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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED OCTOBER 27, 2012

OR

 

¨ 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)

 

 

 

DELAWARE   25-1311645

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

800 Commonwealth Drive

Warrendale, Pennsylvania 15086

(Address of principal executive office)

(724) 776-9780

(Registrant’s 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  x    No  ¨

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  x    No  ¨

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):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the Registrant’s common stock was 23,779,387 as of November 26, 2012.

 

 

 


Table of Contents

rue21, inc.

Form 10-Q

Quarter Ended October 27, 2012

 

     INDEX       
          Page  
Part I.    FINANCIAL INFORMATION   
Item 1.    Financial Statements   
   Consolidated Balance Sheets: October 27, 2012 (unaudited), January 28, 2012 and October 29, 2011 (unaudited)      3   
  

Consolidated Statements of Income: Thirteen and Thirty-nine weeks ended October 27, 2012 (unaudited) and October 29, 2011 (unaudited)

     4   
  

Consolidated Statements of Cash Flows: Thirty-nine weeks ended October 27, 2012 (unaudited) and October 29, 2011 (unaudited)

     5   
   Notes to Unaudited Consolidated Financial Statements      6   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      13   
Item 3.    Quantitative and Qualitative Disclosures about Market Risk      22   
Item 4.    Controls and Procedures      22   
Part II.    OTHER INFORMATION   
Item 1.    Legal Proceedings      23   
Item 1A.    Risk Factors      23   
Item 2.    Unregistered Sales of Securities and Use of Proceeds      23   
Item 6.    Exhibits      24   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

rue21, inc. and subsidiaries

Consolidated Balance Sheets

 

     October 27,     January 28,      October 29,  
     2012     2012      2011  
     (Unaudited)            (Unaudited)  
     (in thousands, except per share data)  
Assets        

Current assets:

       

Cash and cash equivalents

   $ 7,347      $ 41,960       $ 36,071   

Short term investments

     37,000        30,000         —     

Accounts receivable

     10,634        6,675         10,961   

Merchandise inventory, net

     180,609        131,136         142,869   

Prepaid expenses and other current assets

     13,660        11,767         11,062   

Deferred tax assets

     6,079        5,121         6,527   
  

 

 

   

 

 

    

 

 

 

Total current assets

     255,329        226,659         207,490   

Property and equipment, net

     139,443        117,798         115,109   

Other assets

     3,505        3,565         3,661   
  

 

 

   

 

 

    

 

 

 

Total assets

   $ 398,277      $ 348,022       $ 326,260   
  

 

 

   

 

 

    

 

 

 
Liabilities and stockholders’ equity        

Current liabilities:

       

Accounts payable

   $ 129,410      $ 103,914       $ 104,618   

Accrued expenses and other current liabilities

     21,304        16,570         16,020   

Accrued payroll and related taxes

     9,939        12,045         10,099   

Deferred rent and tenant allowances, current portion

     9,945        8,652         8,630   

Accrued income and franchise taxes

     —          1,068         2,252   
  

 

 

   

 

 

    

 

 

 

Total current liabilities

     170,598        142,249         141,619   

Non-current liabilities:

       

Deferred rent, tenant allowances and other long-term liabilities

     57,850        46,965         46,212   

Deferred tax liabilities

     7,006        11,585         5,599   
  

 

 

   

 

 

    

 

 

 

Total non-current liabilities

     64,856        58,550         51,811   
  

 

 

   

 

 

    

 

 

 

Commitments and Contingencies

     —          —           —     

Stockholders’ equity:

       

Preferred stock— par value $0.001 per share, 10,000 shares authorized; none issued or outstanding

     —          —           —     

Common stock— par value $0.001 per share; 200,000 shares authorized; 24,651, 24,476 and 24,463 shares issued; 23,811, 24,476 and 24,463 outstanding, respectively.

