UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
January 30, 2010
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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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.)
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800 Commonwealth Drive
Suite 100
Warrendale, Pennsylvania
(Address of principal
executive offices)
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15086
(Zip Code)
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Registrants telephone number, including area code:
(724) 776-9780
Securities registered pursuant to Section 12(b) of the
Act:
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Common Stock, par value $0.001 per share
(Title of class)
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The NASDAQ Stock Market LLC
(Name of each exchange where registered)
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether 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
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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:
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting company o
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The registrant commenced the initial public offering of its
common stock on November 13, 2009. Accordingly, there was
no public market for the registrants common stock as of
July 31, 2009, the last business day of the
registrants most recently completed second fiscal quarter.
The number of shares of the registrants common stock
outstanding as of March 15, 2010 was 24,250,462.
Documents Incorporated by Reference
Portions of the registrants Proxy Statement for the Annual
Meeting of Shareholders to be held on June 11, 2010
(hereinafter referred to as the 2010 Proxy Statement) are
incorporated by reference into Part III.
Special
Note on Forward-looking Statements
This Annual Report on
Form 10-K
contains forward-looking statements that are subject to risks
and uncertainties. All statements other than statements of
historical fact included in this Annual Report on
Form 10-K
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:
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failure to successfully execute our growth strategy, including
delays in store growth and store conversions, difficulties
executing sales and operating profit margin initiatives and
inventory shrinkage prevention;
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the failure of our new stores or the conversion of our existing
stores to achieve sales and operating levels consistent with our
expectations;
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risks and challenges in connection with sourcing merchandise
from domestic and foreign vendors;
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our level of success in gaining and maintaining broad market
acceptance of our exclusive brands;
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our failure to protect our brand image;
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our debt levels and restrictions in our senior secured credit
facility and in agreements for other indebtedness we may incur;
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economic conditions, including their effect on the financial and
capital markets, our vendors and business partners, employment
levels, consumer demand, spending patterns, inflation and the
cost of goods;
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our loss of key personnel or our inability to hire additional
personnel;
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seasonality of our business;
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increases in costs of fuel, or other energy, transportation or
utilities costs and in the costs of labor and employment;
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the impact of governmental laws and regulations and the outcomes
of legal proceedings;
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disruptions in our supply chain and distribution facility;
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damage or interruption to our information systems;
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changes in the competitive environment in our industry and the
markets in which we operate;
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natural disasters, unusually adverse weather conditions,
pandemic outbreaks, boycotts and geo-political events;
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the incurrence of material uninsured losses or excessive
insurance costs; and our failure to maintain effective internal
controls.
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We derive many of our forward-looking statements from our
operating budgets and forecasts, which are based upon many
detailed assumptions. While we believe that our assumptions are
reasonable, we caution that it is very difficult to predict the
impact of known factors, and, it is impossible for us to
anticipate all factors that could affect our actual results.
Important factors that could cause actual results to differ
materially from our expectations, or cautionary statements, are
disclosed under Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations in this Annual Report
on
Form 10-K.
All written and oral forward-looking statements attributable to
us, or persons acting on our behalf, are expressly qualified in
their
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entirety by the cautionary statements as well as other
cautionary statements that are made from time to time in our
other SEC filings and public communications. You should evaluate
all forward-looking statements made in this Annual Report on
Form 10-K
in the context of these risks and uncertainties. We caution you
that the important factors referenced above may not contain all
of the factors that are important to you. In addition, we cannot
assure you that we will realize the results or developments we
expect or anticipate or, even if substantially realized, that
they will result in the consequences we anticipate or affect us
or our operations in the way we expect. The forward-looking
statements included in this Annual Report on
Form 10-K
are made only as of the date hereof. We undertake no obligation
to publicly update or revise any forward-looking statement as a
result of new information, future events or otherwise, except as
otherwise required by law.
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rue21,
inc.
2009 ANNUAL REPORT ON
FORM 10-K
TABLE OF CONTENTS
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Part I
Our
Company
rue21, inc. (rue21) was originally incorporated in Pennsylvania
in October 1976. We changed our name to rue21, inc. in May 2003
and reincorporated in Delaware on October 30, 2009. rue21is
a fast growing specialty apparel retailer offering the newest
fashion trends to girls and guys at value prices. We operate
over 500 stores in 43 states. Our merchandise is designed
to appeal to 11 to 17 year olds who aspire to be
21 and adults who want to look and feel
21. We react quickly to market trends and our daily
shipments ensure there is always new merchandise for our
customers to discover. In addition, we offer our own brands,
such as rue21 etc!, Carbon, tarea and rueKicks, to create
merchandise excitement and differentiation in our stores. The
energy in our stores and our focus on customer service, combined
with our great value products, keep our customers returning to
us. Through viral marketing and our interactive website, we
continue to build a rueCommunity with a loyal customer base that
will drive our growth into the future. The company and customer
culture we have created invokes only one simple thought in the
minds of most... Do you rue? I do!
We pursue a three-pronged strategy that focuses on
diversification and growth. The key elements of our strategy are:
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Diversified Product girls, guys, rue21 etc!
We offer a broad range of girls and guys apparel, accessories,
footwear, jewelry and fragrances. Over the last few years, we
have expanded and developed a number of product categories to
complement our extensive apparel offerings, including rue21
etc!, our girls jewelry and accessories category; tarea by
rue21, our intimate apparel category; Carbon, our guys apparel
and accessories category; rueKicks, one of our footwear lines
and a full line of fragrances for both girls and guys. While our
girls apparel category currently represents the majority of our
net sales, we believe the expansion of our guys apparel and
accessories category presents a significant opportunity for us.
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Flexible Real Estate strip centers, regional
malls, outlet centers. As of January 30, 2010 approximately
52% of our stores were located in strip centers, 27% in regional
malls and 21% in outlet centers. Our stores are located
primarily in small- and middle-market communities that we
believe have been underserved by traditional specialty apparel
retailers. As a result, we are often the only junior and young
mens specialty apparel retailer in such communities and
face limited direct competition. In these markets, our limited
competition comes from large value retailers and department
stores.
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Balanced Growth new stores, store
conversions, comparable store sales. We drive sales growth
through opening new stores, converting existing stores into our
new, larger rue21 etc! layout, and increasing our comparable
store sales. In fiscal year 2010 , we plan to open 100 new
stores, including 11 new stores opened as of March 2, 2010.
We also plan to convert 30 stores, including 1store converted as
of March 2, 2010, to a larger layout that includes a
separate rue21 etc!
store-in-store.
In fiscal year 2009, we opened 88 new stores and converted 26
stores. We believe our merchandising initiatives and new
category introductions will further enhance our comparable store
sales growth.
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Our comparable store sales increases were 7.8% in fiscal year
2009 and 3.7% in fiscal year 2008. Our net sales were
$525.6 million in fiscal year 2009, which represents a
34.3% increase over fiscal year 2008. Our net income was
$22.0 million in fiscal year 2009, which represents a 74.2%
increase over fiscal year 2008. We believe our compelling value
proposition and trend-right merchandise have contributed to our
strong operating results.
Our
Competitive Strengths
We attribute our success as a specialty apparel retailer to the
following competitive strengths:
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Compelling fashion meets value
proposition. We offer the newest fashion to girls
and guys at prices lower than many other similar apparel
retailers. Our broad product assortment, ranging from apparel to
accessories to footwear, enables our customers to create a
complete look. In addition, we provide our customers with a
distinctive shopping experience in a
fun-to-shop
environment, further enhancing our branded value proposition.
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Flexible, fast-fashion business model. Our
merchandising model allows us to quickly identify and respond to
trends and bring proven concepts and styles to our stores. Our
sourcing model is designed to achieve lower cost, faster
turnaround and lower inventory levels. Our vendor network
consists of domestic importers and domestic suppliers. Our
collaborative relationship with our vendors allows us to test
small quantities of new products in select stores before broadly
distributing them to our stores which, in turn, reduces markdown
risk. By carrying the newest styles and regularly updating our
floor sets, we provide our customers with a reason to frequently
shop our stores.
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Presence in locations with limited direct
competition. We focus on small- and middle-market
communities, which we define as communities with populations
between 25,000 and 200,000 people, where household incomes
do not typically support higher-priced retailers. As a result,
we often are the only junior and young mens specialty
apparel retailer in a shopping center and face limited direct
competition in these communities. We have a prominent, central
location in many of our strip centers and regional malls to
further drive traffic to our stores. We believe we are a highly
attractive tenant and, as such, we are able to negotiate
competitive and favorable lease terms and low construction costs.
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Attractive new store economics. We operate a
proven and efficient store model that delivers strong cash flow.
Not only do our stores provide a distinctive shopping experience
and compelling merchandise assortment, but with low store
build-out costs, competitive lease terms and a low-cost
operating model, our stores also generate a strong return on
store investment. All of our new stores feature our rue21 etc!
store-in-store
layout, showcasing an expanded accessories offering. Our new
stores average approximately 4,700 square feet, which is
larger than our historical store layout, and historically pay
back our investment in less than one year.
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Distinct company and customer culture. We have
a strong core culture that emanates from our employees, many of
whom are high school and college students who live in the
community and are rue21 customers. Through our viral marketing
efforts and the support of our online rueCommunity, we bring the
rue21 culture to our customer base. We believe our culture
enables us to connect to our employees and customers,
differentiate our in-store shopping experience and ultimately
strengthen our brand image and drive customer loyalty.
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Strong and experienced management team. Our
senior management team has extensive experience across a broad
range of disciplines in the specialty retail industry, including
merchandising, real estate, supply chain and finance. Bob Fisch,
our President and Chief Executive Officer, has more than
30 years of experience in the apparel industry. Since being
named President and Chief Executive Officer, he has overseen
consistent growth in net sales and income from operations.
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Our
Growth Strategy
We believe we are positioned to take advantage of significant
opportunities to increase net sales and net income. We have
recently invested significant capital to build the
infrastructure necessary to support our growth. This investment
included an upgrade of our distribution facility and related
systems, which we implemented in the fourth quarter of fiscal
year 2009 and enables the distribution facility to support
approximately 1,300 stores. Key elements of our growth strategy
include:
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Increase Square Footage. We intend to drive
our square footage growth by opening new stores and converting
existing stores to our larger rue21 etc! layout. We believe
there is a significant opportunity to expand our store base from
535 locations as of January 30, 2010 to over 1,000 stores
within the next five years. We expect to open 100 stores in
fiscal year 2010. Most of our new stores will be opened in strip
centers and regional malls in small- and middle-market
communities. In addition, we plan to continue to convert our
existing stores into our larger rue21 etc! layout, which
averages approximately 4,700 square feet. This store layout
allows us to offer an increased proportion of higher margin
categories, such as accessories, intimate apparel, footwear and
fragrances. As of January 30, 2010, more than 55% of our
store base was in the rue21 etc! layout. We converted 26 stores
to the rue21 etc! layout in fiscal year 2009 and plan to convert
30 stores in fiscal year 2010. These conversions result in
increased store profitability and generate return on investment
in excess of 30% over a twelve-month period.
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Drive Comparable Store Sales. We seek to
maximize our comparable store sales by increasing the
penetration of our diversified product categories, increasing
our rue21 brand awareness, continuing to provide our distinctive
store experience and converting existing stores to our larger
rue21 etc! layout. We believe that our fashionable merchandise
selections and affordable prices create more shopping excitement
for our customers, increase our brand loyalty and drive sales.
We believe significant opportunities exist to grow our guys
apparel and accessories category, as there is limited specialty
competition in guys apparel at value prices, and our highly
attractive footwear category, both of which have been recent
drivers of comparable store sales. We also believe that our
ability to quickly and consistently introduce the newest
fashions into our stores keeps our shopping experience fresh and
exciting and drives repeat customer visits.
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Improve Profit Margins. We believe we have the
opportunity to drive margin expansion through scale
efficiencies, continued cost discipline and changes in
merchandise mix. We believe our strong expected store growth
will permit us to take advantage of economies of scale in
sourcing and to leverage our existing infrastructure, corporate
overhead and fixed costs. We are focused on reducing costs
throughout our organization and believe further cost reduction
opportunities exist in inventory and supply chain management. We
believe the expansion of our higher margin categories, such as
accessories and footwear, will increase our overall margins over
time.
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Our
Stores
As of January 30, 2010, we operated 535 stores in
43 states throughout the United States. Our stores are
located in strip centers, regional malls and outlet centers in
small- and middle-market communities. Our stores averaged net
sales of approximately $980,000 and net sales per gross square
foot of $244 for fiscal year 2009.
The table below indicates certain historical information
regarding our stores by type of shopping center as of the fiscal
year end for each of the years indicated below:
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2009
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2008
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2007
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Strip Centers
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278
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215
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148
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Regional Malls
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146
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118
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90
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Outlet Centers
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111
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116
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114
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Total Stores
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535
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449
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352
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Total gross square feet at end of period (in thousands)
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2,390
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1,949
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1,148
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Average gross square feet per store
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4,468
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4,341
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4,113
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The gross square footage of new stores opened in fiscal year
2009 averaged approximately 4,700 square feet, which is
larger than our historical store base and features a separate
store-in-store
for our rue21 etc! girls jewelry and accessories category. We
have an ongoing strategy to convert our existing store base into
the larger rue21 etc! layout. As a result, we have worked with
our landlords to either convert or relocate our existing stores
to attractively priced new locations, either in the same
shopping center or in shopping centers in close proximity to the
existing store, that would allow us to prominently showcase all
of our product lines in a compelling store layout. In fiscal
year 2009, we converted 26 stores to our rue21 etc! layout.
Store
Locations
The following store list shows the number of stores operated in
each state as of January 30, 2010:
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Total Number
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State
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of Stores
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Alabama
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27
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Arizona
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13
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Arkansas
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8
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California
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17
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Colorado
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7
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6
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Total Number
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State
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of Stores
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Connecticut
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1
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Delaware
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1
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Florida
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21
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Georgia
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37
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Illinois
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16
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Indiana
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14
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Iowa
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7
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Kansas
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4
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Kentucky
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8
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Louisiana
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22
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Maine
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1
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Maryland
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6
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Massachusetts
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3
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Michigan
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14
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Minnesota
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4
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Mississippi
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19
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Missouri
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14
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Nebraska
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2
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Nevada
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4
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New Hampshire
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2
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New Jersey
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3
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New Mexico
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7
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New York
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13
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North Carolina
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34
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Ohio
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14
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Oklahoma
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14
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Oregon
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4
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Pennsylvania
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24
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South Carolina
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16
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Tennessee
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23
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Texas
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69
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Utah
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10
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Vermont
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1
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Virginia
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11
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Washington
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4
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West Virginia
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7
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Wisconsin
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8
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Wyoming
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1
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Total
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535
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Distinctive
Store Experience
Our stores are designed by our in-house team in partnership with
architectural consultants with the goal of creating an exciting
and inviting atmosphere for girls and guys to shop and
socialize. Our stores feature colorful displays showcasing the
latest styles and trends, themed dressing rooms and top-40
music. Girls and guys apparel is
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located in separate areas with trend walls displaying the newest
fashions. In our larger rue21 etc! layout stores, we feature our
rue21 etc! accessories in the center of our stores, along with
denim and fragrance bars and rueKicks displays. We believe that
the fun and playful atmosphere in our stores contributes to the
overall shopping experience.
Each of our stores is typically led by a manager, a full-time
assistant manager, two part-time assistant managers and eight to
ten part-time sales associates, depending on store volume.
Store
Growth and Store Conversions
Our in-house real estate team works along with our brokerage
network to negotiate the leases, lease renewals, and
construction costs of every site. We lease all of our stores and
determine store locations based on several factors, including
geographic location, demographic information and proximity to
other value retailers including Walmart, Target and Kohls.
Additionally, we analyze factors such as performance of a
particular shopping center, the quality and nature of existing
shopping center tenants and the configuration of the space and
the lease terms being offered. We have prominent positioning in
many of our strip center and regional mall locations as well as
a highly visible façade.
