |
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
24,415 |
|
|
|
24,277 |
|
|
|
24,394 |
|
|
|
24,257 |
|
Diluted |
|
|
25,080 |
|
|
|
25,044 |
|
|
|
25,066 |
|
|
|
25,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
60.9 |
% |
|
|
61.8 |
% |
|
|
61.0 |
% |
|
|
62.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
39.1 |
% |
|
|
38.2 |
% |
|
|
39.0 |
% |
|
|
38.0 |
% |
Selling, general and administrative expenses |
|
|
28.3 |
% |
|
|
27.1 |
% |
|
|
27.3 |
% |
|
|
27.1 |
% |
Depreciation and amortization expense |
|
|
3.7 |
% |
|
|
3.7 |
% |
|
|
3.6 |
% |
|
|
3.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
7.1 |
% |
|
|
7.3 |
% |
|
|
8.1 |
% |
|
|
7.3 |
% |
Interest (income) expense, net |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
7.2 |
% |
|
|
7.3 |
% |
|
|
8.1 |
% |
|
|
7.3 |
% |
Provision for income taxes |
|
|
2.7 |
% |
|
|
2.8 |
% |
|
|
3.1 |
% |
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
4.4 |
% |
|
|
4.5 |
% |
|
|
5.0 |
% |
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate |
|
|
38.0 |
% |
|
|
38.7 |
% |
|
|
38.6 |
% |
|
|
40.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores open at the end of the period |
|
|
710 |
|
|
|
595 |
|
|
|
710 |
|
|
|
595 |
|
Comparable store sales change |
|
|
-0.3 |
% |
|
|
-1.6 |
% |
|
|
2.4 |
% |
|
|
2.8 |
% |
16
The approximate percentage of our net sales derived from our product categories, based on our
internal merchandising system, is as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended |
|
|
Twenty-six weeks ended |
|
|
|
July 30, |
|
|
July 31, |
|
|
July 30, |
|
|
July 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Girls |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apparel |
|
|
57.2 |
% |
|
|
58.4 |
% |
|
|
57.2 |
% |
|
|
57.7 |
% |
Accessories |
|
|
25.3 |
% |
|
|
23.9 |
% |
|
|
25.8 |
% |
|
|
24.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guys Apparel and Accessories |
|
|
17.5 |
% |
|
|
17.7 |
% |
|
|
17.0 |
% |
|
|
17.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter of 2011 Compared to Second Quarter of 2010
Net Sales
During the second quarter of 2011, our net sales increased 20.9%, or $29.8 million, to $172.8
million as compared to $143.0 million in the second quarter of 2010. This increase in net sales was
due to an increase of approximately 14% in the number of transactions, primarily driven by new
store openings during fiscal year 2011. Net sales also increased due to an increase of
approximately 5% in the average dollar value of transactions. The average dollar value of
transactions increased due to an increase in average unit retail offset by a slight decrease in
units per transaction. During the second quarter of 2011, we opened 34 new stores with 1 store
closure compared to 31 new stores and 1 store closure in the second quarter of 2010. Our comparable
store sales decreased slightly at 0.3% in the second quarter of 2011 compared to a decrease of 1.6%
in the second quarter of 2010. There were 556 comparable stores and 154 non-comparable stores open
at July 30, 2011 compared to 469 and 126, respectively, at July 31, 2010.
During the second quarter of 2011, net sales from the girls apparel, girls accessories and guys
apparel and accessories categories grew by approximately 18%, 27% and 19%, respectively, as
compared to the second quarter of 2010. 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 24.0%, or $13.1 million, in the second quarter of 2011 to $67.6 million as
compared to $54.5 million in the second quarter of 2010. Gross margin increased 90 basis points to
39.1% for the second quarter of 2011 from 38.2% for the second quarter of 2010. This increase in
gross margin was primarily attributable to improvement in merchandise margin, driven primarily from
reduced markdowns. Gross margin was negatively impacted by store occupancy costs, which were
partially offset by freight and distribution costs.