     25        24         24   

Additional paid in capital

     46,950        37,696         36,224   

Treasury stock, 840, -0-, and -0- shares, respectively

     (22,512     —           —     

Retained earnings

     138,360        109,503         96,582   
  

 

 

   

 

 

    

 

 

 

Total stockholder’s equity

     162,823        147,223         132,830   

Total liabilities and stockholders’ equity

   $ 398,277      $ 348,022       $ 326,260   
  

 

 

   

 

 

    

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3


Table of Contents

rue21, inc. and subsidiaries

Consolidated Statements of Income

 

     Thirteen weeks ended      Thirty-nine weeks ended  
     October 27,     October 29,      October 27,     October 29,  
     2012     2011      2012     2011  
     (Unaudited)  
     (in thousands, except per share data)  

Net sales

   $ 225,158      $ 194,761       $ 632,832      $ 540,406   

Cost of goods sold (includes certain buying,occupancy and distribution center expenses)

     140,052        123,361         388,514        334,130   
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     85,106        71,400         244,318        206,276   

Selling, general, and administrative expense

     63,738        50,805         175,333        145,045   

Depreciation and amortization expense

     8,522        6,843         24,067        19,356   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from operations

     12,846        13,752         44,918        41,875   

Interest (income) expense, net

     (12     16         (64     (25
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     12,858        13,736         44,982        41,900   

Provision for income taxes

     4,693        4,995         16,124        15,870   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

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

 

 

   

 

 

    

 

 

   

 

 

 

Basic income per common share

   $ 0.34      $ 0.36       $ 1.18      $ 1.07   

Diluted income per common share

   $ 0.33      $ 0.35       $ 1.15      $ 1.04   

Weighted average basic common shares outstanding

     23,939        24,461         24,371        24,407   

Weighted average diluted common shares outstanding

     24,555        25,066         24,990        25,057   

See accompanying notes to the unaudited consolidated financial statements.

 

4


Table of Contents

rue21, inc. and subsidiaries

Consolidated Statements of Cash Flows

 

     Thirty-nine weeks ended  
     October 27,     October 29,  
     2012     2011  
     (Unaudited, in thousands)  

Operating activities:

    

Net income

   $ 28,858      $ 26,030   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     24,067        19,356   

Loss on fixed asset disposals

            312   

Impairment of long-lived assets

     158        285   

Deferred taxes

     (5,537     (1,555

Stock based compensation

     7,606        3,522   

Excess tax benefits from stock-based compensation activities

     (858     (618

Changes in:

    

Accounts receivable

     (3,959     (4,676

Merchandise inventory, net

     (49,473     (46,818

Prepaid expenses and other current assets

     (1,893     (2,162

Accounts payable

     25,496        22,991   

Accrued payroll and related taxes

     (2,106     (1,954

Accrued expenses and other current liabilities

     4,734        404   

Deferred rent and tenant allowances

     12,220        12,553   

Accrued income and franchise taxes

     (210     872   

Other

     (78     (136
  

 

 

   

 

 

 

Net cash provided by operating activities

     39,025        28,406   

Investing activities:

    

Acquisition of property and equipment

     (45,774     (43,595

Purchase of short term investments

     (37,000       

Proceeds from the sale of short term investments

     30,000          
  

 

 

   

 

 

 

Net cash used for investing activities

     (52,774     (43,595

Financing activities:

    

Shares of common stock withheld from employees

     (360       

Repurchase of common stock as part of a publicly announced program

     (22,152       

Excess tax benefits from stock-based compensation activities

     858        618   

Proceeds from stock options exercised

     790        531   
  

 

 

   

 

 

 

Net cash (used for) provided by financing activities

     (20,864     1,149   
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (34,613     (14,040

Cash and cash equivalents, beginning of period

     41,960        50,111   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 7,347      $ 36,071   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Cash paid for interest (line of credit fees)

   $ 226      $ 226   
  

 

 

   

 

 

 

Cash paid for income taxes

   $ 18,867      $ 16,462   
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5


Table of Contents

rue21, inc and subsidiaries

Notes to unaudited Consolidated Financial Statements

Thirteen and Thirty-Nine weeks ended October 27, 2012 and October 29, 2011

(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 862, 755 and 740 stores as of October 27, 2012, January 28, 2012 and October 29, 2011, respectively, in various strip centers, regional malls and outlet centers throughout the United States. Sales are generally transacted for cash or check 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 October 27, 2012, 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 28, 2012 included in the Company’s Annual Report on Form 10-K.

Certain reclassifications have been made to the prior period’s consolidated financial statement amounts to conform to the current period’s presentation.