In fiscal year 2009, we opened 88 new stores. We plan to open a
total of 100 stores in fiscal year 2010. We expect our store
base to grow from 535 stores today to more than 1,000 stores
within the next five years. Our new store operating model
assumes an average store size of 4,700 square feet that has
historically achieved sales per store of $900,000 to
$1.1 million in the first twelve months. Our average net
investment to open a new store is approximately $160,000, which
includes $120,000 of average build-out costs, net of landlord
contributions, and $40,000 of initial inventory, net of payables.
Our new store strategy is primarily focused on expanding our
strip center presence, particularly in single anchor centers. We
also see an opportunity to increase our footprint within
regional malls, particularly in the small- and middle-markets
communities, and to a more limited extent in outlet centers.
Converting existing stores to our larger rue21 etc! layout
remains central to our growth strategy. As of January 30,
2010, 314 of our 535 stores were in the rue21 etc! layout. We
have plans to continue to convert additional stores within the
next five years to the larger rue 21 etc! layout as
opportunities to do so become available. In fiscal year 2010, we
have plans to convert 30 stores to the rue21 etc! layout.
The table below highlights certain information regarding our new
stores opened and existing stores converted to the rue21 etc!
layout as of the fiscal year end for each of the years indicated
below:
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2009
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2008
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2007
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Stores at beginning of period
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449
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352
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278
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Stores opened during period (1)
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88
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99
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74
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Stores closed during period
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(2
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(2
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Stores at end of period
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535
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449
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|
352
|
|
Store conversions during the period
|
|
|
26
|
|
|
|
21
|
|
|
|
20
|
|
|
|
|
(1) |
|
Stores opened during period do not include existing stores that
have been converted. |
rueCulture
and rueCommunity
A key component to our ongoing success has been our ability to
preserve and continue to build our deeprooted corporate and
customer culture. The passion and commitment fostered by
rueCulture enables us to connect with our employees and
customers, to differentiate our customers shopping
experience and to ultimately drive our growth and profitability.
Customer
Connection
We create a fun and exciting fashion destination for our
customers both in the store, through our themed dressing rooms
and our top-40 music selection, and on the internet via our
website, the rueCommunity blog and
8
other social networking sites such as Facebook, MySpace, Twitter
and YouTube. We consult a panel of teen advisors who regularly
provide us with feedback on products and trends. By carrying the
newest styles and regularly updating floor sets, we encourage
our customers to shop our stores frequently. Our store
associates share the rue21 excitement and deliver a memorable,
high energy in-store experience to our customers. Our stores
have become a community destination of choice where customers
can meet and socialize with friends.
Associate
Development
rueCulture emphasizes exceptional people, and we believe that
the passion and commitment of our managers, assistant managers
and sales associates are key to our past and future success. We
are intensely focused on fostering the talents of our employees,
and are committed to providing sales associates and managers
with career advancement opportunities. We endeavor to promote a
large portion of store managers and district managers from
within our company. We emphasize clear communication throughout
the company, and routinely hold store manager conference calls
and store level, district, and regional management meetings to
keep our employees focused, informed and involved. In addition,
we provide continuing education and training through our
Management Advancement Development training program and our
rueniversity assistant manager training program,
which promote building effective management skills and reinforce
the rueCulture.
Our
Products and Brands
We offer a complete assortment of fashion apparel and
accessories for girls and guys, including graphic t-shirts,
denim, dresses, shirts, hoodies, belts, jewelry, handbags,
footwear, intimate apparel and other accessories. We seek to
identify the most current fashion trends in the market and
utilize our product and sourcing teams to quickly introduce
these fashions to our stores. All our brands are sold
exclusively through our own stores. Our apparel and accessory
brands include rue21 (Girls apparel), rue21 etc! (Girls
accessories), tarea by rue21 (Girls intimate apparel), Carbon
(Guys apparel and accessories) and rue Kicks (Girls and Guys
footwear). In addition, we sell our own line of fragrances under
names of rue by rue21, revert eco rue21, CJ Black, sparkle
rue21, Pink Ice by rue21 and MetroBlack rue21. Our strategy is
to price our fashion merchandise lower than most other similar
apparel retailers, with most of our products priced below
$35.00. The prices for each of our products typically range from
$7.99 to $39.99 for our girls and guys apparel, $1.99 to $19.99
for our accessories, $14.99 to $29.99 for our footwear and $9.99
for our fragrances.
The table below indicates our product mix as a percentage of our
net sales derived from our product categories, based on our
internal merchandising system, as of the fiscal year end for
each of the years indicated below:
|
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|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Girls
|
|
|
|
|
|
|
|
|
|
|
|
|
Apparel
|
|
|
56.7
|
%
|
|
|
58.3
|
%
|
|
|
61.6
|
%
|
Accessories
|
|
|
24.3
|
%
|
|
|
23.5
|
%
|
|
|
21.9
|
%
|
Guys Apparel and Accessories
|
|
|
19.0
|
%
|
|
|
18.2
|
%
|
|
|
16.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We believe that we have an opportunity to increase sales in our
guys apparel and accessories category because there are few
value retailers who offer similarly priced fashion apparel for
young men. Currently, we offer more girls apparel and girls
accessories than guys apparel and accessories. Our product mix
may change based on the growth rate of each product category,
although an increase in net sales in one of our product
categories may not necessarily decrease net sales in our other
product categories. Our diversified product assortment allows us
to benefit from increased sales in all categories.
Merchandising
and Sourcing
Our flexible, fast fashion model allows us to quickly identify
and respond to trends and bring the newest, tested concepts and
styles to our stores. We strive to offer a compelling product
selection for our customers by regularly
9
editing our merchandise assortment to reflect key fashion trends
and by shipping daily deliveries of new merchandise to our
stores.
Merchandising
We maintain a separate merchandising team for each of the three
principal categories of our business girls apparel, girls
accessories and guys apparel and accessories. Our merchandise
directors, with the support of our product development and
visual teams, coordinate color and trends across the product
categories to ensure brand consistency. We utilize fashion and
color services, trade shows, vendors, retail shopping and social
networking to identify the merchandise that meets the demands of
our customers. Our merchandising team schedules weekly trend
meetings to review the information gathered and determine the
trends to incorporate into our product offerings. We order our
product assortments after careful review and consideration of
the volumes required by each of our stores. We frequently test
our new products in a limited number of our stores before
broadly distributing to the rest of our stores.
Sourcing
We do not own or operate any manufacturing facilities. We
purchase all of our merchandise from a network of third-party
vendors. Our vendor network currently consists of approximately
370 domestic importers and domestic suppliers. During the last
twelve months, we sourced approximately 69% of our merchandise
from our top thirty vendors, with no single vendor accounting
for more than 8% of our merchandise. We believe our lack of
dependence on any one vendor enhances our flexibility and
minimizes product risk. In addition, we believe our long-term
relationships with many of our vendors enable us to benefit from
quick deliveries as well as very competitive pricing.
A majority of our products are manufactured in China and India
at lead times of less than 90 days. Our vendors are
responsible for importing products. We do not directly import
any of our products. A small portion of our merchandise is
manufactured domestically, with lead times as short as seven
days to eight weeks. This maximizes our speed to market on key
fashion items.
Although we typically transact business on an
order-by-order
basis, all of our vendors are required to sign our vendor
agreement that incorporates a comprehensive vendor compliance
manual. The vendor compliance manual details our packing,
shipping and production requirements, as well as our legal
requirements, professional and ethical standards and payment
terms. Each purchase order also incorporates and references
these requirements, standards and terms. The purchase orders,
vendor agreement and vendor compliance manual all are designed
to ensure that our vendors operate in compliance with all
applicable rules and regulations, including labor, customs and
consumer protection laws. We do not control or audit the vendors
that produce the merchandise we sell. We do reserve the right to
conduct random testing of products and use a third party
resource to conduct such random testing on designated categories
of items to further address our concern for customer safety.
Our national freight consolidator ships to our distribution
facility in Weirton, West Virginia from both the west coast and
east coast.
Marketing
and Advertising
We believe that girls and guys rely heavily on the opinions of
their peers, often expressed through social media, websites and
blogs, to determine whether a retailer is relevant to them. As a
result, we do not depend on conventional advertising, but
instead employ a viral approach to marketing that is designed to
capture the interest of our customers and drive them into our
stores. For example, product knowledge, trend statements and
fashion blogs are posted daily through Facebook, MySpace,
Twitter and YouTube. Our rue21.com website reinforces our brand
image and allows us to reach our customers in a fun and
interactive environment. Website promotions and contests are an
added incentive to motivate teens to share their voice. In
addition, email campaigning is used to send
e-blasts
on a regular basis to customers who have provided their email
addresses to us though our website or in-store collection
processes. The
e-blasts
highlight key trends, new products and promotional events to
drive our customer back to our stores.
10
In addition to using our website and social networking to
promote our brand image, we employ a community-based marketing
approach to building brand awareness and customer loyalty. We
often initiate marketing efforts in concert with the local
shopping center management in advance of opening our stores. At
a store level, we reinforce our brands through in-store signage,
events, and product labeling.
Our coupon programs encourage repeat business from our
customers. We have built an extensive coupon program, which is
strategically planned during select time periods during the year
to maximize sales, traffic and customer loyalty. During an
event, coupons are distributed in stores to our customers to
generate repeat traffic as well as provide us with information
as to customer spending, shopping patterns and habits. Hiring
the right people is a brand building tool in and of itself. We
seek to hire a diverse, energetic, enthusiastic, trendy,
passionate and knowledgeable group of individuals to be a part
of our team. We promote individuality by welcoming diversity,
keeping an open mind, and valuing different points of view.
Distribution
We distribute all of our merchandise from an 189,600 square
foot distribution and office facility located in Weirton, West
Virginia. Substantially all merchandise arrives at our
distribution facility pre-ticketed by our vendors, which allows
for a quick turn around time and reduced internal labor. In
general, the merchandise is received, sorted by stock keeping
unit, or SKU, based upon class, vendor and style, and packed in
to shipments for each store based on a predetermined allocation
plan. The distribution facility then uses an automated sorting
system for separating shipments by store. Merchandise is shipped
to our stores daily via a third-party delivery service to ensure
a steady flow of new products to our stores. We have implemented
the process of upgrading our distribution facility and related
systems. The distribution facility will now be able to support
approximately 1,300 stores.
Management
Information Systems
Our management information systems provide a full range of
business process support and information to our store,
merchandising, financial and real estate business teams. We
believe the combination of our business processes and systems
provide us with improved operational efficiencies, scalability,
increased management control and timely reporting that allow us
to identify and respond to trends in our business. These
applications operate on vendor supported NCR registers, IBM and
Dell servers, and operate on Epicor/CRS software for store point
of sale and loss prevention, Island Pacific software for
merchandising, allocation, inventory and warehouse management,
and Lawson software for accounting and financial reporting.
Using a high-speed, broadband network, we have the ability to
communicate to our stores continuously, change POS promotional
pricing daily and update each stores SKU level inventory
that is updated daily in our inventory management system.
Competition
We believe rue21 is specialized in its ability to operate
successfully in many different types of markets, including small
or middle markets where there is limited direct competition.
Small markets, which we define as communities with populations
of less than 50,000 people, provide us with the ability to
have a prominent location within the community. Typically, no
other junior and young mens specialty apparel retailer
operates in these markets and our principal competitors are
large value retailers. Even in middle markets, which we define
as communities with populations between 50,000 and
200,000 people, we typically face limited direct
competition from other junior and young mens specialty
apparel retailers. Although large value retailers, including
Walmart, Target and Kohls, sell merchandise at comparable
price points, our store format and in-store shopping experience
is distinctive, with an exciting and inviting atmosphere
offering trend-right fashions and our exclusive brands. Large
value retailers may only have a small part of their store and
total product selection dedicated to apparel and accessories.
Department stores, including Dillards and JC Penney, or
other junior retailers may be located in regional malls or
outlet centers in small to middle markets; however we believe
that we have been successful competing in these markets against
all types of competition based on our product assortment,
exclusive brands, ability to respond to changing trends, and our
distinctive combination of fashion and value. Although we feel
we have many competitive strengths, we recognize that we face
some competitive challenges in small to middle
11
markets, including the fact that large value retailers,
department stores and some junior retail stores have
substantially greater name recognition, as well as financial,
marketing, and other resources, and devote greater resources to
the marketing and sale of their products than we do. We believe
that we benefit from the traffic that large value retailers
generate in a shopping center, and often seek to place ourselves
in close proximity to large value retailers.
The junior and young mens specialty apparel landscape is
highly competitive in large markets, which we define as
communities with populations in excess of 200,000 people.
We believe we are able to operate successfully in these markets
given our distinctive combination of fashion and value. In large
markets, we tend to position ourselves adjacent to other value
retailers in strip centers or outlet centers. This provides the
possibility of significant customer traffic and increased
potential for sales, as most junior and young mens
specialty apparel retailers, including Aéropostale,
American Eagle Outfitters, Charlotte Russe, Forever 21, the Gap,
J. Crew, Metropark, Old Navy and Wet Seal, choose to position
themselves in the more dominant regional malls. We recognize
that some of the specialty apparel retailers with whom we
compete also successfully offer a personalized shopping
experience that could appeal to our target customers and that
existing and new competitors may seek to emulate facets of our
business strategy and in-store experience. Further, we may face
new competitors and increased competition from existing
competitors as we expand into new markets and increase our
presence in existing markets. Competitive forces and pressures
may intensify as our presence in the retail marketplace grows.
Intellectual
Property
We have registered numerous trademarks, trade names and logos
with the United States Patent and Trademark Office, including
rue21 and rue21 etc!, Carbon, Carbon Black, the CJ logo design,
rue Kicks and tarea by rue21. We also own trademark
registrations for the names of our fragrances, including rue by
rue21, revert eco rue21, CJ Black rue21, sparkle rue21, Metro
Black rue21 and Pink Ice by rue21. These trademarks are
renewable indefinitely, as long as they are still in use and
their registrations are properly maintained. We believe that the
recognition associated with these trademarks makes them
extremely valuable and, therefore, we intend to use and renew
our trademarks in accordance with our business plans. In
addition we own domain names, including www.rue21.com, for our
primary trademarks and own unregistered copyright rights in our
website content. We also rely on a variety of intellectual
property rights that we license from third parties. We expect to
continually grow our merchandise assortment and strengthen our
brands, and we will continue to file new applications as
appropriate to protect our intellectual property rights.
Regulation
and Legislation
We are subject to labor and employment laws, laws governing
advertising and promotions, privacy laws, safety regulations and
other laws, including consumer protection regulations that
regulate retailers and or govern the promotion and sale of
merchandise and the operation of stores and warehouse
facilities. We monitor changes in these laws and believe that we
are in material compliance with applicable laws.
Insurance
We use a combination of insurance and self-insurance for a
number of risk management activities including workers
compensation, general liability, automobile liability, and
employee-related health care benefits, a portion of which is
paid by the employees. We believe that we have adequately
reserved for our self-insurance liability. We evaluate our
insurance requirements on an ongoing basis to ensure we maintain
adequate levels of coverage.
Employees
As of January 30, 2010, we had 5,765 employees of
which 4,101 were part-time employees. Of this total number,
205 employees were based at our corporate headquarters,
135 employees were employed at our distribution facility,
77 managers were employed in the field, 1,992 managers and
assistant managers and 3,356 sales associates were located in
our stores. None of our employees is represented by a union and
we have had no labor-related work stoppages. Our rueCulture
emphasizes teamwork and the belief that everyone can make a
12
difference. The value we place on our employees is one of the
keys to our success, and as a result we believe our relationship
with our employees is strong.
Seasonality
Our business is seasonal and, historically, we have realized a
higher portion of our net sales, net income and operating cash
flows in the second through fourth fiscal quarters, attributable
to the impact of the summer and holiday selling seasons. As a
result, our working capital requirements fluctuate during the
year, increasing in mid-summer in anticipation of the fourth
fiscal quarter. 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.