Selling, General and Administrative Expense
Selling, general and administrative expense increased 26.2%, or $10.1 million, to $48.9 million in
the second quarter of 2011 as compared to $38.7 million in the second quarter of 2010. As a
percentage of net sales, selling, general and administrative expense
increased to 28.3% in the second quarter of 2011 as compared to 27.1% in the second quarter of
2010.
Store operating expenses increased by $8.1 million in the second quarter of 2011 as compared to the
second quarter of 2010 due primarily to the operation of 710 stores as of July 30, 2011 compared to
the operation of 595 stores as of July 31, 2010. As a percentage of net sales, store operating
expenses increased to 21.0% for the second quarter of 2011 as compared to 19.7% in the second
quarter of 2010, primarily as a result of store payroll and related costs, utility costs, and
insurance expenses.
Administrative and general expenses decreased as a percentage of net sales to 7.3% for the second
quarter of 2011 as compared to 7.4% in the second quarter of 2010. The decrease in costs as a
percent of sales was a result of lower salary and related costs offset by stock compensation costs.
17
Depreciation and Amortization Expense
Depreciation and amortization expenses increased by $1.0 million to $6.4 million in the second
quarter of 2011 as compared to $5.4 million in the second quarter of 2010. Depreciation and
amortization expense was flat as a percentage of net sales at 3.7% during the second quarter of
2011 and 2010.
Interest (Income) Expense, Net
Interest income increased by $49,000 to $19,000 interest income for the second quarter of 2011 as
compared to interest expense of $30,000 for the second quarter of 2010 as a result of the Company
increasing its cash balance on hand. The Company had no borrowings under the senior secured credit
facility during the second quarter of 2011.
Provision for Income Taxes
The provision for income taxes increased $0.7 million to $4.7 million in the second quarter of 2011
as compared to $4.0 million in the second quarter of 2010. This increase was due primarily to the
$1.9 million increase in pre-tax income. The effective tax rates were 38.0% and 38.7% for the
second quarter of 2011 and 2010, respectively. The lower effective income tax rate for the second
quarter of 2011 was primarily due to a discrete item the Company received in state tax credits and
disqualifying dispositions of stock options.
Net Income
Net income increased 20.0%, or $1.3 million, to $7.7 million for the second quarter of 2011 as
compared to $6.4 million in the second quarter of 2010. This increase was due to the factors
discussed above.
Year-to-date 2011 Compared to Year-to-date 2010
Net Sales
Net Sales increased 23.1%, or $64.9 million, to $345.6 million for the year-to-date 2011 from
$280.7 million for the year-to-date 2010. The increase in net sales was due to an approximately
16% increase in the number of transactions, primarily driven by new stores opened in 2011. Net
sales also increased due to an increase of approximately 6% in the average dollar value of
transactions. The average dollar value of transactions increased due to an increase in average unit
retail offset by a slight decrease in units per transaction. During the year-to-date 2011 period,
we opened 73 new stores and closed 1 store as compared to 62 news stores and 2 closures in the
year-to-date 2010 period. Our comparable store sales increased 2.4% for the year-to-date 2011
period compared to an increase of 2.8% for the year-to-date 2010 period. There were 556 comparable
and 154 non-comparable stores at July 30, 2011 compared to 469 and 126, respectively, at July 31,
2010.
During year-to-date 2011, net sales from the girls apparel, girls accessories and guys apparel and
accessories categories grew by approximately 22%, 29% and 18%, respectively, as compared to the
year-to-date 2010 period. 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 26.3%, or $28.1 million, in the year-to-date 2011 period to $134.9 million
as compared to $106.8 million in the year-to-date 2010 period. Gross margin increased 100 basis
points to 39.0% for the year-to-date 2011 period from 38.0% for the year-to-date 2010 period. The
increase in gross margin was primarily attributable to increased merchandise margin. Gross margin
was partially offset by occupancy costs, however, improved due to lower freight and distribution
center costs as a percentage of sales.