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 Company’s 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 2012” and the “third quarter of 2011” refer to the thirteen week periods ending October 27, 2012 and October 29, 2011, respectively. “Year-to-date 2012” and “Year-to-date 2011” refer to the thirty-nine week periods ending October 27, 2012 and October 29, 2011, 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 operations are seasonal in nature and consist of two principal selling seasons: Spring (the first and second quarters) and Fall (the third and fourth quarters). Generally, our highest sales volume occurs in the fourth quarter, which includes the holiday selling season. Accordingly, cash requirements are highest in the third quarter as our inventories build in advance of the holiday season. In addition, our quarterly results can be affected by the timing of new store openings and store closings, the amount of sales contributed by new and existing stores and the timing of certain holidays.

 

6


Table of Contents

Recent Accounting Standards

The FASB issues Accounting Standards Updates (ASU) to amend the authoritative literature in Accounting Standards Codification (ASC). There have been a number of ASU’s to date that amend the original text of ASC. No ASU’s were issued by the FASB during the current period that (i) provide supplemental guidance, (ii) are technical corrections, (iii) are applicable to the Company or (iv) are expected to have a significant impact on the Company.

NOTE 3 — Earnings Per Share

Earnings per common share has been computed as follows:

 

     Thirteen weeks ended      Thirty-nine weeks ended  
     October 27,      October 29,      October 27,      October 29,  
     2012      2011      2012      2011  
     (in thousands, except per share data)  

Net income

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

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average basic common shares outstanding

     23,939         24,461         24,371         24,407   

Impact of dilutive securities

     616         605         619         650   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average diluted common shares outstanding

     24,555         25,066         24,990         25,057   

Per common share:

           

Basic income per common share

   $ 0.34       $ 0.36       $ 1.18       $ 1.07   

Diluted income per common share

   $ 0.33       $ 0.35       $ 1.15       $ 1.04   

Stock options to purchase 838,557 and 831,293 shares of common stock during the third quarter of 2012 and Year-to-date 2012, respectively, and 787,406 and 670,270 shares of common stock for the third quarter of 2011 and Year-to-date 2011, 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

The Company adopted the 2009 Omnibus Incentive Plan (the 2009 Plan) pursuant to which key employees, officers, and directors shall be eligible to receive grants of stock options, stock appreciation rights, restricted stock, restricted stock units or performance share 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 grant.

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 Company recognized $2.5 million and $7.6 million in compensation expense related to stock-based compensation during the third quarter of 2012 and Year-to-date 2012, respectively, and $1.4 million and $3.5 million in compensation expense related to stock-based compensation for the third quarter of 2011 and Year-to-date 2011, respectively. The Company recognized $0.5 million and $1.9 million, respectively, in stock-based compensation associated with performance-based stock grants during the third quarter and Year-to-date 2012. No expense was recognized for performance-based stock grants for fiscal 2011. As of October 27, 2012, the Company had 2,366,759 shares available for equity grants.

 

7


Table of Contents

Stock Options

The following table represents stock option activity during the Year-to-date 2012 period.

 

     Common
Stock Options
    Weighted-
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value
 
     (in thousands)     (per share)      (in years)      (in thousands)  

Outstanding January 28, 2012

     1,600      $ 18.41         7.32       $ 15,680   

Granted

     125      $ 27.33         

Exercised

     (127   $ 6.21         

Expired or forfeited

     (15   $ 21.26         
  

 

 

   

 

 

       

Outstanding October 27, 2012

     1,583      $ 20.06         6.91       $ 16,991   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested at October 27, 2012

     945      $ 15.02         6.08       $ 14,730   
  

 

 

   

 

 

    

 

 

    

 

 

 

The weighted average fair value of stock options at the grant date was $12.50 and $13.67 during the third quarter of 2012 and Year-to-date 2012, respectively and $19.02 and $16.45 during the third quarter of 2011 and Year-to-date 2011, respectively. The intrinsic value of options exercised was $1.9 million and $2.9 million during the third quarter of 2012 and Year-to-date 2012, respectively and $0.1 million and $2.1 million for the third quarter of 2011 and Year-to-date 2011, respectively. All outstanding vested options are currently exercisable as of October 27, 2012.

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     Thirty-nine weeks ended  
     October 27,
2012
    October 29,
2011
    October 27,
2012
    October 29,
2011
 

Risk-free interest rate (1)

     1.1     1.2%-2.3%        1.1%-1.8%        1.2%-2.9%   

Dividend yield

     —          —          —          —     

Volatility factors for the expected market price of the Company’s common stock (2)

     53.0     55.0     53.0     55.0

Weighted average expected term (3)

     6.0 years        6.0 years        6.0 years        6.0 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 rue21’s 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.