Available
Information
Our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and all amendments to those reports and the proxy statement for
our annual meeting of stockholders are made available, free of
charge, on our corporate web site, www.rue21.com, as soon as
reasonably practicable after such reports have been filed with
or furnished to the Securities and Exchange Commission (SEC).
Our Code of Business Conduct and Ethics and Board of Directors
Committee Charters (Audit, Compensation and Governance and
Nominating Committees) are also available on our website. The
Committee Charters and Code of Business Conduct and Ethics can
be found at www.rue21.com, under Investor Relations,
Corporate Governance. Any amendments and waivers to the
code will also be available on the website.
All of these documents are available in print to any stockholder
who requests them via our website or by writing to rue21, inc.,
c/o Vice
President and General Counsel, 800 Commonwealth Dr.,
Suite 100, Warrendale, PA 15086.
The public may also read and copy any materials that we have
filed with the SEC at the SECs Public Reference Room at
100 F Street, NE, Washington, D.C. 20549. In
addition, these materials may be obtained at the web site
maintained by the SEC at www.sec.gov.
The content of our web site (www.rue21.com) is not intended to
be incorporated by reference in this Annual Report on
Form 10-K.
Our
business is highly dependent upon our ability to identify and
respond to new and changing fashion trends, customer preferences
and other related factors.
Fashion trends and customer tastes are volatile and can change
rapidly. Our success depends in large part upon our ability to
effectively identify and respond to changing fashion trends and
consumer demands, and to translate market trends into
appropriate, saleable product offerings in a timely manner. A
small number of our employees, including our divisional
merchandise managers, our Senior Vice President and General
Merchandise Manager and our President and Chief Executive
Officer, are primarily responsible for performing this analysis
and making related product purchase decisions. Failure of these
employees to identify and react appropriately to new and
changing trends or tastes or to accurately forecast demand for
certain product offerings could lead to, among other things,
excess inventories, markdowns and write-offs, which could
materially adversely affect us and our brand image. Because our
success depends significantly on our brand image, damage to our
brand in particular would have a negative impact on us. There
can be no assurance that our new product offerings will be met
with the same level of acceptance as our past product offerings
or that we will be able to adequately and timely respond to the
preferences of our customers. The failure of any new product
offerings could have a material adverse effect on our business
plan, results of operations and financial condition.
13
Our
growth strategy depends upon our ability to successfully open
and operate a significant number of new stores each year in a
timely and cost-effective manner without affecting the success
of our existing store base.
Our net sales have grown appreciably during the past several
years, primarily as a result of the opening of new stores. We
intend to continue to pursue our growth strategy of opening new
stores for the foreseeable future, and our future operating
results will depend largely upon our ability to successfully
open and operate a significant number of new stores each year in
a timely and cost-effective manner, and to profitably manage a
significantly larger business. We believe there is a significant
opportunity to expand our store base from 535 locations as of
January 30, 2010 to more than 1,000 stores within five
years. In fiscal year 2010, we plan to open 100 new stores, and
convert 30 stores.
Our ability to successfully open and operate new stores depends
on many factors including, among others, our ability to:
|
|
|
|
|
identify suitable store locations primarily in strip centers and
regional malls, the availability of which is largely outside of
our control;
|
|
|
|
negotiate acceptable lease terms, desired tenant allowances and
assurances from operators and developers that they can complete
the project, which depend in part on the financial resources of
the operators and developers;
|
|
|
|
obtain or maintain adequate capital resources on acceptable
terms;
|
|
|
|
source sufficient levels of inventory at acceptable costs;
|
|
|
|
hire, train and retain an expanded workforce of store managers
and other personnel;
|
|
|
|
successfully integrate new stores into our existing control
structure and operations, including information system
integration;
|
|
|
|
maintain adequate distribution facility, information system and
other operational system capabilities;
|
|
|
|
identify and satisfy the merchandise and other preferences of
our customers in new geographic areas and markets; and
|
|
|
|
address competitive, merchandising, marketing, distribution and
other challenges encountered in connection with expansion into
new geographic areas and markets.
|
In addition, as the number of our stores increases, we may face
risks associated with market saturation of our product
offerings. To the extent our new store openings are in markets
where we have existing stores, we may experience reduced net
sales in existing stores in those markets. Finally, there can be
no assurance that any newly opened stores will be received as
well as, or achieve net sales or profitability levels comparable
to those of, our existing stores in the time periods estimated
by us, or at all. If our stores fail to achieve, or are unable
to sustain, acceptable net sales and profitability levels, our
business may be materially harmed and we may incur significant
costs associated with closing those stores.
Our failure to effectively address challenges such as these
could adversely affect our ability to successfully open and
operate new stores in a timely and cost-effective manner, and
could have a material adverse effect on our business, results of
operations and financial condition. In addition, our current
expansion plans are only estimates. The actual number of new
stores we open each year and actual number of suitable locations
for our new stores could differ significantly from these
estimates. Any failure to successfully open and operate new
stores in the time frames and at the costs estimated by us could
have a material adverse effect on our business and result in a
decline in the price of our common stock.
Our
growth strategy will require us to expand and improve our
operations and could strain our existing resources and cause the
performance of our existing stores to suffer.
Our operating complexity will increase as our store base grows.
Such increased complexity will require that we continue to
expand and improve our operating capabilities, and grow, train
and manage our employee base. We will
14
need to continually evaluate the adequacy of our information and
distribution systems and controls and procedures related to
financial reporting. Implementing new systems, controls and
procedures and any changes to existing systems, controls and
procedures could present challenges we do not anticipate and
could negatively impact us.
In addition, we may be unable to hire, train and retain a
sufficient number of personnel or successfully manage our
growth; moreover, our planned expansion will place increased
demands on our existing operational, managerial, administrative
and other resources. These increased demands could cause us to
operate our business less effectively, which in turn could cause
deterioration in the financial performance of our individual
stores or our overall business.
Our rapid growth also makes it difficult for us to adequately
predict the expenditures we will need to make in the future.
This growth may also place increased burdens on our vendors, as
we will likely increase the size of our merchandise orders. In
addition, increased orders may negatively impact our approach of
generally striving to minimize the time from purchase order to
product delivery, and may increase our markdown risk. If we do
not make the necessary capital or other expenditures necessary
to accommodate our future growth, we may not be successful in
our growth strategy. We cannot anticipate all of the demands
that our expanding operations will impose on our business,
personnel, systems and controls and procedures, and our failure
to appropriately address such demands could have a material
adverse effect on us.
Our
business depends in part on a strong brand image, and if we are
not able to maintain and enhance our brand, particularly in new
markets where we have limited brand recognition, we may be
unable to attract a sufficient number of customers to our stores
or sell sufficient quantities of our products.
We believe that the brand image we have developed has
contributed significantly to the success of our business. We
also believe that maintaining and enhancing our brand image,
particularly in new markets where we have limited brand
recognition, is important to maintaining and expanding our
customer base. Maintaining and enhancing our brand image may
require us to make substantial investments in areas such as
merchandising, marketing, store operations, community relations,
store promotions and employee training, and these investments
may not be successful. Moreover, we do not utilize some of the
advertising and marketing media used by some of our competitors,
including advertising through the use of newspapers, magazines,
billboards, television and radio. We believe our customers rely
on
word-of-mouth
and social media marketing. As a result, we employ a viral
approach to marketing that is designed to capture the interest
of our customers and drive them into our stores. For example, we
offer promotions and contests through our website, we provide
product knowledge, trend statements and fashion blogs through
Facebook, MySpace, Twitter and YouTube and we send regular
e-blasts
to customers to highlight key trends, new products and
promotional events.
Because we do not rely on traditional advertising channels, such
as newspaper or television advertisements, if our viral
marketing efforts are not successful, there may be no
immediately available alternative marketing channel for us to
build awareness of our products in a manner that we think will
be successful. This may impair our ability to successfully
integrate new stores into the surrounding communities, to expand
into new markets or to maintain the strength or distinctiveness
of our brand image in our existing markets. In addition, if our
viral marketing efforts are unsuccessful or we are otherwise
required to use traditional advertising channels in our overall
marketing strategy, then we will incur additional expenses
associated with the transition to and operation of traditional
advertising channels. Failure to successfully market our
products and brand in new and existing markets could harm our
business, results of operations and financial condition.
As of January 30, 2010, our 535 stores are located in
516 cities in 43 states. A primary component of our
strategy involves expanding into new geographic markets. As we
expand into new geographic markets, we may be unable to develop,
and consumers in these markets may not accept, our brand without
significant additional expenditures or at all. Maintaining and
enhancing our brand image will depend largely on our ability to
offer a differentiated in-store experience to our customers and
to continue to provide high quality products, which we may not
continue to do successfully. In addition, our brand image may
also be adversely affected if our public image or reputation is
tarnished by negative publicity. The strength of our brand image
is also dependent on our ability to successfully market our
brand and product offerings to our customer demographic. To the
extent the store and merchandise preferences of these customers
change, the popularity of our brand may decline and our business
may suffer.
15
Our
inability to maintain or improve levels of comparable store
sales could cause our stock price to decline.
We may not be able to maintain or improve the levels of
comparable store sales that we have experienced in the recent
past. Although we have sustained net sales growth since fiscal
year 2005, our
quarter-to-quarter
comparable store sales have ranged from a decrease of 8.1% to an
increase of 14.2%. We have recently experienced strong
comparable store sales, which we may not be able to sustain. If
our future comparable store sales decline or fail to meet market
expectations, the price of our common stock could decline. In
addition, the aggregate results of operations of our stores have
fluctuated in the past and will fluctuate in the future. A
variety of factors affect comparable store sales, including
fashion trends, competition, current national and regional
economic conditions, pricing, inflation, the timing of the
release of new merchandise and promotional events, changes in
our merchandise mix, inventory shrinkage, the success of our
multi-channel marketing programs, the timing and level of
markdowns and weather conditions. In addition, many retailers
have been unable to sustain high levels of comparable store
sales growth during and after periods of substantial expansion.
These factors may cause our comparable store sales results to be
materially lower than in recent periods and our expectations,
which could harm our business and result in a decline in the
price of our common stock.
Our
business is sensitive to global, national and regional consumer
spending and economic conditions.
Consumer purchases of discretionary retail items and specialty
retail products, including our products, may be affected by
economic conditions such as employment levels, salary and wage
levels, the availability of consumer credit, inflation, high
interest rates, high tax rates, high fuel prices and consumer
confidence in future economic conditions. These consumer
purchases may decline during recessionary periods or at other
times when disposable income is lower. These risks may be
exacerbated for retailers such as us that focus on selling
discretionary fashion merchandise. Consumer sentiment has
recently declined and may decline further due to national and
regional economic conditions, resulting in a general decrease in
discretionary purchases. Our financial performance is
particularly susceptible to economic and other conditions in
regions or states where we have a significant number of stores,
such as Texas or Georgia. Current economic conditions and
further slowdown in the economy could further adversely affect
strip center and regional mall traffic and new strip center and
regional mall development and could materially adversely affect
us and our growth plans.
Our
plans to convert our existing stores and expand our product
offerings may not be successful, and implementation of these
plans may divert our operational, managerial and administrative
resources, which could impact our competitive
position.
In addition to our store growth strategy, we plan to convert
many of our existing stores and grow our business by expanding
some of our existing product categories, including our rue21
etc! girls jewelry and accessories category, our footwear
category and our Carbon guys apparel and accessories category.
These plans involve various risks discussed elsewhere in these
risk factors, including:
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implementation of these plans may be delayed or may not be
successful;
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we may be unable to identify locations for conversion of
existing stores to our larger rue21 etc! layout;
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if our expanded product offerings fail to maintain and enhance
our distinctive brand identity, our brand image may be
diminished and our sales may decrease;
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if we fail to expand our infrastructure, including by securing
desirable store locations at reasonable costs and hiring and
training employees, we may be unable to manage our expansion
successfully; and
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implementation of these plans may divert managements
attention from other aspects of our business and place a strain
on our management, operational and financial resources, as well
as our information systems.
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In addition, our ability to successfully carry out our plans to
expand our product offerings may be affected by, among other
things, inventory shrinkage that can result from an inventory
that consists of smaller and easily concealable items such as
jewelry, economic and competitive conditions, changes in
consumer spending patterns and changes in consumer preferences
and style trends. Our expansion plans could be delayed or
abandoned, could
16
cost more than anticipated or could divert resources from other
areas of our business, any one of which could negatively impact
our competitive position and reduce our revenue and
profitability.
We
could face increased competition from other retailers that could
adversely affect us and our growth strategy.
We face competition in the specialty retail industry. We compete
on the basis of a combination of factors, including among others
things, price, breadth, quality and style of merchandise
offered, in-store experience, level of customer service, ability
to identify and respond to new and emerging fashion trends,
brand image and scalability. We compete with a wide variety of
large and small retailers for customers, vendors, suitable store
locations and personnel. We face competition from major
specialty apparel retailers that offer their own private label
assortment, including Aéropostale, American Eagle
Outfitters, Charlotte Russe, Forever 21, the Gap, J. Crew,
Metropark, Old Navy and Wet Seal, as well as national off-price
apparel chains such as TJX Companies, Burlington Coat Factory,
and Ross Stores. We also face competition from department stores
such as Dillards, and JC Penney, and large value retailers
such as Walmart, Target and Kohls. We also compete against
local off-price and specialty retail stores, regional retail
chains, web-based retail stores and other direct retailers that
engage in the retail sale of junior and young mens
apparel, accessories, footwear and similar merchandise, which
offer a variety of products, including apparel, for the
value-conscious consumer. The competitive landscape we face,
particularly among specialty retailers, is subject to rapid
change which can affect customer preferences.
Many of our competitors have substantially greater name
recognition as well as financial, marketing and other resources
and therefore may be able to adapt to changes in customer
preferences more quickly, devote greater resources to marketing
and sale of their products, generate national brand recognition
or adopt more aggressive pricing policies than we can. Many of
our competitors also utilize advertising and marketing media
which we do not, including advertising through use of
newspapers, magazines, billboards, television and radio, which
may provide them with greater brand recognition than we have.
Our competitors may also sell certain products or substantially
similar products through the Internet or through outlet centers
or discount stores, increasing the competitive pricing pressure
for those products. We cannot assure you that we will continue
to be able to compete successfully against existing or future
competitors. Our expansion into markets served by our
competitors and entry of new competitors or expansion of
existing competitors into our markets could have a material
adverse effect on us. Competitive forces and pressures may
intensify as our presence in the retail marketplace grows.
We do not possess exclusive rights to many of the elements that
comprise our in-store experience and product offerings. Some
specialty retailers offer a personalized shopping experience
that in some ways is similar to the one we strive to provide to
our customers. Our competitors may seek to emulate facets of our
business strategy and in-store experience, which could result in
a reduction of any competitive advantage or special appeal that
we might possess. In addition, some of our product offerings are
sold to us on a nonexclusive basis. As a result, our current and
future competitors may be able to duplicate or improve upon some
or all of our in-store experience or product offerings that we
believe are important in differentiating our stores and our
customers shopping experience, especially those
competitors with significantly greater financial, marketing and
other resources than ours. If our competitors were to duplicate
or improve upon some or all of our in-store experience or
product offerings, our competitive position and our business
could suffer.
We
depend on key personnel and may not be able to retain or replace
these individuals or recruit additional personnel, which could
harm our business.
We believe that we have benefited substantially from the
leadership and experience of our key personnel, including our
President and Chief Executive Officer, Robert N. Fisch, and our
Senior Vice President and General Merchandise Manager, Kim A.
Reynolds. The loss of the services of any of our key personnel
could have a material adverse effect on our business and
prospects, as we may not be able to find suitable individuals to
replace such personnel on a timely basis. In addition, any such
departure could be viewed in a negative light by investors and
analysts, which could cause our common stock price to decline.