Selling, General and Administrative Expense
Selling, general and administrative expense increased 23.9%, or $18.2 million, to $94.2 million in
the year-to-date 2011 period as compared to $76.0 million in the year-to-date 2010 period. As a
percentage of net sales, selling, general and administrative expense increased to 27.3% in the
year-to-date 2011 period as compared to 27.1% in the year-to-date 2010 period. During the
year-to-date 2010 period, we incurred $0.6 million in expense related to our secondary offering of
common stock completed in March 2010. Excluding the impact of these secondary offering costs,
selling, general and administrative expenses as a percentage of net sales, would have decreased to
26.9% in the year-to-date 2010 period. Store operating expenses increased by $14.4 million in the
year-to-
18
date 2011 period as compared to the year-to-date 2010 period, due primarily to the
operation of 710 stores as of July 30, 2011 compared to the operation of 595 stores as of July 31,
2010. As a percentage of net sales, store operating expenses increased to 19.9% for the
year-to-date 2011 period as compared to 19.4% in the year-to-date 2010 period, primarily as a
result of increasing costs of store payroll and insurance costs as a rate to sales.
Administrative and general expenses decreased as a percentage of net sales to 7.4% for the
year-to-date 2011 period as compared to 7.7% in the year-to-date 2010 period. The decrease in costs
as a percent of sales was primarily a result of lower salary and related costs offset by stock
compensation costs. Additionally, as mentioned, the Company incurred $0.6 million in secondary
offering costs in March 2010.
Depreciation and Amortization Expense
Depreciation and amortization expenses increased by $2.2 million to $12.5 million in the
year-to-date 2011 period as compared to $10.3 million in the year-to-date 2010 period. The increase
in depreciation and amortization expense was primarily due to the continued opening of new stores
and conversions as well as distribution center infrastructure investments. Depreciation and
amortization expense decreased as a percentage of net sales to 3.6% for the year-to-date 2011
period as compared to 3.7% in the year-to-date 2010 period.
Interest (Income) Expense, Net
Interest income was $41,000 for the year-to-date 2011 period as compared to interest expense of
$57,000 for the year-to-date 2010 period as a result of the Company increasing it cash balance on
hand. The Company had no borrowings under the senior secured credit facility during the
year-to-date 2011.
Provision for Income Taxes
The provision for income taxes increased $2.7 million to $10.9 million in the year-to-date 2011
period as compared to $8.1 million in the year-to-date 2010 period. This increase was due primarily
to the $7.8 million increase in pre-tax income. The effective tax rates were 38.6% and 40.0% for
the year-to-date 2011 and the year-to-date 2010 periods, respectively. The lower effective income
tax rate for the year-to-date 2011 period was primarily due to a discrete item the Company incurred
for $0.6 million in expense related to our secondary offering of common stock completed in March
2010.
Net Income
Net income increased 41.6%, or $5.1 million, to $17.3 million for the year-to-date 2011 period from
$12.2 million for the year-to-date 2010 period. The increase was due to the factors discussed
above.
Liquidity and Capital Resources
We believe that internally generated funds, current cash on hand, and available borrowings
under our existing credit facility will be adequate to meet foreseeable liquidity needs. Our
primary sources of liquidity are cash flows from operations and availability under our senior
secured credit facility. Our primary cash needs are for capital expenditures in connection with
opening new stores and converting existing stores to the rue21 etc! format, including the
additional working capital required for the related increase in merchandise inventories. Cash 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.
As of July 30, 2011, we had cash and cash equivalents totaling $43.4 million. Our cash and cash
equivalents consist of cash on deposit and credit and debit card transactions. Our cash and cash
equivalents balance at July 30, 2011 decreased by $6.7 million from $50.1 million at January 29,
2011. Components of this change in cash for the year-to-date 2011 period, as well as for change in
cash for the year-to-date 2010 period, are provided below in more detail.