As of October 27, 2012, there was $9.2 million of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized over a weighted-average period of 1.01 years. The total fair value of shares vested during the third quarter of 2012 and Year-to-date 2012 was $0.3 million and $3.7 million respectively, and $0.2 million and $2.4 million for the third quarter of 2011 and Year-to-date 2011, respectively.

 

8


Table of Contents

Restricted Stock Units

Time-based restricted stock unit awards vest generally over three years.

Performance-based stock unit awards generally vest over three years if the performance goal is achieved in the first year period. The level of goal achievement, if any, will determine the number of shares that may be received.

The following table summarizes information regarding non-vested outstanding restricted stock units as of October 27, 2012:

Restricted Stock Unit Grants

 

     Time-Based Restricted Stock Units     Performance Share Units  
     Thirty-nine weeks Ended October 27, 2012     Thirty-nine weeks Ended October 27, 2012  
     Shares     Weighted Averaged
Fair Value at Grant
Date
    Shares      Weighted Averaged
Fair Value at Grant
Date
 
     (in thousands)     (per share)     (in thousands)      (per share)  

Non-vested as of January 28, 2012

     162      $ 29.85        —         $ —     

Granted

     182      $ 27.20        199       $ 27.24   

Vested

     (51   $ 30.26        —         $ —     

Expired or forfeited

     (1   $ (30.12     —         $ —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Non-vested as of October 27, 2012

     292      $ 28.12        199       $ 27.24   
  

 

 

   

 

 

   

 

 

    

 

 

 

As of October 27, 2012, there was $8.1 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 1.21 years. The total fair value of shares vested during the third quarter of 2012 and Year-to-date 2012 was $0.1 million and $1.5 million respectively, and no material value vested during the third quarter of 2011 and Year-to-date 2011 period.

As of October 27, 2012, there was $2.6 million of unrecognized compensation expense related to non-vested performance share unit awards that is expected to be recognized over a weighted-average period of 1.64 years. The total fair value of shares vested during the third quarter of 2012 and Year-to-date 2012 as well as during the third quarter of 2011 and Year-to-date 2011 period was $0.

NOTE 5 — Property and Equipment

 

     October 27,
2012
    January 28,
2012
    October 29,
2011
 
     (in thousands)  

Furniture and fixtures

   $ 109,445      $ 93,301      $ 89,148   

Leasehold improvements

     128,223        102,731        98,949   

Computer equipment, software and other

     26,522        22,541        20,559   
  

 

 

   

 

 

   

 

 

 
     264,190        218,573        208,656   

Less accumulated depreciation and amortization

     (124,747     (100,775     (93,547
  

 

 

   

 

 

   

 

 

 
   $ 139,443      $ 117,798      $ 115,109   
  

 

 

   

 

 

   

 

 

 

In accordance with the FASB’s 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.

 

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NOTE 6 — Fair Value

The FASB’s 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 Company’s cash, cash equivalents, and short term investments of $44,347, $71,960 and $36,071 as of October 27, 2012, January 28, 2012 and October 29, 2011, 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 management’s 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 Company’s financial assets (cash equivalents) measured at fair value on a recurring basis as of October 27, 2012 and October 29, 2011:

 

     Fair Value Measurements at October 27, 2012  
     Carrying
Amount
     Quoted Market
Prices in Active
Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Cash and cash equivalents

           

Cash

   $ 7,347       $ 7,347       $ —         $ —     

Short Term Investments

   $ 37,000       $ 37,000       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44,347       $ 44,347       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value Measurements at October 29, 2011  
     Carrying
Amount
     Quoted Market
Prices in Active
Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Cash and cash Equivalents

           

Cash

   $ 36,071       $ 36,071       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,071       $ 36,071       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 third quarter of 2012 was 36.5% as compared to 36.4% for the third quarter of 2011. The Company classifies interest and penalties as an element of tax expense. The amount of tax related interest and penalties for the third quarter of 2012 and 2011, respectively, was not material.

The Year-to-date 2012 effective income tax rate was 35.8% as compared to 37.9% for the Year-to-date 2011 period. The lower effective income tax rate was due to corporate restructuring, federal and state income tax credits, disqualifying dispositions of stock options and other increased permanent tax differences in the current year.

The Company recognizes income tax liabilities related to unrecognized tax benefits in accordance with the FASB’s authoritative guidance related to uncertain tax positions and adjusts these liabilities when its judgment changes as a 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.