None of our employees are subject to non-compete obligations at
the present time. In addition, except for our President and
Chief Executive Officer and employees
17
subject to stock option award agreements, our employees are not
subject to non-solicitation obligations. Moreover, we do not
have employment agreements with any of our employees and we do
not maintain key man or key woman
insurance policies on the lives of these individuals, except for
our President and Chief Executive Officer. As a result, their
employment may be terminated by us or them at any time. We may
consider entering into employment agreements or other long-term
incentive programs with certain members of senior management. As
our business expands, our future success will depend greatly on
our continued ability to attract and retain highly skilled and
qualified personnel. We are also currently in search of
qualified and experienced individuals to fill open senior
management positions. There is a high level of competition for
experienced, successful personnel in the retail industry. Our
inability to meet our staffing requirements in the future could
impair our growth and harm our business.
Our
ability to attract customers to our stores that are located in
strip centers, regional malls and outlet centers depends heavily
on the success of the shopping centers in which our stores are
located, and any decrease in customer traffic in these shopping
centers could cause our net sales to be less than
expected.
Our stores are located in strip centers, regional malls and
outlet centers and our expansion is expected to be predominantly
focused on strip centers and regional malls. Net sales at these
stores are derived, to a significant degree, from the volume of
traffic in those shopping centers and the surrounding area. Our
stores benefit from the ability of shopping centers other
tenants, particularly anchor stores such as Walmart, Target and
Kohls, to generate consumer traffic in the vicinity of our
stores and the continuing popularity of the strip centers,
regional malls and outlet centers as shopping destinations. Our
sales volume and traffic may be adversely affected by, among
other things, economic downturns nationally or regionally, high
fuel prices, increased competition, changes in consumer
demographics, a decrease in popularity of shopping centers or of
stores in the shopping centers in which our stores are located,
the closing of anchor stores important to our business, or a
deterioration in the financial condition of shopping center
operators or developers which could, for example, limit their
ability to finance tenant improvements for us and other
retailers. A reduction in consumer traffic as a result of these
or any other factors, or our inability to obtain or maintain
prominent store locations within shopping centers, could have a
material adverse effect on us. Although we do not have specific
information in respect to the strip centers, regional malls and
outlet centers in which we locate or plan to locate our stores,
we believe strip center, regional mall and outlet center vacancy
rates have been rising and traffic has been decreasing
nationally.
We
plan to use cash from operations to fund our expanding business
and execute on our growth strategy and may require additional
financing, which may not be available to us.
We have grown rapidly, with our net sales increasing from
$192.8 million for fiscal year 2005 to $525.6 million
for fiscal year 2009. During fiscal year 2009, capital
expenditures, net of tenant allowances, were $24.3 million,
of which $9.2 million was related to the 88 new stores we
opened during fiscal year 2009. In addition, we spent
approximately $2.3 million to convert our existing stores
during fiscal year 2009. We plan to continue our growth and
expansion, including opening a significant number of additional
stores, as well as converting existing stores. Our plans to
expand our store base may not be successful and the
implementation of these plans may not result in expected
increases in our net sales even though they increase our costs.
To support our expanding business and execute on our growth
strategy, we will need significant amounts of cash from
operations, including funds to pay our lease obligations, build
out new store space, purchase inventory, pay personnel, further
invest in our infrastructure and facilities, and pay for the
increased costs associated with operating as a public company.
In particular, payments under the operating leases associated
with our stores and our distribution facility account for a
significant portion of our operating expenses.
We primarily depend on cash flow from operations and our senior
secured credit facility to fund our business and growth plans.
If our business does not generate sufficient cash flow from
operations to fund these activities, and sufficient funds are
not otherwise available to us under our senior secured credit
facility, we may need additional equity or debt financing. If
such financing is not available to us on satisfactory terms, our
ability to run and expand our business or to respond to
competitive pressures would be limited and we could be required
to delay, significantly curtail or eliminate planned store
openings or operations or other elements of our growth strategy.
If we raise additional capital by issuing equity securities or
securities convertible into equity securities, your ownership
may be
18
diluted. Our senior secured credit facility and any additional
debt financing we may incur may impose upon us covenants that
restrict our operations, including limitations on our ability to
incur liens or additional debt, pay dividends, redeem our common
stock, make certain investments and engage in certain merger,
consolidation or asset sale transactions. Moreover, any
borrowings under any future debt financing will require interest
payments and need to be repaid or refinanced, and would create
additional cash demands and financial risk for us, which could
be exacerbated by then-existing business or prevailing financial
market conditions.
We
have many important vendor relationships and our ability to
obtain merchandise at competitive prices could suffer as a
result of any deterioration or change in those relationships or
events that adversely affect our vendors or their ability to
obtain financing for their operations.
We have many important vendor relationships that we believe
provide us with a competitive advantage. We do not own or
operate any manufacturing facilities. We instead purchase all of
our merchandise from third-party vendors. Over the last twelve
months, we sourced a majority of our merchandise from our
various merchandise vendors, with no single vendor accounting
for more than 8% of our merchandise. Our financial performance
depends in large part on our ability to purchase desired
merchandise in sufficient quantities at competitive prices from
these and other vendors. In some cases, we obtain exclusive use
of select products from our vendors for a period of time.
Moreover, from time to time, some of our vendors, with their
prior consent, allow us to return certain merchandise purchased
from them. In addition, we are typically able to return
merchandise that does not meet our preset specifications.
However, we generally have no long-term purchase contracts or
other contractual assurances of continued supply, pricing or
access to new products. Any of our vendors could discontinue
supplying us with desired products in sufficient quantities for
a variety of reasons. The benefits we currently experience from
our vendor relationships could be adversely affected if our
vendors:
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choose to discontinue selling non-exclusive or exclusive
products to us;
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refuse to allow us to return merchandise purchased from them;
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raise the prices they charge us;
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sell similar or identical products to certain of our
competitors, many of whom purchase products in significantly
greater volume and, in some cases, at lower prices than we do;
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enter into arrangements with competitors that could impair our
ability to sell their products, including by giving our
competitors exclusive licensing arrangements or exclusive access
to styles, brands and products or limiting our access to such
arrangements or styles, brands or products;
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initiate or expand sales of their products through their own
stores or through the Internet to the retail market and
therefore compete with us directly; or
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sell their products through outlet centers or discount stores,
increasing the competitive pricing pressure we face.
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Some of our vendors are small and specialized with limited
resources, production capacities and operating histories. Events
that adversely affect our vendors could impair our ability to
obtain desired merchandise in sufficient quantities. Such events
include difficulties or problems associated with our
vendors business, finances, labor, importation of
products, costs, production, insurance and reputation. For
example, some of our vendors are extended credit by units of the
CIT Group, or CIT, and if CIT ceases to do business or
materially decreases its level of credit to our vendors, we may
be required to pay for merchandise from our vendors earlier than
our historical practice.
There can be no assurance that we will be able to acquire
desired merchandise in sufficient quantities on acceptable terms
or at all in the future, especially if we need significantly
greater amounts of inventory in connection with the growth of
our business. Any inability to acquire suitable merchandise in
sufficient quantities and at acceptable prices, in particular
exclusive merchandise, due to the loss of or a deterioration or
change in our relationship with one or more key vendors, or
events harmful to our vendors, may materially adversely affect
us.
19
We are
subject to risks associated with leasing substantial amounts of
space, including future increases in occupancy
costs.
We do not own any real estate. Instead, we lease all of our
store locations, our corporate headquarters in Warrendale,
Pennsylvania and our distribution facility in Weirton, West
Virginia. We lease our distribution facility from the State of
West Virginia under a lease that expires in 2011, with two
five-year renewal options.
Although some of our leases are for ten-year periods, we
typically occupy our stores under operating leases with terms of
five years, with additional five-year renewal options. We have
been able to negotiate favorable rental rates over the last year
due in part to the state of the economy and high vacancy rates
within some shopping centers; however, there is no guarantee
that we will be able to continue to negotiate such favorable
terms, and this can cause our occupancy rates to be higher in
future years or may force us to close stores in desirable
locations. Some of our leases have early cancellation clauses,
which permit the lease to be terminated by us or the landlord if
certain sales levels are not met in specific periods or if the
strip center does not meet specified occupancy standards. In
addition to future minimum lease payments, some of our store
leases provide for additional rental payments based on a
percentage of net sales, or percentage rent, if
sales at the respective stores exceed specified levels, as well
as the payment of common area maintenance charges, real property
insurance and real estate taxes. Many of our lease agreements
have defined escalating rent provisions over the initial term
and any extensions. As we expand our store base, our lease
expense and our cash outlays for rent under the lease agreements
will increase. Our substantial operating lease obligations could
have significant negative consequences, including:
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requiring that a substantial portion of our available cash be
applied to pay our rental obligations, thus reducing cash
available for other purposes;
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increasing our vulnerability to general adverse economic and
industry conditions;
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limiting our flexibility in planning for or reacting to changes
in our business or in the industry in which we compete; and
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limiting our ability to obtain additional financing.
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Any of these consequences could place us at a disadvantage with
respect to our competitors. We depend on cash flow from
operations to pay our lease expenses and to fulfill our other
cash needs. If our business does not generate sufficient cash
flow from operating activities to fund these expenses and needs,
we may not be able to service our lease expenses, grow our
business, respond to competitive challenges or to fund our other
liquidity and capital needs, which would harm our business.
Additional sites that we lease may be subject to long-term
non-cancelable leases if we are unable to negotiate our current
standard lease terms. If an existing or future store is not
profitable, and we decide to close it, we may nonetheless be
committed to perform our obligations under the applicable lease
including, among other things, paying the base rent for the
balance of the lease term. Moreover, even if a lease has an
early cancellation clause, we may not satisfy the contractual
requirements for early cancellation under that lease. Our
inability to enter into new leases or renew existing leases on
terms acceptable to us or be released from our obligations under
leases for stores that we close would materially adversely
affect us.
Our
failure to find store employees that reflect our brand image and
embody our culture, especially in light of our growth strategy,
could adversely affect our business.
Our success depends in part upon our ability to attract,
motivate and retain a sufficient number of store employees,
including store managers, who understand and appreciate our
corporate culture and customers, and are able to adequately and
effectively represent our culture and establish credibility with
our customers. The store employee turnover rate in the retail
industry is generally high. If we are unable to hire and retain
store personnel capable of consistently providing a high level
of customer service, as demonstrated by their enthusiasm for our
culture, understanding of our customers and knowledge of the
merchandise we offer, our ability to open new stores may be
impaired, the performance of our existing and new stores could
be materially adversely affected and our brand image may be
negatively impacted. We are also dependent upon temporary
personnel to adequately staff our stores and distribution
facility, with heightened dependence during busy periods such as
the Easter and spring break
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season,
back-to-school
season and the winter holiday season and when multiple new
stores are opening. There can be no assurance that we will
receive adequate assistance from our temporary personnel, or
that there will be sufficient sources of suitable temporary
personnel to meet our demand. Any such failure to meet our
staffing needs or any material increases in employee turnover
rates could have a material adverse effect on our business or
results of operations.
Our
net sales and inventory levels fluctuate on a seasonal basis or
due to store events or promotions, leaving our operating results
particularly susceptible to changes in seasonal shopping
patterns and related risks.
Our net sales are typically disproportionately higher in the
second through the fourth fiscal quarters due to increased net
sales during the summer and winter holiday seasons. Net sales
during these periods cannot be used as an accurate indicator of
annual results. Likewise, as is the case with many retailers of
apparel, accessories and gifts, we typically experience lower
net sales in the first fiscal quarter relative to other
quarters. Any significant decrease in net sales during the
summer or winter holiday seasons would have a material adverse
effect on us. In addition, in order to prepare for these
seasons, we must order and keep in stock significantly more
merchandise than we carry during other parts of the year. This
inventory
build-up may
require us to expend cash faster than is generated by our
operations during this period. Any unanticipated decrease in
demand for our products during these peak shopping seasons could
require us to sell excess inventory at a substantial markdown,
which could have a material adverse effect on our business,
profitability, ability to repay any indebtedness and our brand
image. In addition, we may experience variability in net sales
as a result of a variety of other factors, including the timing
of new store openings, store events, promotions or other
marketing activities, which may cause our results of operations
to fluctuate on a quarterly basis and relative to corresponding
periods in prior years.
We
only have one distribution facility and have not yet implemented
disaster recovery procedures, and if we encounter difficulties
associated with our distribution facility or if it were to shut
down for any reason, we could face shortages of inventory that
would have a material adverse affect on our business operations
and harm our reputation.
Our only distribution facility is located in Weirton, West
Virginia. Our distribution facility supports our entire
business. All of our merchandise is shipped to the distribution
facility from our vendors, and then packaged and shipped from
our distribution facility to our stores. The success of our
stores depends on their timely receipt of merchandise. The
efficient flow of our merchandise requires that we have adequate
capacity in our distribution facility to support our current
level of operations, and the anticipated increased levels that
may follow from our growth plans. If we encounter difficulties
associated with our distribution facility or if it were to shut
down for any reason, including by fire, natural disaster, or a
prolonged shutdown, we could face shortages of inventory,
resulting in
out-of-stock
conditions in our stores, and incur significantly higher costs
and longer lead times associated with distributing merchandise
to our stores. This could have a material adverse effect on our
business and harm our reputation. We are in the process of
developing disaster recovery and business continuity plans that
would allow us to be fully operational regardless of casualties
or unforeseen events that may affect our corporate headquarters
or distribution center. Without proper disaster recovery and
business continuity plans, if we encounter difficulties with our
distribution facility or other problems or disasters arise, we
cannot ensure that critical systems and operations will be
restored in a timely manner or at all and this would have a
material adverse effect on our business.
We have implemented an upgrade of our distribution facility
during fiscal year 2009, which we believe will support our
growth to approximately 1,300 stores with little additional
capital investment. We may need to further increase the capacity
of this facility to support our growth, which may require us to
secure additional favorable real estate or may require us to
obtain additional financing. Appropriate locations or financing
for the purchase or lease of such additional real estate may not
be available at reasonable costs or at all. Our failure to
provide adequate order fulfillment and secure additional
distribution capacity when necessary could impede our growth
plans, and the further increase of this capacity would increase
our costs.
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We
rely upon independent third-party transportation providers for
substantially all of our product shipments.
We currently rely upon independent third-party transportation
providers for substantially all of our product shipments,
including shipments to all of our stores. Our utilization of
their delivery services for shipments, or those of any other
shipping companies we may elect to use, is subject to risks,
including increases in fuel prices, which would increase our
shipping costs, and employee strikes and inclement weather,
which may impact the shipping companys abilities to
provide delivery services that adequately meet our shipping
needs. If we change shipping companies, we could face logistical
difficulties that could adversely affect deliveries and we would
incur costs and expend resources in connection with such change.
Moreover, we may not be able to obtain terms as favorable as
those received from the independent third-party transportation
providers we currently use, which in turn would increase our
costs. We also face shipping and distribution risks and
uncertainties associated with the upgrade of our distribution
facility and related systems.
Our
ability to source our merchandise profitably or at all could be
hurt if new trade restrictions are imposed or existing trade
restrictions become more burdensome.
Trade restrictions, including increased tariffs, safeguards or
quotas, on apparel and accessories could increase the cost or
reduce the supply of merchandise available to us. Under the
World Trade Organization, or WTO, Agreement, effective
January 1, 2005, the United States and other WTO member
countries removed quotas on goods from WTO members, which in
certain instances affords us greater flexibility in importing
textile and apparel products from WTO countries from which we
source our merchandise. However, as the removal of quotas
resulted in an import surge from China, the United States in May
2005 imposed safeguard quotas on seven categories of goods and
apparel imported from China. Effective January 1, 2006, the
United States imposed quotas on approximately twelve categories
of goods and apparel from China, and may impose additional
quotas in the future. These and other trade restrictions could
have a significant impact on our sourcing patterns in the
future. The extent of this impact, if any, and the possible
effect on our purchasing patterns and costs, cannot be
determined at this time. We cannot predict whether any of the
countries in which our merchandise is currently manufactured or
may be manufactured in the future will be subject to additional
trade restrictions imposed by the United States and foreign
governments, nor can we predict the likelihood, type or effect
of any such restrictions. Trade restrictions, including
increased tariffs or quotas, embargoes, safeguards and customs
restrictions against apparel items, as well as United States or
foreign labor strikes, work stoppages or boycotts, could
increase the cost or reduce the supply of apparel available to
us or may require us to modify our current business practices,
any of which could hurt our profitability.