A summary of operating, investing and financing activities are shown in the following table:
19
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended |
|
|
|
July 30, |
|
|
July 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Provided by operating activities |
|
$ |
20,964 |
|
|
$ |
7,465 |
|
Used for investing activities |
|
|
(28,781 |
) |
|
|
(18,498 |
) |
Provided by for financing activities |
|
|
1,110 |
|
|
|
951 |
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
$ |
(6,707 |
) |
|
$ |
(10,082 |
) |
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended |
|
|
|
July 30, |
|
|
July 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Net income |
|
$ |
17,289 |
|
|
$ |
12,212 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
12,513 |
|
|
|
10,336 |
|
Deferred taxes |
|
|
(1,320 |
) |
|
|
(959 |
) |
Stock-based compensation |
|
|
2,137 |
|
|
|
963 |
|
Merchandise inventory |
|
|
(41,313 |
) |
|
|
(36,952 |
) |
Accounts payable |
|
|
33,831 |
|
|
|
26,716 |
|
Other working capital components |
|
|
(1,986 |
) |
|
|
(4,341 |
) |
All other |
|
|
(187 |
) |
|
|
(510 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
20,964 |
|
|
$ |
7,465 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities was $21.0 million and $7.5 million for the year-to-date
2011 period and the year-to-date 2010 period, respectively. The increase of $13.5 million in the
year-to-date 2011 period as compared to the year-to-date 2010 period was primarily due to an
increase in net income ($5.1 million), increased growth in accounts payable ($7.1 million) offset
by increased merchandise inventory growth ($4.4 million) and improvement in other working capital
components ($2.4 million), primarily deferred rent and tenant allowances. Depreciation and
amortization increased $2.2 million.
Investing Activities
Investing activities consist principally in of capital expenditures for new and converted stores.
20
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended |
|
|
|
July 30, |
|
|
July 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Capital expenditures, net of tenant
allowances and proceeds from the sale
of property and equipment |
|
$ |
(17,134 |
) |
|
$ |
(11,301 |
) |
Tenant allowances |
|
|
(11,647 |
) |
|
|
(7,201 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities |
|
$ |
(28,781 |
) |
|
$ |
(18,502 |
) |
|
|
|
|
|
|
|
For the year-to-date 2011 period capital expenditures increased $10.3 million to $28.8 million as
compared to $18.5 million in the year-to-date 2010 period. During the year-to-date 2011 period, we
opened 73 new stores and converted 26 existing stores as compared to 62 new stores and 22 store
conversions in the year-to-date 2010 period, respectively. Capital expenditures for the new stores
and conversions of existing stores increased $4.4 million to $11.6 million during the year-to-date
2011 period as compared to $7.2 million in the comparable prior year period. Additionally, capital
expenditures for store fixtures increased $1.1 million during the year-to-date 2011 period as
compared to the year-to-date 2010 period. These increases were offset by lower capital expenditures
for the distribution center of $0.5 million versus the comparable prior year period. The company
expects total capital expenditures for fiscal year 2011 to be approximately $39.0 million.
Financing Activities
Financing activities consist principally of proceeds from the exercise of employee stock options
and excess tax benefits from share- based award activities.
|
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended |
|
|
|
July 30, |
|
|
July 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Proceeds from stock options exercised |
|
$ |
500 |
|
|
$ |
235 |
|
Excess tax benefits from stock-based
award activities |
|
|
610 |
|
|
|
716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
$ |
1,110 |
|
|
$ |
951 |
|
|
|
|
|
|
|
|
Net cash of $1.1 million was provided by financing activities in the year-to-date 2011 period, in
the current fiscal year, compared to $1.0 million for the same period in 2010.
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
include 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. As of July 30, 2011 and July 31, 2010, $0 was outstanding under the
senior secured credit 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 July 30, 2011 and expect to remain in compliance for the next twelve
months.
21
Off Balance Sheet Arrangements
We are not a party to any off balance sheet arrangements.
Contractual Obligations
Except as set forth below, 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 29, 2011, other than those which occur in the normal course of business.