NOTE 8 — Stock Repurchase Program

rue21’s Board of Directors has authorized a stock repurchase program granting the Company authority to repurchase up to $50 million of the Company’s common stock. Under the stock repurchase program, the Company may repurchase shares in the open market or through privately negotiated transactions. During the third quarter of 2012, the Company repurchased 332,200 shares of its common stock on the open market at an average price of $27.80 for an aggregate cost of $9.2 million. During Year-to-date 2012, the Company repurchased 828,100 shares of its common stock on the open market at an average price of $26.75 per share for an aggregate cost of $22.2 million. The Company has not purchased any stock through privately negotiated transactions. At October 27, 2012, the Company has authorized repurchases of $27.8 million of its common stock remaining under its $50 million stock repurchase program. These shares may be repurchased at our discretion.

In addition to the shares of common stock we purchased under our $50 million stock repurchase program, we withheld 832 and 12,112 shares during the third quarter of 2012 and Year-to-date 2012, respectively from employees for the payment of taxes, not in excess of the minimum statutory withholding requirements, in connection with the vesting of shared-based payments. The aforementioned shares have been recorded as treasury stock.

NOTE 9 — Commitments and Contingencies

We are subject to various proceedings, lawsuits, disputes, and claims arising in the ordinary course of our business. Many of these actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against us from time to time include commercial, intellectual property, customer, and employment actions, including class action lawsuits. The plaintiffs in some actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages, and some are covered in part by insurance. Given the uncertain nature of litigation generally, we are not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome of the litigation to which we are a party. In accordance with U.S. generally accepted accounting principles, we establish accruals to the extent probable future losses are estimable. Nevertheless, we could incur charges in excess of any currently established accruals and any available insurance. Any such future charges, individually or in the aggregate, could have a material adverse effect on our consolidated results of operations and consolidated cash flows.

On June 11, 2010, Elva Perez, a former employee, on behalf of herself and a purported class of all of our other similarly situated California employees, filed a complaint in the Superior Court of California, County of Santa Cruz. The complaint alleges, among other things, that we have forced our in-store employees to work off-the-clock without compensation; failed to pay overtime wages; failed to provide in-store employees bona fide meal and rest periods; failed to reimburse in-store employees for business expenses they incur; and failed to provide accurate, timely itemized wage statements, in violation of the California Labor Code, the California Industrial Welfare Commission Wage Orders and the California Business and Professions Code. The complaint seeks, among other things, an order awarding compensatory and liquidated damages, including unpaid wages; an award of restitution; an order imposing civil penalties; an order enjoining us from committing future violations of the laws allegedly violated; and interest, attorney’s fees and costs. The Company denied the allegations made by the Plaintiff and asserted various defenses. On June 6, 2012, the Court certified a class of all individuals employed in our California locations as hourly store managers, assistant store managers and sales clerks from June 11, 2006 to pursue claims related to meal breaks, meal premium pay, work related travel claims, travel expense claims, bag check claims, and pay record claims.

 

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On October 4, 2012, the parties to the litigation agreed to a settlement under which we agreed to pay $2,750,000 as a gross settlement amount, which will, among other things, be used to provide payments to employees participating in the certified class and to pay for fees and expenses of class counsel. The plaintiff, on behalf of herself and the employees participating in the certified class, will provide a general release, releasing us from all claims, from June 11, 2006 until the date the Court preliminarily approves the settlement agreement, that were pled or could have been pled based on the factual allegations set forth in the complaint. Consummation of the settlement is subject to preliminary and final approval of the Court.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements other than those that are purely historical are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenues, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies, or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including, but not limited to the following:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

our failure to protect our brand image;

 

   

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

 

   

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

 

   

seasonality of our business;

 

   

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

 

   

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

 

   

disruptions in our supply chain and distribution facility;

 

   

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

 

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

 

   

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

 

   

the incurrence of material uninsured losses or excessive insurance costs;

 

   

our failure to maintain effective internal controls; and

 

   

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

Our Business

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

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

Performance Metrics

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

Net Sales

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

Comparable Store Sales

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

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

 

   

consumer preferences, buying trends and overall economic trends;

 

   

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

 

   

competition;

 

   

changes in our merchandise mix;

 

   

pricing;

 

   

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

 

   

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

 

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our ability to source and distribute products efficiently; and

 

   