We
rely significantly on information systems and any failure,
inadequacy, interruption or security failure of those systems
could harm our ability to effectively operate our
business.
Our ability to effectively manage and maintain our inventory,
and to ship products to our stores and our customers on a timely
basis, depends significantly on our information systems,
including our Island Pacific Inc., or Island Pacific, enterprise
resource planning system and Epicor Software Corporation, or
Epicor, including its Customer Relationship Management and store
point-of-sale,
or POS, system. We believe that utilizing this suite of products
has allowed us to avoid the expense associated with internally
developing and managing our own hardware and software systems.
See Business Management Information
Systems. To manage the growth of our operations, personnel
and real estate portfolio, we will need to continue to improve
and expand our operational and financial systems, real estate
management systems, transaction processing and internal controls
and business processes; in doing so, we could encounter
transitional issues and incur substantial additional expenses.
If we are unable to maintain our current relationships with
Island Pacific or Epicor, there is no assurance that we will be
able to locate replacements on a timely basis or on acceptable
terms. The failure of our information systems to operate
effectively, problems with transitioning to upgraded or
replacement systems or expanding them into new stores, or a
breach in security of these systems, could adversely impact the
promptness and accuracy of our merchandise distribution,
transaction processing, financial accounting and reporting, the
efficiency of our operations and our ability to properly
forecast earnings and cash requirements. We could be required to
make significant additional
22
expenditures to remediate any such failure, problem or breach.
Such events may have a material adverse effect on us.
In addition, we may now and in the future implement new systems
to increase efficiencies and profitability. To manage growth of
our operations and personnel, we will need to continue to
improve and expand our operational and financial systems,
transaction processing, and internal controls and business
processes. In doing any implementation or change to existing
processes, we may encounter transitional issues and incur
substantial additional expenses.
System
security risk issues could disrupt our internal operations or
information technology services, and any such disruption could
harm our net sales, increase our expenses, and harm our
reputation and stock price.
Experienced computer programmers and hackers, or even internal
users, may be able to penetrate our network security or that of
Island Pacific or Epicor and misappropriate our confidential
information or that of third parties, create system disruptions
or cause shutdowns. As a result, we could incur significant
expenses addressing problems created by security breaches of our
network. This risk is heightened because we collect and store
customer information for marketing purposes. Any compromise of
customer information could subject us to customer or government
litigation and harm our reputation, which could adversely affect
our business and growth. Moreover, we could incur significant
expenses or disruptions of our operations in connection with
system failures or breaches. In addition, sophisticated hardware
and operating system software and applications that we procure
from third parties, including that of Island Pacific or Epicor,
may contain defects in design or manufacture, including
bugs and other problems that could unexpectedly
interfere with the operation of the systems. The costs to us to
eliminate or alleviate security problems, viruses and bugs, or
any problems associated with the outsourced services provided by
Island Pacific or Epicor, could be significant, and such efforts
to address these problems could result in interruptions, delays
or cessation of service that may impede our sales, distribution
or other critical functions.
We may
suffer risks if our vendors fail to follow our vendor
guidelines, including the risk we could acquire merchandise
without full rights to sell it and the risks that a vendor or a
manufacturer may fail to use acceptable labor practices, comply
with other applicable laws or face interruption with its
operations.
We sometimes purchase merchandise from vendors who hold
manufacturing and distribution rights under the terms of certain
licenses or who themselves own intellectual property rights to
the merchandise. In addition, we purchase merchandise that may
be subject to design copyrights, design patents, or otherwise
may incorporate protected intellectual property. We are not
involved in the manufacture of any of the merchandise we
purchase from our vendors for sale to our customers, and we do
not independently investigate whether these vendors legally hold
intellectual property rights to merchandise that they are
manufacturing or distributing. As a result, we rely upon
vendors representations set forth in our purchase orders
and vendor agreements concerning their right to sell us the
products that we purchase from them. If a third party claims to
have licensing rights with respect to merchandise we purchased
from a vendor, or we acquire unlicensed merchandise, we could be
obligated to remove such merchandise from our stores, incur
costs associated with destruction of such merchandise if the
distributor or vendor is unwilling or unable to reimburse us,
and be subject to liability under various civil and criminal
causes of action, including actions to recover unpaid royalties
and other damages and injunctions. Although our purchase orders
and vendor agreement with each vendor require the vendor to
indemnify us against such claims, a vendor may not have the
financial resources to defend itself or us against such claims,
in which case, we may have to pay the costs and expenses
associated with defending such claim. Any of these results could
harm our brand image and have a material adverse effect on our
business and growth.
Many of the products sold in our stores are manufactured outside
of the United States, which may increase the risk that the
labor, manufacturing safety and other practices followed by the
manufacturers of these products may differ from those generally
accepted in the United States. Although we require each of our
vendors to sign a purchase order and vendor agreement that
requires adherence to accepted labor practices and compliance
with labor, manufacturing safety and other laws, we do not
supervise, control or audit our vendors or the manufacturers
that produce the merchandise we sell to our customers, and we
have no direct relationship and very limited contact
23
with any of the manufacturers. We do reserve the right to
conduct random testing of products and we use a third-party
resource to conduct such random testing on designated categories
of items to further address our concern for customer safety.
However, some of our vendors are small and may not have adequate
procedures in place to assure compliance with applicable labor,
manufacturing safety and other laws. The violation of such
labor, manufacturing safety or other laws by any of our vendors
or these manufacturers, or the divergence of the labor practices
followed by any of our vendors or these manufacturers from those
generally accepted in the United States, could interrupt, or
otherwise disrupt, the shipment of finished products to us or
damage our brand image
and/or
subject us to boycotts by our customers or activist groups.
In fiscal year 2009, substantially all of our merchandise was
sourced from foreign factories, many of which were located in
China and India. Any event causing a sudden disruption of
manufacturing or imports from Asia, Central America or
elsewhere, including the imposition of additional import
restrictions, could materially harm our operations. We have no
long-term merchandise supply contracts, and many of our imports
are subject to existing or potential duties, tariffs or quotas
that may limit the quantity of certain types of goods that may
be imported into the United States from countries in Asia,
Central America or elsewhere. We compete with other companies
for production facilities and import quota capacity.
Our vendors sourcing operations may also be hurt by
political and financial instability, strikes, health concerns
regarding infectious diseases in countries in which our
merchandise is produced, adverse weather conditions or natural
disasters that may occur in Asia, Central America or elsewhere
or acts of war or terrorism in the United States or worldwide,
to the extent these acts affect the production, shipment or
receipt of merchandise. Our future operations and performance
will be subject to these factors, which are beyond our control,
and these factors could materially hurt our business, financial
condition and results of operations or may require us to modify
our current business practices or incur increased costs.
There
are claims made against us from time to time that can result in
litigation or regulatory proceedings which could distract
management from our business activities and result in
significant liability or damage to our brand
image.
As a growing company with expanding operations, we increasingly
face the risk of litigation and other claims against us.
Litigation and other claims may arise in the ordinary course of
our business and include employee claims, commercial disputes,
intellectual property issues, product-oriented allegations and
slip and fall claims. Often these cases raise complex factual
and legal issues, which are subject to risks and uncertainties
and which could require significant management time. Litigation
and other claims against us could result in unexpected expenses
and liability, as well as materially adversely affect our
operations and our reputation.
We may
be subject to liability if we infringe upon the trademarks or
other intellectual property rights of third
parties.
We may be subject to liability if we infringe upon the
trademarks or other intellectual property rights of third
parties. If we were to be found liable for any such
infringement, we could be required to pay substantial damages
and could be subject to injunctions preventing further
infringement. Such infringement claims could subject us to
boycotts by our customers or otherwise harm our brand image. In
addition, any payments we are required to make and any
injunctions we are required to comply with as a result of such
infringement actions could adversely affect our financial
results.
Changes
in laws, including employment laws and laws related to our
merchandise, could make conducting our business more expensive
or otherwise change the way we do business.
We are subject to numerous regulations, including labor and
employment, customs,
truth-in-advertising,
consumer protection and zoning and occupancy laws and ordinances
that regulate retailers generally
and/or
govern the importation, promotion and sale of merchandise and
the operation of stores and warehouse facilities. If these
regulations were to change or were violated by our management,
employees, vendors, buying agents or trading companies, the
costs of certain goods could increase, or we could experience
delays in shipments of our goods, be
24
subject to fines or penalties, or suffer reputational harm,
which could reduce demand for our merchandise and hurt our
business and results of operations.
In addition to increased regulatory compliance requirements,
changes in laws could make ordinary conduct of our business more
expensive or require us to change the way we do business. For
example, changes in federal and state minimum wage laws could
raise the wage requirements for certain of our employees, which
would likely cause us to reexamine our entire wage structure for
stores. Other laws related to employee benefits and treatment of
employees, including laws related to limitations on employee
hours, supervisory status, leaves of absence, mandated health
benefits or overtime pay, could also negatively impact us, such
as by increasing compensation and benefits costs for overtime
and medical expenses. Moreover, changes in product safety or
other consumer protection laws could lead to increased costs to
us for certain merchandise, or additional labor costs associated
with readying merchandise for sale. For example, in August 2008,
the Consumer Product Safety Improvement Act of 2008, or CPSIA,
was signed into law. The CPSIA imposes new requirements for the
textile and apparel industries. These new requirements relate to
all products marketed to children 12 years of age and
under. Among other requirements, the Consumer Product Safety
Commission requires certification and testing of certain
regulated substances. We have engaged an accredited third party
testing service to ensure our vendors compliance with
consumer safety laws and to meet further product safety goals.
It is often difficult for us to plan and prepare for potential
changes to applicable laws and future actions or payments
related to such changes could be material to us.
We may
incur indebtedness in the future and that indebtedness could
adversely affect our financial health and harm our ability to
react to changes to our business. Any future indebtedness may
contain covenants that limit our business
activities.
We may incur indebtedness in the future. Any increase in the
amount of our indebtedness could require us to divert funds
identified for other purposes for debt service and impair our
liquidity position. If we cannot generate sufficient cash flow
from operations to service our debt, we may need to refinance
our debt, dispose of assets or issue equity to obtain necessary
funds. We do not know whether we will be able to take any of
such actions on a timely basis, on terms satisfactory to us or
at all.
Our level of indebtedness has important consequences to you and
your investment in our common stock. For example, our level of
indebtedness may:
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require us to use a substantial portion of our cash flow from
operations to pay interest and principal on our debt, which
would reduce the funds available to us for working capital,
capital expenditures and other general corporate purposes;
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limit our ability to pay future dividends;
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limit our ability to obtain additional financing for working
capital, capital expenditures, expansion plans and other
investments, which may limit our ability to implement our
business strategy;
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result in higher interest expense if interest rates increase on
any floating rate borrowings;
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heighten our vulnerability to downturns in our business, the
industry or in the general economy and limit our flexibility in
planning for or reacting to changes in our business and the
retail industry; or
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prevent us from taking advantage of business opportunities as
they arise or successfully carrying out our plans to expand our
store base and product offerings.
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We cannot assure you that our business will generate sufficient
cash flow from operations or that future borrowings will be
available to us in amounts sufficient to enable us to make
payments on our indebtedness or to fund our operations.
Any indebtedness we incur may contain covenants that restrict
our ability to incur additional debt, pay dividends, make
acquisitions or investments or do certain other things that may
impact the value of our common stock.
25
The
terms of our senior secured credit facility may restrict our
current and future operations, which would adversely affect our
ability to respond to changes in our business and to manage our
operations.
Our senior secured credit facility contains, and any future
indebtedness of ours would likely contain, a number of
restrictive covenants that impose significant operating and
financial restrictions on us, including restrictions on our
ability to, among other things:
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place liens on our or our direct or indirect subsidiaries
assets;
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make investments other than permitted investments;
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incur additional indebtedness, subject to certain exceptions;
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prepay or redeem certain indebtedness;
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merge, consolidate and dissolve;
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sell assets;
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engage in transactions with affiliates;
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change the nature of our business;
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change our or our direct or indirect subsidiaries fiscal
year or organizational documents; and
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make restricted payments, including certain equity issuances and
payment of dividends in a form other than in common stock.
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A failure by us to comply with the covenants or financial ratios
contained in our senior secured credit facility could result in
an event of default under our credit facility, which could
adversely affect our ability to respond to changes in our
business and manage our operations. A change in control of our
company is also an event of default under our senior secured
credit facility. Under our senior secured credit facility, a
change in control of our company will occur if, among other
things, any person or entity other than the funds advised by
Apax Partners or us or our subsidiaries acquires, directly or
indirectly, more than 35% of the outstanding equity interests of
us or a greater percentage of the equity interest than is
beneficially owned by the funds advised by Apax Partners. Upon
the occurrence of an event of default under our senior secured
credit facility, the lenders could elect to declare all amounts
outstanding to be due and payable, require us to apply all of
our available cash to repay these amounts and exercise other
remedies as set forth in the senior secured credit facility. If
the indebtedness under our senior secured credit facility were
to be accelerated, there can be no assurance that our assets
would be sufficient to repay this indebtedness in full.
We may
be unable to protect our trademarks or other intellectual
property rights.
We are not aware of any claims of infringement upon or
challenges to our right to use any of our brand names or
trademarks in the United States. Nevertheless, there can be no
assurance that the actions we have taken to establish and
protect our trademarks will be adequate to prevent imitation of
our products by others or to prevent others from seeking to
block sales of our products as a violation of the trademarks or
proprietary rights of others. Also, others may assert rights in,
or ownership of, our trademarks and other proprietary rights or
claim that we are infringing on their proprietary rights, and we
may not be able to successfully resolve these types of conflicts
to our satisfaction. In addition, we do not register our marks
internationally, and the laws of certain foreign countries may
not protect proprietary rights to the same extent as do the laws
of the United States.
Because we have not registered our trademarks in any foreign
countries, international protection of our brand image and the
use of these marks could be limited. Other entities may have
rights to trademarks that contain portions of our marks or may
have registered similar or competing marks for apparel and
accessories in foreign countries in which our vendors source our
merchandise. There may also be other prior registrations in
other foreign countries of which we are not aware. Accordingly,
it may be possible for others to enjoin the manufacture, sale or
exportation of our branded goods to the United States. If we
were unable to reach a licensing arrangement with these parties,
our vendors may be unable to manufacture our products in those
countries. Our inability to register our trademarks or purchase
or license the right to use our trademarks or logos in these
jurisdictions could limit our ability to obtain
26
supplies from less costly markets or penetrate new markets
should our business plan change to include selling our
merchandise in those jurisdictions outside the United States.
We may
be subject to unionization, work stoppages, slowdowns or
increased labor costs, especially if the Employee Free Choice
Act is adopted.
Currently, none of our employees is represented by a union.
However, our employees have the right at any time under the
National Labor Relations Act to form or affiliate with a union.
If some or all of our workforce were to become unionized and the
terms of the collective bargaining agreement were significantly
different from our current compensation arrangements, it could
increase our costs and adversely impact our profitability. The
Employee Free Choice Act of 2007: H.R. 800, or EFCA, was passed
in the United States House of Representatives last year and the
same legislation has been introduced again in 2009 as H.R. 1409
and S. 560. President Obama and leaders of Congress have made
public statements in support of this bill. Accordingly, this
bill or a variation of it could be enacted in the future and the
enactment of this bill could have an adverse impact on our
business, by making it easier for workers to obtain union
representation and increasing the penalties employers may incur
if they engage in labor practices in violation of the National
Labor Relations Act.
Maintaining
and improving our financial controls and the requirements of
being a public company may strain our resources, divert
managements attention and affect our ability to attract
and retain qualified board members.
As a public company, we are subject to the reporting
requirements of the Securities Exchange Act of 1934, or the
Exchange Act, the Sarbanes-Oxley Act of 2002, or the
Sarbanes-Oxley Act, and The NASDAQ Stock Market rules. The
requirements of these rules and regulations will significantly
increase our legal and financial compliance costs, including
costs associated with the hiring of additional personnel, make
some activities more difficult, time-consuming or costly, and
may also place undue strain on our personnel, systems and
resources. The Exchange Act requires, among other things, that
we file annual, quarterly and current reports with respect to
our business and financial condition.