On July 8, 2011, the Company entered into a Lease (the New Lease) with the West Virginia Economic
Development Authority (Landlord) in order to expand its distribution center facility located in
Weirton, West Virginia (the DC Facility). The Company currently leases the DC Facility under that
certain Lease Agreement, by and between Landlord and the Company, dated as of June 28, 1999 (the
Original Lease), as amended. The premises leased pursuant to the Original Lease consisted of an
existing building containing approximately 189,600 rentable square feet of space (the Existing
Building) located at Three Springs Industrial and Business Park in Weirton, West Virginia. The
premises under the New Lease consist of both the Existing Building and an addition to be built
containing approximately 185,000 square feet of space (the Expansion Building). Upon delivery of
the Expansion Building and commencement of the initial term of the New Lease, the Original Lease
will terminate. Delivery of the Expansion Building is expected to occur in the fiscal fourth
quarter of 2011 upon which the company will recognize straight-line rent expense in accordance with
current accounting principles. During the initial term, the Companys base rent will be $1.4
million a year, payable in monthly installments of $116,667, plus adjustments of $6.60 per month
for each $1,000 of the purchase price of the Expansion Building exceeding $8.1 million. During the
Initial Term, the minimum expected aggregate base rent is expected to be approximately $21.0
million.
The description of the New Lease and termination of the Original Lease contained in the Companys
Current Report on Form 8-K filed with the Securities and Exchange Commission on July 14, 2011 is
incorporated by reference herein and is qualified in its entirety by reference to the text of the
New Lease, a copy of which is attached as Exhibit 10.1 to such Current Report on Form 8-K and to
the text of the Original Lease, a copy of which is attached as Exhibit 10.8 to Amendment No. 1 to
the Companys Registration Statement on Form S-1 filed with the Securities and Exchange Commission
on October 13, 2009 (File No. 333-161850) (the Registration Statement), as amended by the First
Amendment, a copy of which is attached as Exhibit 10.8.1 to the Registration Statement and each of
which is incorporated by reference herein.
Critical Accounting Policies and Estimates
The preparation of our consolidated 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
consolidated 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 29, 2011.
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 as disclosed in our Annual Report on Form
10-K for the fiscal year ended January 29, 2011. For further information, see Item 7A of the
Companys Annual Report on Form 10-K for the fiscal year ended January 29, 2011.
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
22
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 second quarter of
2011 period 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
We are subject to various legal proceedings and claims which arise in the ordinary course of our
business. If a potential loss arising from these lawsuits, claims and pending actions is probable
and reasonably estimable, we record the estimated liability based on circumstances and assumptions
existing at the time. Management does not believe that the outcome of current litigation will have
a material adverse effect on our consolidated results of operations or financial condition, and
believes that the recorded liabilities are adequate. However, there are inherent limitations in
projecting the outcome of these matters and in the estimation process, and if future actual
liabilities exceed projected liabilities, it could have a material adverse effect on our
consolidated financial condition or on our operations.
Item 1A. Risk Factors
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 29, 2011.
Item 6. Exhibits
|
|
|
10.1
|
|
Lease by and between West Virginia Economic Development Authority, as Landlord, and
rue21, inc. as Tenant, dated July 8, 2011, incorporated by reference to Exhibit 10.1 to
Registrants Form 8-K filed on July 14, 2011 |
|
|
|
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 |
|
|
|
101***
|
|
Interactive Data File |
|
|
|
* |
|
Filed herewith |
|
** |
|
Furnished herewith |
|
*** |
|
Pursuant to Rule 406T of SEC Regulation S-T, the Interactive Data Files on Exhibit 101 hereto
are deemed not filed or part of a registration statement or prospectus for purposes of
Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not
subject to liability under these Sections. |
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: September 1, 2011 |
By |
/s/ Robert Fisch
|
|
|
|
Robert Fisch |
|
|
|
Chairman and Chief Executive Officer |
|
|
|
|
|
Date: September 1, 2011 |
By |
/s/ Keith McDonough
|
|
|
|
Keith McDonough |
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
24