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

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

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

Gross Profit

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

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

Selling, General and Administrative Expense

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

 

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Results of Operations

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

 

     Thirteen weeks ended     Thirty-nine weeks ended  
     October 27,     October 29,     October 27,     October 29,  
     2012     2011     2012     2011  
     (Unaudited)  
     (in thousands, except operating data)  

Net sales

   $ 225,158      $ 194,761      $ 632,832      $ 540,406   

Cost of goods sold

     140,052        123,361        388,514        334,130   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     85,106        71,400        244,318        206,276   

Selling, general and administrative expenses

     63,738        50,805        175,333        145,045   

Depreciation and amortization expense

     8,522        6,843        24,067        19,356   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     12,846        13,752        44,918        41,875   

Interest income, net

     (12     16        (64     (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     12,858        13,736        44,982        41,900   

Provision for income taxes

     4,693        4,995        16,124        15,870   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

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

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share

        

Basic

     0.34        0.36        1.18        1.07   

Diluted

     0.33        0.35        1.15        1.04   

Weighted average common shares outstanding

        

Basic

     23,939        24,461        24,371        24,407   

Diluted

     24,555        25,066        24,990        25,057   

Net sales

     100.0     100.0     100.0     100.0

Cost of goods sold

     62.2     63.3     61.4     61.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     37.8     36.7     38.6     38.2

Selling, general and administrative expenses

     28.3     26.1     27.7     26.8

Depreciation and amortization expense

     3.8     3.5     3.8     3.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     5.7     7.1     7.1     7.7

Interest income, net

     0.0     0.0     0.0     0.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     5.7     7.1     7.1     7.7

Provision for income taxes

     2.1     2.6     2.5     2.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     3.6     4.5     4.6     4.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective Tax Rate

     36.5     36.4     35.8     37.9

Operating Data (unaudited)

        

Number of stores open at the end of the period

     862        740        862        740   

Comparable store sales change

     0.2     0.0     0.8     1.5

 

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

 

     Thirteen weeks ended     Thirty-nine weeks ended  
     October 27,     October 29,     October 27,     October 29,  
     2012     2011     2012     2011  

Girls

        

Apparel

     59.1     57.7     58.9     58.3

Accessories

     21.4     23.7     22.6     24.1

Guys Apparel and Accessories

     19.5     18.6     18.5     17.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Third quarter of 2012 Compared to Third quarter of 2011

Net Sales

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

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

Gross Profit

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

Selling, General and Administrative Expense

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

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

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

 

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Depreciation and Amortization Expense

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

Provision for Income Taxes

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

Net Income

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

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

Net Sales

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

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

Gross Profit

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

Selling, General and Administrative Expense

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

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

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

Depreciation and Amortization Expense

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

 

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Provision for Income Taxes

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

Net Income

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

Liquidity and Capital Resources

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

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

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

 

     Thirty-nine weeks ended  
     October 27,     October 29,  
     2012     2011  
     (in thousands)  

Provided by operating activities

   $ 39,025      $ 28,406   

Used for investing activities

     (52,774     (43,595

(Used for) provided by financing activities

     (20,864     1,149   
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

   $ (34,613   $ (14,040
  

 

 

   

 

 

 

Operating Activities

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

 

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     Thirty-nine weeks ended  
     October 27,     October 29,  
     2012     2011  
     (in thousands)  

Net income

   $ 28,858      $ 26,030   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     24,067        19,356   

Deferred taxes

     (5,537     (1,555

Stock-based compensation

     7,606        3,522   

Merchandise inventory

     (49,473     (46,818

Accounts payable

     25,496        22,991   

Accrued expenses and other current liabilities

     4,734        404   

Accrued income and franchise taxes

     (210     872   

Deferred rent and tenant allowances

     12,220        12,553   

Other working capital components

     (8,036     (8,928

All other

     (700     (21
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 39,025      $ 28,406   
  

 

 

   

 

 

 

Net cash provided by operating activities was $39.0 million and $28.4 million for the Year-to-date 2012 period and the Year-to-date 2011 period, respectively. The increase of $10.6 million in the Year-to-date 2012 period as compared to the Year-to-date 2011 period was driven by accrued expenses primarily, accruals for the California wage and hour case settlement offset by a deceleration of deferred tax liabilities associated with bonus depreciation of capital expenditures. Non-cash charges relating to depreciation and amortization increased $4.7 million and stock-based compensation increased $4.1 million.