The Sarbanes-Oxley Act will require, among other things, that we
maintain effective disclosure controls and procedures and
internal control over financial reporting. Ensuring that we have
adequate internal financial and accounting controls and
procedures in place is a costly and time-consuming effort that
needs to be re-evaluated frequently. We are in the initial stage
of documenting our internal control procedures and have not
begun testing these procedures in order to comply with the
requirements of Section 404 of the Sarbanes-Oxley Act, or
Section 404. Section 404, which requires annual
management assessments of the effectiveness of our internal
control over financial reporting and a report by our independent
registered public accounting firm auditing our effectiveness of
internal control over financial reporting beginning with fiscal
year 2010. Both we and our independent registered public
accounting firm will be testing our internal controls in
connection with the Section 404 requirements and could, as
part of that documentation and testing, identify material
weaknesses, significant deficiencies or other areas for further
attention or improvement. Implementing any appropriate changes
to our internal controls may require specific compliance
training for our directors, officers and employees, require the
hiring of additional finance, accounting and other personnel,
entail substantial costs to modify our existing accounting
systems, and take a significant period of time to complete. Such
changes may not, however, be effective in maintaining the
adequacy of our internal controls, and any failure to maintain
that adequacy, or consequent inability to produce accurate
financial statements on a timely basis, could increase our
operating costs and could materially impair our ability to
operate our business. Moreover, effective internal controls are
necessary for us to produce reliable financial reports and are
important to help prevent fraud. As a result, our failure to
satisfy the requirements of Section 404 on a timely basis
could result in the loss of investor confidence in the
reliability of our financial statements, which in turn could
cause the market value of our common stock to decline.
We expect that various rules and regulations applicable to
public companies will make it more difficult and more expensive
for us to maintain directors and officers liability
insurance, and we may be required to accept reduced coverage or
incur substantially higher costs to maintain coverage. If we are
unable to maintain adequate directors and officers
insurance, our ability to recruit and retain qualified officers
and directors, especially those
27
directors who may be deemed independent for purposes of The
NASDAQ Stock Market rules, will be significantly curtailed.
Concentration
of ownership among our existing executive officers, directors
and principal stockholders may prevent new investors from
influencing significant corporate decisions.
Our executive officers, directors and principal stockholders
own, in the aggregate, approximately 38.0% of our outstanding
common stock and will own options that will enable them to own,
in the aggregate, approximately 39.5% of our outstanding common
stock. As a result, these stockholders will be able to exercise
significant influence over all matters requiring stockholder
approval, including the election of directors and approval of
significant corporate transactions and will have significant
influence over our management and policies. Two of the six
members of our board of directors are principals of Apax
Partners. Funds advised by Apax Partners can take actions that
have the effect of delaying a change in control of us or
discouraging others from making tender offers for our shares,
which could prevent stockholders from receiving a premium for
their shares. These actions may be taken even if other
stockholders oppose them. The concentration of voting power
among funds advised by Apax Partners may have an adverse effect
on the price of our common stock. The interests of these
stockholders may not be consistent with your interests as a
stockholder.
In addition, our amended and restated certificate of
incorporation will provide that the provisions of
Section 203 of the Delaware General Corporation Law, or the
DGCL, that relate to business combinations with interested
stockholders will apply to us. Section 203 of the DGCL
prohibits a publicly held Delaware corporation from engaging in
a business combination transaction with an interested
stockholder for a period of three years after the interested
stockholder became such unless the transaction fits within an
applicable exemption, such as board approval of the business
combination or the transaction which resulted in such
stockholder becoming an interested stockholder. The provisions
of Section 203 of the DGCL may delay, prevent or deter a
merger, acquisition, tender offer or other transaction that
might otherwise result in our stockholders receiving a premium
over the market price for their common stock.
Our amended and restated certificate of incorporation provides
that the doctrine of corporate opportunity does not apply to
Apax Partners, funds advised by Apax Partners, or any of our
directors who are employees of or affiliated with Apax Partners,
acting on Apax Partners behalf, or funds advised by Apax
Partners, in a manner that would prohibit them from investing or
participating in competing businesses. To the extent they invest
in such other businesses, Apax Partners or funds advised by Apax
Partners may have differing interests than our other
stockholders.
We
were a controlled company within the meaning of The NASDAQ Stock
Market rules, and, as a result, relied upon exemptions from
certain corporate governance requirements that provide
protection to stockholders of other companies.
Prior to the completion of a secondary offering of our common
stock on February 26, 2010, funds advised by Apax Partners
owned more than 50% of the total voting power of our common
stock and, as such, we were a controlled company under The
NASDAQ Stock Market corporate governance listing standards. We
ceased to be a controlled company on February 26, 2010 and
have one year to comply with the NASDAQ Stock Market rules. As a
controlled company, certain exemptions under The NASDAQ Stock
Market listing standards exempted us from the obligation to
comply with certain of the NASDAQ Stock Market corporate
governance requirements, including the requirements:
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that a majority of our board of directors consist of independent
directors, as defined under the rules of The NASDAQ Stock Market;
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that we have a corporate governance and nominating committee
that is composed entirely of independent directors with a
written charter addressing the committees purpose and
responsibilities; and
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that we have a compensation committee that is composed entirely
of independent directors with a written charter addressing the
committees purpose and responsibilities.
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Accordingly, until we are required to comply with the corporate
governance listing standards of the NASDAQ Stock Market, holders
of our common stock will not have the same protections afforded
to stockholders of companies that are subject to all of The
NASDAQ Stock Market corporate governance requirements.
Our
stock price may be volatile or may decline regardless of our
operating performance or other factors.
Shares of our common stock were sold in our initial public
offering in November 2009 at a price of $19.00 per share, and
our common stock has subsequently traded as high as $32.82
during the period from our initial public offering to
January 30, 2010. There has been a public market for our
common stock for only a short period of time. An active, liquid
and orderly market for our common stock may not be sustained,
which could depress the trading price of our common stock. An
inactive market may also impair our ability to raise capital to
continue to fund operations by selling shares and may impair our
ability to acquire other companies by using our shares as
consideration. In addition, the market price of our common stock
may fluctuate significantly in response to a number of factors,
most of which we cannot control, including:
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fashion trends and changes in consumer preferences;
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market conditions or trends in our industry or the economy as a
whole and, in particular, in the retail sales environment;
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the timing of new store openings and the relative proportion of
our new stores to existing stores;
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the performance and successful integration of any new stores
that we open;
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changes in our merchandise mix;
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timing of promotional events;
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changes in key personnel;
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entry into new markets;
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our levels of comparable store sales;
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announcements by us or our competitors of new product offerings
or significant acquisitions;
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actions by competitors or other strip center, regional mall and
outlet center tenants;
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weather conditions, particularly during the holiday shopping
period;
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the level of pre-opening expenses associated with our new stores;
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the level of expenses associated with our store conversions;
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inventory shrinkage beyond our historical average rates;
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changes in operating performance and stock market valuations of
other retail companies;
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the publics response to press releases or other public
announcements by us or third parties, including our filings with
the Securities and Exchange Commission, or SEC, and
announcements relating to litigation;
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the financial projections we may provide to the public, any
changes in these projections or our failure to meet these
projections;
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changes in financial estimates by any securities analysts who
follow our common stock, our failure to meet these estimates or
failure of those analysts to initiate or maintain coverage of
our common stock;
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ratings downgrades by any securities analysts who follow our
common stock;
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the development and sustainability of an active trading market
for our common stock;
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future sales of our common stock by our officers, directors and
significant stockholders;
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other events or factors, including those resulting from war,
acts of terrorism, natural disasters or responses to these
events; and
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changes in accounting principles.
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In addition, the stock markets, and in particular The NASDAQ
Global Select Market, have experienced extreme price and volume
fluctuations that have affected and continue to affect the
market prices of equity securities of many retail companies. In
the past, stockholders have instituted securities class action
litigation following periods of market volatility. If we were
involved in securities litigation, we could incur substantial
costs and our resources and the attention of management could be
diverted from our business.
Anti-takeover
provisions in our charter documents and Delaware law might
discourage or delay acquisition attempts for us that you might
consider favorable.
Our amended and restated certificate of incorporation and
amended and restated bylaws contain provisions that may make the
acquisition of our company more difficult without the approval
of our board of directors. These provisions:
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establish a classified board of directors so that not all
members of our board of directors are elected at one time;
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authorize the issuance of undesignated preferred stock, the
terms of which may be established and the shares of which may be
issued without stockholder approval, and which may include super
voting, special approval, dividend, or other rights or
preferences superior to the rights of the holders of common
stock;
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prohibit stockholder action by written consent, which requires
all stockholder actions to be taken at a meeting of our
stockholders;
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provide that the board of directors is expressly authorized to
make, alter, or repeal our amended and restated bylaws; and
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establish advance notice requirements for nominations for
elections to our board of directors or for proposing matters
that can be acted upon by stockholders at stockholder meetings.
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These anti-takeover provisions and other provisions under
Delaware law could discourage, delay or prevent a transaction
involving a change in control of our company, even if doing so
would benefit our stockholders. These provisions could also
discourage proxy contests and make it more difficult for you and
other stockholders to elect directors of your choosing and to
cause us to take other corporate actions you desire.
If
securities or industry analysts do not publish research or
publish inaccurate or unfavorable research about our business,
our stock price and trading volume could decline.
The trading market for our common stock depends in part on the
research and reports that securities or industry analysts
publish about us or our business. If no securities or industry
analysts cover our company, the trading price for our common
stock would be negatively impacted. If one or more of the
analysts who covers us downgrades our common stock or publishes
inaccurate or unfavorable research about our business, our stock
price would likely decline. If one or more of these analysts
ceases coverage of us or fails to publish reports on us
regularly, demand for our common stock could decrease, which
could cause our stock price and trading volume to decline.
We do
not expect to pay any cash dividends for the foreseeable
future.
The continued operation and expansion of our business will
require substantial funding. Accordingly, we do not anticipate
that we will pay any cash dividends on shares of our common
stock for the foreseeable future. Any determination to pay
dividends in the future will be at the discretion of our board
of directors and will depend upon results of operations,
financial condition, contractual restrictions, including our
senior secured credit facility and other indebtedness we may
incur, restrictions imposed by applicable law and other factors
our board of directors deems relevant.
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Item 1B.
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Unresolved
Staff Comments.
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None.
We do not own any real property. Our principal executive office
is located in Warrendale, Pennsylvania and is leased under a
lease agreement expiring in 2017, with an option to renew for an
additional five-year term. The 53,035 square foot space
includes two
state-of-the-art
simulated stores that provide a forum for planning, visual and
marketing concepts prior to their execution in our stores. We
also lease office space in New York City under a lease agreement
that expires at the end of 2013.
Our 189,600 square foot distribution facility is located in
Weirton, West Virginia. Our distribution facility is leased
under a lease agreement expiring in 2011, with options to renew
for two additional five-year terms. We implemented an upgrade of
our distribution facility and related systems. The distribution
facility will now be able to support approximately 1,300 stores.
As of January 30, 2010, we operated 535 stores in
516 cities in 43 states. All of our stores are leased
from third parties and the leases typically have terms of five
years with options to renew for additional five-year periods
thereafter. Some of our leases have early cancellation clauses,
which permit the lease to be terminated by us or the landlord if
certain sales levels are not met in specific periods or if a
shopping center does not meet specified occupancy standards. In
addition to future minimum lease payments, some of our store
leases provide for additional rental payments based on a
percentage of net sales if sales at the respective stores exceed
specified levels, as well as the payment of common area
maintenance charges, real property insurance and real estate
taxes. Many of our lease agreements have defined escalating rent
provisions over the initial term and any extensions.
We believe that our facilities are generally adequate for
current and anticipated future use, although we may from time to
time lease new facilities or vacate existing facilities as our
operations require.
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Item 3.
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Legal
Proceedings.
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We are subject to various legal proceedings and claims which
arise in the ordinary course of our business.
Although the outcome of these and other claims cannot be
predicted with certainty, management does not believe that the
ultimate resolution of these matters will have a material
adverse effect on our consolidated financial condition or on our
operations.
Part II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Our common stock has been listed on The NASDAQ Global Select
Market under the symbol rue since our initial public
offering on November 13, 2009. Before then, there was no
public market for our common stock. The following table sets
forth the high and low sales prices of our common stock per
share, as reported by The NASDAQ Global Select Market. The
number of holders of record of our stock as of February 16,
2010 was approximately 110.
The following table sets forth the high and low sales prices of
our common stock per share, as reported by The NASDAQ Global
Market.
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Fiscal Year 2009
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High
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Low
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4th Quarter (Commencing November 13, 2009)
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$
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32.82
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$
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22.26
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Dividends
The continued operation and expansion of our business will
require substantial funding. Accordingly, we do not anticipate
that we will pay any cash dividends on shares of our common
stock for the foreseeable future. Any determination to pay
dividends in the future will be at the discretion of our board
of directors and will depend upon results of operations,
financial condition, contractual restrictions, including our
senior secured credit facility and other indebtedness we may
incur, restrictions imposed by applicable law and other factors
our board of directors deems relevant.
Securities
Authorized for Issuance Under Equity Compensation
Plans
The information incorporated by reference in Item 12 of
this Annual Report from our 2010 Proxy Statement under the
heading Equity Compensation Plan Information is
hereby incorporated by reference into this Item 5.
Stock
Price Performance Graph
The following graph compares the cumulative stockholder return
on common stock with the return on the Total Return Index for
the NASDAQ Stock Market (US securities only) and the NASDAQ
Retail Trade Stocks. The graph assumes $100 invested on
November 13, 2009, in the stock of rue21, inc. the NASDAQ
Global Stock Market (US securities only), and the NASDAQ Retail
Trade Stocks. It also assumes that all dividends are reinvested.
Comparison of Cumulative Total Return
Assumes Initial Investment of $100
January 2010
|
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|
|
|
|
|
|
Measurement Period(1)
|
|
|
|
|
11/13/2009
|
|
|
|
11/30/2009
|
|
|
|
12/31/2009
|
|
|
|
1/30/2010
|
|
rue21, inc.
|
|
|
|
100.00
|
|
|
|
|
130.05
|
|
|
|
|
147.84
|
|
|
|
|
147.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NASDAQ Stock Market (US securities only)
|
|
|
|
100.00
|
|
|
|
|
99.03
|
|
|
|
|
104.75
|
|
|
|
|
98.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NASDAQ Retail Trade Index
|
|
|
|
100.00
|
|
|
|
|
99.15
|
|
|
|
|
103.83
|
|
|
|
|
102.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
(1) |
|
Returns are based upon the premise that $100 is invested in each
of (a) our common stock, (b) NASDAQ Stock Market (US
securities only), and (c) the index of NASDAQ Retail Trade
Stocks on November 13, 2009, and that all dividends (if
any) were reinvested. Stockholder returns over the indicated
period should not be considered indicative of future shareholder
returns. |
Unregistered
Sales of Equity Securities
During the period from February 1, 2009 through
January 30, 2010, 453,480 options to purchase common stock
of the Company were granted to employees and non-employee
directors under the Companys Second
32
Amended and Restated 2003 Ownership Incentive Plan and 2009
Omnibus Incentive Plan. From February 1, 2009 through
January 30, 2010, the Companys employees exercised
options to purchase 497,460 shares of the Companys
common stock pursuant to options issued under the Companys
Second Amended and Restated 2003 Ownership Incentive Plan at an
average purchase price of $0.22 per share for an aggregate
purchase price of approximately $110,000, which was utilized for
general corporate purposes. These issuances were made in
reliance upon the exemption from registration requirements of
Rule 701 of the Securities Act of 1933, as amended.
|
|
Item 6.
|
Selected
Consolidated Financial Data.
|
The following selected financial data are derived from the
Consolidated Financial Statements of the Company. We have also
included certain non-financial operating data to enhance your
understanding of our business. The data set forth below should
be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of
Operations in Item 7 and the Companys
Consolidated Financial Statements and related notes herein. The
historical results presented below are not necessarily
indicative of results of operations to be expected for any
future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share and operating data)
|
|
|
Consolidated Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
525,600
|
|
|
$
|
391,414
|
|
|
$
|
296,887
|
|
|
$
|
225,559
|
|
|
$
|
192,818
|
|
Cost of goods sold
|
|
|
337,693
|
|
|
|
257,853
|
|
|
|
195,034
|
|
|
|
150,163
|
|
|
|
129,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
187,907
|
|
|
|
133,561
|
|
|
|
101,853
|
|
|
|
75,396
|
|
|
|
63,604
|
|
Selling, general and administrative expense
|
|
|
134,078
|
|
|
|
99,886
|
|
|
|
76,039
|
|
|
|
57,575
|
|
|
|
48,703
|
|
Depreciation and amortization expense
|
|
|
16,898
|
|
|
|
11,532
|
|
|
|
8,241
|
|
|
|
5,926
|
|
|
|
3,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
36,931
|
|
|
|
22,143
|
|
|
|
17,573
|
|
|
|
11,895
|
|
|
|
10,956
|
|
Interest expense, net
|
|
|
532
|
|
|
|
1,477
|
|
|
|
2,520
|
|
|
|
2,645
|
|
|
|
1,959
|
|
Provision for income taxes
|
|
|
14,382
|
|
|
|
8,027
|
|
|
|
5,920
|
|
|
|
1,452
|
|
|
|
1,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,017
|
|
|
$
|
12,639
|
|
|
$
|
9,133
|
|
|
$
|
7,798
|
|
|
$
|
7,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.99
|
|
|
$
|
0.58
|
|
|
$
|
0.42
|
|
|
$
|
0.39
|
|
|
$
|
0.38
|
|
Diluted
|
|
$
|
0.96
|
|
|
$
|
0.55
|
|
|
$
|
0.40
|
|
|
$
|
0.36
|
|
|
$
|
0.33
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,267
|
|
|
|
21,914
|
|
|
|
21,705
|
|
|
|
19,782
|
|
|
|
19,217
|
|
Diluted
|
|
|
23,037
|
|
|
|
22,814
|
|
|
|
22,842
|
|
|
|
21,888
|
|
|
|
22,184
|
|
Operating Data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales per gross square foot
|
|
$
|
244
|
|
|
$
|
235
|
|
|
$
|
236
|
|
|
$
|
234
|
|
|
$
|
245
|
|
Comparable store sales change
|
|
|
7.8
|
%
|
|
|
3.7
|
%
|
|
|
7.8
|
%
|
|
|
(4.7
|
)%
|
|
|
10.9
|
%
|
Number of stores open at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
end of period
|
|
|
535
|
|
|
|
449
|
|
|
|
352
|
|
|
|
278
|
|
|
|
229
|
|
Total gross square feet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
end of period (in thousands)
|
|
|
2,390
|
|
|
|
1,949
|
|
|
|
1,448
|
|
|
|
1,095
|
|
|
|
896
|
|
Store conversions during period
|
|
|
26
|
|
|
|
21
|
|
|
|
20
|
|
|
|
18
|
|
|
|
6
|
|
Capital expenditures (in thousands)
|
|
$
|
33,630
|
|
|
$
|
26,464
|
|
|
$
|
20,265
|
|
|
$
|
16,586
|
|
|
$
|
12,098
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,751
|
|
|
$
|
4,611
|
|
|
$
|
3,343
|
|
|
$
|
2,525
|
|
|
$
|
4,075
|
|
Working capital (deficit)
|
|
|
21,604
|
|
|
|
798
|
|
|
|
3,946
|
|
|
|
(622
|
)
|
|
|
37
|
|
Total assets
|
|
|
188,431
|
|
|
|
141,200
|
|
|
|
102,285
|
|
|
|
79,092
|
|
|
|
52,716
|
|
Total long-term debt
|
|
|
|
|
|
|
19,476
|
|
|
|
27,968
|
|
|
|
23,317
|
|
|
|
25,279
|
|
Stockholders equity (deficit)
|
|
|
67,448
|
|
|
|
18,393
|
|
|
|
5,753
|
|
|
|
(3,537
|
)
|
|
|
(11,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash from operations
|
|
$
|
48,779
|
|
|
$
|
36,589
|
|
|
$
|
21,512
|
|
|
$
|
17,480
|
|
|
$
|
16,195
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
You should read the following discussion together with
Selected Consolidated Financial Data, and the
historical financial statements and related notes included
elsewhere in this Annual Report on
Form 10-K.
The statements in this discussion regarding industry outlook,
our expectations regarding our future performance, liquidity and
capital resources and other non-historical statements in this
discussion are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to numerous risks and
uncertainties, including, but not limited to, the risks and
uncertainties described in Part I Item 1A
Risk Factors. Our actual results may differ
materially from those contained in or implied by any
forward-looking statements.
We operate on a fiscal calendar widely used by the retail
industry that results in a given fiscal year consisting of a 52-
or 53-week period ending on the Saturday closest to January 31
of the following year. For example, references to fiscal
year 2009 refer to the fiscal year ended January 30,
2010. Our fiscal year 2006 consisted of a 53-week period and
ended on February 3, 2007.
Overview
rue21 is a fast growing specialty apparel retailer offering the
newest fashion trends for girls and guys at value prices. We
were originally founded in 1976 as a value-focused specialty
apparel retailer. In 1998, we were acquired by certain funds now
advised by Apax Partners, through SKM Equity Fund II, L.P.
and SKM Investment Fund II. In 2001, our current President
and Chief Executive Officer, Bob Fisch, joined us. Upon his
hiring, Bob Fisch began repositioning our company by aligning
our stores under one brand name, strengthening our management
team, honing our fashion value merchandise approach and
refocusing our store growth strategy. In late 2006, we
introduced our larger rue21 etc! store layout, which averages
approximately 4,700 square feet and features a separate
store-in-store
for our rue21 etc! girls jewelry and accessories category. As of
January 30, 2010, we operated 535 stores in 43 states,
314 of which featured the larger rue21 etc! store layout.
Our strong growth and operating results reflect the initiatives
taken by our management team, as well as the increasing
acceptance of our brand and merchandise. Our net sales increased
from $192.8 million in fiscal year 2005 to
$525.6 million in fiscal year 2009, a compound annual
growth rate of 28.5%. Over the same period, we grew income from
operations from $11.0 million to $36.9 million, a
compound annual growth rate of 35.3%. Since the beginning of
fiscal year 2005, we have increased our store base from 193
stores to 535 stores as of January 30, 2010. Our total
square footage growth has outpaced our total store growth over
this same period, reflecting the increasing size of our average
store.
We expect to continue our strong growth in the
future. We believe there is a significant opportunity
to grow our store base to more than 1,000 stores within five
years. We plan to open 100 stores in fiscal year 2010. We also
plan to continue to convert our existing stores into the larger
rue21 etc! layout, which allows us to offer an increased
proportion of higher margin categories, such as accessories,
intimate apparel, footwear and fragrances. We converted 26
stores to the rue21 etc! layout in fiscal year 2009 and plan to
convert 30 stores in fiscal year
34
2010 . We expect to continue to drive our comparable store sales
by increasing the penetration of our newer product categories,
increasing our brand awareness, continuing to provide our
distinctive in-store experience and converting stores to the
rue21 etc! layout.
Our growth in total square footage is supported by our store
economics, which we believe to be very attractive. As a result
of our low store build-out costs, favorable lease terms and
low-cost operating model, our stores generate strong returns on
investment. We focus our real estate strategy on strip centers,
regional malls and outlet centers, primarily in small- and
middle-market communities, which we believe are underserved by
traditional junior and young mens specialty apparel
retailers. Our typical new store investment is approximately
$160,000, which includes build-out costs, net of landlord tenant
allowances and initial inventory, net of payables. New stores
generate on average between $900,000 and $1.1 million in
net sales per store in the first twelve months. However, new
stores opened in the future may not generate similar net sales
in the first twelve months or pay back our investment in a
similar time period.
We have recently invested significant capital to build the
infrastructure necessary to support our future growth. This
investment included an upgrade of our distribution facility and
related systems. The distribution facility will now be able to
support approximately 1,300 stores. Additionally, we continue to
invest in our systems infrastructure, including implementation
of the latest store merchandising, distribution, financial and
real estate applications. Furthermore, in fiscal year 2008, we
invested in an expansion of our corporate headquarters, which
increased the square footage by 50%.
We believe our business strategy will continue to offer
significant opportunity, but it also presents risks and
challenges. These risks and challenges include that we may not
be able to effectively identify and respond to changing fashion
trends and customer preferences, that we may not be able to find
desirable locations in strip centers and regional malls or that
we may not be able to effectively manage our operations which
have grown rapidly, or our future growth. We seek to ensure that
addressing these risks does not divert our managements
attention from continuing to build on the strengths that we
believe have driven the growth of our business. We believe our
focus on maintaining the desirability of our products to our
customers, maintaining and scaling our supply chain resources
and improving our in-store shopping experience and our customer
service will contribute to our ongoing success.
How We
Assess the Performance of Our Business
In assessing the performance of our business, we consider a
variety of performance and financial measures. The key measures
for determining how our business is performing are net sales,
comparable store and non-comparable store sales, gross profit
margin and selling, general and administrative expense.
Net
Sales
Net sales constitute gross sales net of any returns and
merchandise discounts. Net sales consist of sales from
comparable stores and non-comparable stores.
Comparable
Store Sales
A store is included in comparable store sales on the first day
of the sixteenth month as new stores generally open with above
run-rate sales volumes, which usually extend for a period of at
least three months, and comparability 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 process of being
converted to our rue21 etc! layout, net sales from that store
remain in comparable store sales. There may be variations in the
way in which some of our competitors and other apparel retailers
calculate comparable or same store sales. As a
result, data in this Annual Report on
Form 10-K
regarding our comparable store sales may not be comparable to
similar data made available by other retailers. Non-comparable
store sales include sales not included in comparable store sales
and sales from closed stores.
35
Measuring the change in
year-over-year
comparable store sales allows us to evaluate how our store base
is performing. Various factors affect comparable store sales,
including:
|
|
|
|
|
consumer preferences, buying trends and overall economic trends;
|
|
|
|
our ability to identify and respond effectively to fashion
trends and customer preferences;
|
|
|
|
competition;
|
|
|
|
changes in our merchandise mix;
|
|
|
|
pricing;
|
|
|
|
the timing of our releases of new merchandise and promotional
events;
|
|
|
|
the level of customer service that we provide in our stores;
|
|
|
|
our ability to source and distribute products efficiently; and
|
|
|
|
the number of stores we open, close and convert in any period.
|
As we continue to pursue our store growth strategy, we expect
that a significant percentage of our net sales increase will
continue to come from non-comparable store sales. Opening new
stores is an important part of our growth strategy. Accordingly,
comparable store sales is only one element we use to assess the
success of our growth strategy.
The retail apparel industry is cyclical, and consequently our
net sales are affected by general economic conditions. Purchases
of apparel and accessories are sensitive to a number of factors
that influence the levels of consumer spending, including
economic conditions and the level of disposable consumer income,
consumer debt, interest rates and consumer confidence.
Our business is seasonal and as a result, our net sales
fluctuate from quarter to quarter. Net sales are usually higher
in the second through fourth fiscal quarters, and particularly
in the months of August and December, as customers make
back-to-school
and holiday purchases.
Gross
Profit
Gross profit is equal to our net sales minus our cost of goods
sold. Gross margin measures gross profit as a percentage of our
net sales. Cost of goods sold includes the direct cost of
purchased merchandise, distribution center costs, all freight
costs incurred to get merchandise to our stores, store occupancy
costs and buying costs. The components of our cost of goods sold
may not be comparable to those of other retailers.
Our cost of goods sold is substantially higher in higher volume
quarters because cost of goods sold generally increases as net
sales increase. Changes in the mix of our products, such as
changes in the proportion of accessories, may also impact our
overall cost of goods sold. We review our inventory levels on an
ongoing basis in order to identify slow-moving merchandise, and
generally use markdowns to clear that merchandise. The timing
and level of markdowns are not seasonal in nature but are driven
by customer acceptance of our merchandise. If we misjudge the
market for our products, we may be faced with significant excess
inventories for some products and be required to mark down those
products in order to sell them. Significant markdowns have
reduced our gross profit in some prior periods and may have a
material adverse impact on our earnings for future periods
depending on the amount of the markdowns and the amount of
merchandise affected.
Selling,
General and Administrative Expense
Selling, general and administrative expense includes
administration, share-based compensation and store expenses but
excludes store occupancy costs and freight to stores. These
expenses do not generally vary proportionally with net sales. As
a result, selling, general and administrative expense as a
percentage of net sales is usually higher in lower volume
quarters and lower in higher volume quarters. The components of
our selling, general and administrative expense may not be
comparable to those of other retailers. We expect that our
selling, general and administrative expense will increase in
future periods due to our continuing store growth and in part to
36
additional legal, accounting, insurance and other expenses we
expect to incur as a result of being a public company. Among
other things, we expect that compliance with the Sarbanes-Oxley
Act and related rules and regulations will result in significant
legal and accounting costs.
Share-based compensation expense related to stock options was
$410, $0 and $34 for fiscal years 2009, 2008 and 2007,
respectively. We granted options to purchase an aggregate of
453,408 shares and 126,500 shares of common stock in
fiscal years 2009 and 2008, respectively. These and any future
stock option grants will increase our share-based compensation
expense in fiscal year 2010 and in future fiscal years compared
to fiscal year 2009. See Critical Accounting
Policies.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except operating data)
|
|
|
Net Sales
|
|
$
|
525,600
|
|
|
$
|
391,414
|
|
|
$
|
296,887
|
|
Cost of goods sold
|
|
|
337,693
|
|
|
|
257,853
|
|
|
|
195,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
187,907
|
|
|
|
133,561
|
|
|
|
101,853
|
|
Selling, general and administrative expenses
|
|
|
134,078
|
|
|
|
99,886
|
|
|
|
76,039
|
|
Depreciation and amortization expense
|
|
|
16,898
|
|
|
|
11,532
|
|
|
|
8,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
36,931
|
|
|
|
22,143
|
|
|
|
17,573
|
|
Interest expense, net
|
|
|
532
|
|
|
|
1,477
|
|
|
|
2,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
36,399
|
|
|
|
20,666
|
|
|
|
15,053
|
|
Provision for income taxes
|
|
|
14,382
|
|
|
|
8,027
|
|
|
|
5,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,017
|
|
|
$
|
12,639
|
|
|
$
|
9,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores open at the end of the period
|
|
|
535
|
|
|
|
449
|
|
|
|
352
|
|
Total gross square feet at the end of the period (in thousands)
|
|
|
2,390
|
|
|
|
1,949
|
|
|
|
1,448
|
|
Sales per average gross square foot
|
|
$
|
244
|
|
|
$
|
235
|
|
|
$
|
236
|
|
Comparable store sales change
|
|
|
7.8
|
%
|
|
|
3.7
|
%
|
|
|
7.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net Sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold
|
|
|
64.2
|
%
|
|
|
65.9
|
%
|
|
|
65.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
35.8
|
%
|
|
|
34.1
|
%
|
|
|
34.3
|
%
|
Selling, general and administrative expenses
|
|
|
25.5
|
%
|
|
|
25.5
|
%
|
|
|
25.6
|
%
|
Depreciation and amortization expense
|
|
|
3.2
|
%
|
|
|
2.9
|
%
|
|
|
2.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
7.0
|
%
|
|
|
5.7
|
%
|
|
|
5.9
|
%
|
Interest expense, net
|
|
|
0.1
|
%
|
|
|
0.4
|
%
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
6.9
|
%
|
|
|
5.3
|
%
|
|
|
5.1
|
%
|
Provision for income taxes
|
|
|
2.7
|
%
|
|
|
2.1
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4.2
|
%
|
|
|
3.2
|
%
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
The approximate percentage of our net sales derived from our
product categories, based on our internal merchandising system,
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Girls
|
|
|
|
|
|
|
|
|
|
|
|
|
Apparel
|
|
|
56.7
|
%
|
|
|
58.3
|
%
|
|
|
61.6
|
%
|
Accessories
|
|
|
24.3
|
%
|
|
|
23.5
|
%
|
|
|
21.9
|
%
|
Guys Apparel and Accessories
|
|
|
19.0
|
%
|
|
|
18.2
|
%
|
|
|
16.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the number of stores open at the
beginning of the period and at the end of the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Stores at beginning of period
|
|
|
449
|
|
|
|
352
|
|
|
|
278
|
|
Stores opened during period(1)
|
|
|
88
|
|
|
|
99
|
|
|
|
74
|
|
Stores closed during period
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores at end of period
|
|
|
535
|
|
|
|
449
|
|
|
|
352
|
|
Store conversions during the period
|
|
|
26
|
|
|
|
21
|
|
|
|
20
|
|
|
|
|
(1) |
|
Stores opened during period do not include existing stores that
have been converted. |
Fiscal
Year 2009 Compared to Fiscal Year 2008
Net
Sales
In fiscal year 2009, our net sales increased 34.3%, or
$134.2 million, to $525.6 million from
$391.4 million in fiscal year 2008. This increase in net
sales was due to an increase of approximately 33% in the number
of transactions, primarily driven by new store openings and an
increase of approximately 1% in the average dollar value of
transactions per store. During fiscal year 2009, we opened 88
new stores and closed 2 stores compared to 99 new stores and 2
store closures in fiscal year 2008. Our comparable store sales
increased 7.8% in fiscal year 2009 compared to an increase of
3.7% in fiscal year 2008. Comparable store sales increased by
$100.5 million and non-comparable store sales increased by
$33.7 million for fiscal year 2009 compared to fiscal year
2008. There were 417 comparable stores and 118 non-comparable
stores open at January 30, 2010 compared to 330 and 119,
respectively, at January 31, 2009.