Investing Activities

Investing activities consist principally of capital expenditures for new and converted stores.

 

     Thirty-nine weeks ended  
     October 27,     October 29,  
     2012     2011  
     (in thousands)  

Capital expenditures, net of tenant allowances

   $ (30,853   $ (26,633

Tenant allowances

     (14,921     (16,962

Purchase of short term investments

     (37,000     —     

Proceeds from the sale of short term investments

     30,000        —     
  

 

 

   

 

 

 

Net cash used for investing activities

   $ (52,774   $ (43,595
  

 

 

   

 

 

 

For the Year-to-date 2012 period cash used for investing activities increased $9.2 million to $52.8 million as compared to $43.6 million in the Year-to-date 2011 period. During the Year-to-date 2012, we opened 108 new stores as compared to 103 new stores in the Year-to-date 2011 period, respectively. Capital expenditures, net of tenant allowances, for the new stores and conversions of existing stores increased $0.6 million to $18.5 million during the Year-to-date 2012 as compared to $17.9 million in the comparable prior year period. Additionally, capital expenditures for IT infrastructure increased $3.2 million to $6.3 million during Year-to-date 2012 as compared to $3.1 million in the Year-to-date 2011 period. The Company expects total capital expenditures, net of tenant allowances, for fiscal year 2012 to be approximately $37.0 million to $39.0 million.

Purchases and sales of short term investments resulted in an additional $7.0 million use of cash in the Year-to-date 2012 period compared to $0 in the Year-to-date 2011 period. The Company is invested in highly liquid short term investments.

 

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Financing Activities

Financing activities consist principally of repurchases of common stock as well as the withholding of common stock from employees for the payment of taxes in conjunction with the vesting of share-based payments. Net cash of $22.2 million was used in the repurchase of shares in the publicly announced program during the Year-to-date period of 2012. There were no repurchases in 2011.

 

     Thirty-nine weeks ended  
     October 27,     October 29,  
     2012     2011  
     (in thousands)  

Withholding of common stock from employees

   $ (360   $ —     

Repurchase of common stock as part of a publicly announced program

     (22,152     —     

Proceeds from stock options exercised

     790        531   

Excess tax benefits from stock-based award activities

     858        618   
  

 

 

   

 

 

 

Net cash (used for) provided by financing activities

   $ (20,864   $ 1,149   
  

 

 

   

 

 

 

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. On November 18, 2011 a second amendment was executed. The key provision of the second amendment allows the Company to provide guarantees to third party lenders in connection with purchase orders in the ordinary course of business if such guarantees are considered necessary by the Company. 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. There were no borrowings as of October 27, 2012 and October 29, 2011, 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 October 27, 2012 and expect to remain in compliance for the next twelve months.

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 28, 2012, other than those which occur in the normal course of business.

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 28, 2012.

 

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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 28, 2012. For further information, see Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2012.

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 at a reasonable assurance level 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 was no change to our internal control over financial reporting during the third quarter of fiscal year 2012 that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

For a description of the Company’s legal proceedings, see Note 9 to the unaudited consolidated financial statements, which is incorporated herein by reference.

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 28, 2012.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information regarding our repurchases of our common stock during the 13 weeks Ended October 27, 2012.

 

Period

   Total Number of
Shares Purchased
     Average Price Paid
Per Share (1)
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
     Approximate Dollar
Value of Shares that
May Yet be
Purchased Under the
Plans or Programs (1)
 

July 29, 2012 to August 25, 2012

     209,000         25.97         209,000         31,656,429   

August 26, 2012 to September 29, 2012

     67,200         30.66         67,200         29,595,951   

September 30, 2012 to October 27, 2012

     56,000         31.21         56,000         27,848,190   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     332,200       $ 27.80         332,200       $ 27,848,190   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) All of the above repurchases were made on the open market at prevailing market rates plus related expenses under our stock repurchase program, which authorized the repurchase of up to $50 million in common stock. Our stock repurchase program was authorized by our Board of Directors and publicly announced on May 24, 2012.

 

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Item 6. Exhibits

 

  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.

 

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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: November 29, 2012     By  

/s/ Robert Fisch

     

Robert Fisch

Chairman and Chief Executive Officer

Date: November 29, 2012     By  

/s/ Keith McDonough

     

Keith McDonough

Senior Vice President and Chief Financial Officer

 

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