In fiscal year 2009, net sales of girls apparel, girls
accessories and guys apparel and accessories represented 56.7%,
24.3% and 19.0%, respectively, of total net sales compared to
58.3%, 23.5% and 18.2%, respectively, for fiscal year 2008. For
fiscal year 2009, the girls accessories and guys apparel and
accessories categories grew by approximately 39% and 40%,
respectively. The girls apparel category grew by approximately
31%. The increase in the guys apparel and accessories category
as a percentage of net sales was due to management efforts to
expand the number of items in the guys apparel and accessories
category.
Gross
Profit
Gross profit increased 40.7%, or $54.3 million, in fiscal
year 2009 to $187.9 million from $133.6 million in
fiscal year 2008. Gross margin increased 170 basis points
to 35.8% for fiscal year 2009 from 34.1% for fiscal year 2008.
This increase was attributable to a 90 basis point increase
in merchandise margin, due primarily to lower merchandise costs
throughout most of fiscal year 2009. Gross margin as a percent
of sales was also positively impacted by an 80 basis point
decrease in store occupancy, distribution and buying costs, as
these costs increased at a rate lower than net sales.
38
Selling,
General and Administrative Expense
Selling, general and administrative expense increased 34.2%, or
$34.2 million to $134.1 million in fiscal year 2009
from $99.9 million in fiscal year 2008. As a percentage of
net sales, selling, general and administrative expenses remained
constant at 25.5% in fiscal year 2009 as compared to fiscal year
2008. In November 2009, we and Apax Partners, L.P (Apax) agreed
to terminate the letter agreement relating to financial advisory
services provided to the Company. As part of termination
agreement, we were required to pay Apax a one-time termination
fee of $1.5 million, which is included in selling, general
and administrative expenses. Additionally, our expense related
to our share-based awards increased by $0.4 million to
$0.4 million for fiscal year 2009, as compared to $0 for
fiscal year 2008. Excluding the impact of these items, selling,
general and administrative expenses as a percentage of net
sales, would have decreased to 25.1% in fiscal year 2009.
Store operating expenses increased by $24.5 million
primarily resulting from the operation of 535 stores as of
January 30, 2010 compared to the operation of 449 stores as
of January 31, 2009. As a percentage of net sales, store
operating expenses decreased slightly to 18.5% in fiscal year
2009 from 18.6% in fiscal year 2008.
Depreciation
and Amortization Expense
Depreciation and amortization expense increased as a percentage
of net sales to 3.2% in fiscal year 2009 from 2.9% in fiscal
year 2008, or $5.4 million. The increase was due to the
growth in capital expenditures of $7.1 million and
$6.2 million in fiscal year 2009 and fiscal year 2008,
respectively.
Provision
for Income Taxes
The increase in provision for income taxes of $6.4 million
in fiscal year 2009 from fiscal year 2008 was due primarily to a
$15.7 million increase in pre-tax income. The effective tax
rate increased to 39.5% in fiscal year 2009 from 38.8% in fiscal
year 2008. This increase was the result of an increase in the
amount of non-deductible expenses in fiscal year 2009.
Net
Income
Net income increased 74.2%, or $9.4 million, to
$22.0 million in fiscal year 2009 from $12.6 million
in fiscal year 2008. This increase was due to the factors
discussed above.
Fiscal
Year 2008 Compared to Fiscal Year 2007
Net
Sales
Net sales increased 31.8%, or $94.5 million, to
$391.4 million in fiscal year 2008 from $296.9 million
in fiscal year 2007. The increase in net sales was due to an
increase of approximately 23% in the number of transactions,
driven by new store openings and an increase of approximately 2%
in the average dollar value of transactions per store.
Comparable store sales increased 3.7% for fiscal year 2008
compared to an increase of 7.8% for fiscal year 2007. Comparable
store sales increased by $66.7 million and non-comparable
store sales increased by $27.8 million. There were 330
comparable stores and 119 non-comparable stores open at
January 31, 2009 compared to 260 and 92, respectively, at
February 2, 2008.
The increase in the girls accessories and guys apparel and
accessories categories as a percentage of net sales and the
approximate corresponding decrease in the girls apparel category
as a percentage of net sales was reflective of varying category
sales growth rates. The girls accessories and guys apparel and
accessories categories grew by approximately 42% and 45%,
respectively. Girls apparel category growth was approximately
25%. The increase in girls accessories as a percentage of net
sales was due to management efforts to expand the number of
items in the girls accessories category.
39
Gross
Profit
Gross profit increased 31.1%, or $31.7 million, in fiscal
year 2008 to $133.6 million from $101.9 million in
fiscal year 2007. Gross margin decreased 20 basis points to
34.1% for fiscal year 2008 from 34.3% for fiscal year 2007. This
decrease was primarily attributable to a 30 basis point
decrease in merchandise margin, due primarily to increased
markdowns. Gross margin was positively impacted by a
10 basis point increase in store occupancy, distribution
and buying costs, as these costs increased at a rate lower than
net sales.
Selling,
General and Administrative Expense
Selling, general and administrative expense increased 31.4%, or
$23.8 million, to $99.9 million in fiscal year 2008
from $76.0 million in fiscal year 2007. As a percentage of
net sales, selling, general and administrative expense remained
relatively constant at 25.5% and 25.6% in fiscal year 2008 and
fiscal year 2007, respectively.
Store operating expenses increased by $18.6 million
primarily resulting from the operation of 449 stores as of
January 31, 2009 compared to the operation of 352 stores as
of February 2, 2008. As a percentage of net sales, store
operating expenses increased to 18.6% in fiscal year 2008 from
18.3% in fiscal year 2007, due primarily to increased store
salaries as a percentage of net sales.
Administrative and general expenses decreased as a percentage of
net sales to 6.9% in fiscal year 2008 from 7.4% in fiscal year
2007 as these costs increased at a lower rate than net sales.
Offsetting the decrease in administrative expense margin was a
$434,000 asset write-off related to store conversions.
Depreciation
and Amortization Expense
Depreciation and amortization expense increased as a percentage
of net sales to 2.9% in fiscal year 2008 from 2.8% in fiscal
year 2007, or $3.3 million. The increase was due to growth
in capital expenditures of $6.2 million and $3.7 in fiscal
year 2008 and fiscal year 2007, respectively.
Interest
Expense, Net
Interest expense, net decreased by $1.0 million to
$1.5 million in fiscal year 2008 due to both reduced
weighted average borrowings and a reduced average interest rate
under our senior secured credit facility.
Provision
for Income Taxes
The increase in provision for income taxes of $2.1 million
in fiscal year 2008 from fiscal year 2007 was due primarily to a
$5.6 million increase in pre-tax income. The effective tax
rate declined to 38.8% in fiscal year 2008 from 39.3% in fiscal
year 2007.
Net
Income
Net income increased 38.4%, or $3.5 million, to
$12.6 million in fiscal year 2008 from $9.1 million in
fiscal year 2007. This increase was due primarily to a
$31.7 million increase in gross profit and lower interest
expense, partially offset by increases in selling, general and
administrative expense of $23.8 million, higher
depreciation and amortization expense of $3.3 million and a
higher provision for income taxes of $2.1 million.
Fiscal
Year 2007 Compared to Fiscal Year 2006
Net
Sales
Net sales increased 31.6%, or $71.3 million, to
$296.9 million in fiscal year 2007 from $225.6 million
in fiscal year 2006. The increase in net sales was due primarily
to the increase of approximately 19% in the number of
transactions coupled with an increase of approximately 6% in the
average dollar value of transactions per store.
Comparable store sales increased 7.8% for fiscal year 2007
compared to a decrease of 4.7% for fiscal year 2006. Comparable
store sales increased by $46.4 million and non-comparable
stores increased by $24.9 million.
40
There were 260 comparable stores and 92 non-comparable stores
open at February 2, 2008 compared to 208 and 69,
respectively, at February 3, 2007.
The increases in the girls apparel and girls accessories
categories as a percentage of net sales and the approximate
corresponding decrease in the guys apparel and accessories
category as a percentage of net sales was reflective of varying
category sales growth rates. The girls apparel and girls
accessories categories grew by approximately 35% and 37%,
respectively. The guys apparel and accessories category growth
was approximately 25%. The increase in girls accessories as a
percentage of net sales was due to management efforts to expand
the number of items in the girls accessories category.
Gross
Profit
Gross profit increased 35.1%, or $26.5 million, in fiscal
year 2007 to $101.9 million from $75.4 million in
fiscal year 2006. Gross margin increased 90 basis points to
34.3% for fiscal year 2007 from 33.4% for fiscal year 2006. This
increase was primarily attributable to a 50 basis point
increase in merchandise margin, due primarily to lower
merchandise costs. In addition, store occupancy, distribution
and buying costs decreased 40 basis points as these costs
increased at a lower rate than net sales.
Selling,
General and Administrative Expense
Selling, general and administrative expense increased 32.1%, or
$18.5 million, to $76.0 million in fiscal year 2007
from $57.6 million in fiscal year 2006. As a percentage of
net sales, selling, general and administrative expense remained
constant at 25.6% and 25.5% in fiscal year 2007 and fiscal year
2006, respectively.
Store operating expenses increased by $11.9 million
primarily resulting from the operation of 352 stores as of
February 2, 2008 compared to the operation of 278 stores as
of February 3, 2007. However, these costs declined from
18.8% of net sales in fiscal year 2006 to 18.3% of net sales in
fiscal year 2007.
Administrative and general expenses increased as a percentage of
net sales to 7.4% in fiscal year 2007 from 6.8% in fiscal year
2006 as these costs increased at a rate greater than net sales,
due primarily to increased administrative salaries.
Depreciation
and Amortization Expense
Depreciation and amortization expense increased as a percentage
of net sales to 2.8% in fiscal year 2007 from 2.6% in fiscal
year 2006, or $2.3 million. This increase was due to growth
in capital expenditures of $3.7 million in fiscal year 2007.
Interest
Expense, Net
Interest expense, net decreased by $125,000 to $2.5 million
in fiscal year 2007 from $2.6 million in fiscal year 2006
due to relatively constant levels of weighted average borrowings
and average interest rate under our senior secured credit
facility.
Provision
for Income Taxes
The increase in provision for income taxes of $4.5 million
in fiscal year 2007 from fiscal year 2006 was due primarily to
the increase in the effective tax rate and to a lesser extent
pre-tax income being $5.8 million higher. The effective tax
rates were 39.3% and 15.7% for fiscal year 2007 and fiscal year
2006, respectively. The fiscal year 2006 effective tax rate was
significantly less than the fiscal year 2007 effective tax rate
as a result of the reversal of income tax reserves due to
settlement of a 2004 Internal Revenue Service audit as well as
the reversal of the valuation allowance as we determined as of
February 3, 2007 that it was more likely than not that the
deferred tax assets would be fully realized.
41
Net
Income
Net income increased 17.1%, or $1.3 million, to
$9.1 million in fiscal year 2007 from $7.8 million in
fiscal year 2006. This increase was due primarily to a
$26.5 million increase in gross profit, partially offset by
increases in selling, general and administrative expense of
$18.5 million, higher depreciation and amortization expense
of $2.3 million and a higher provision for income taxes of
$4.5 million.
Liquidity
and Capital Resources
Our primary sources of liquidity are cash flows from operations
and borrowings under our senior secured credit facility. Our
primary cash needs are for capital expenditures in connection
with opening new stores and converting existing stores, and the
additional working capital required for the related increase in
merchandise inventories. Cash is also required for investment in
information technology and distribution facility enhancements
and funding normal working capital requirements. The most
significant components of our working capital are cash and cash
equivalents, merchandise inventories, accounts payable and other
current liabilities. Our working capital position benefits from
the fact that we generally collect cash from sales to customers
the same day or, in the case of credit or debit card
transactions, within several days of the related sale, and we
typically have up to 75 days to pay our vendors.
As of January 30, 2010, we had cash and cash equivalents
totaling $26.8 million. Our cash and cash equivalents
consist of cash on deposit and credit and debit card
transactions. Our cash and cash equivalents balance at
January 30, 2010 increased by $22.1 million from
$4.6 million at January 31, 2009. Components of this
change in cash for fiscal year 2009, as well as for change in
cash for the fiscal years 2008 and 2007, are provided below in
more detail.
A summary of operating, investing and financing activities are
shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Provided by operating activities
|
|
$
|
48,779
|
|
|
$
|
36,859
|
|
|
$
|
21,512
|
|
Used for investing activities
|
|
|
(33,630
|
)
|
|
|
(26,464
|
)
|
|
|
(20,265
|
)
|
Provided by (used for) for financing activities
|
|
|
6,991
|
|
|
|
(9,127
|
)
|
|
|
(429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
$
|
22,140
|
|
|
$
|
1,268
|
|
|
$
|
818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
22,017
|
|
|
$
|
12,639
|
|
|
$
|
9,133
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
16,994
|
|
|
|
11,624
|
|
|
|
8,241
|
|
Deferred taxes
|
|
|
1,158
|
|
|
|
1,900
|
|
|
|
(522
|
)
|
Share-based compensation
|
|
|
410
|
|
|
|
|
|
|
|
34
|
|
Merchandise inventory
|
|
|
(5,855
|
)
|
|
|
(19,685
|
)
|
|
|
(8,977
|
)
|
Accounts payable
|
|
|
(486
|
)
|
|
|
24,134
|
|
|
|
5,141
|
|
Other working capital components
|
|
|
14,544
|
|
|
|
5,679
|
|
|
|
8,405
|
|
All other
|
|
|
(3
|
)
|
|
|
568
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
48,779
|
|
|
$
|
36,859
|
|
|
$
|
21,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal year 2009, we generated $48.8 million in cash
from operating activities; as compared to $36.9 million in
fiscal year 2008, an increase of $11.9 million. This
increase in cash from operating activities was primarily
attributable to an increase in net income of $9.4 million,
which includes the one-time termination fee of $1.5 million
paid to Apax, an increase in non-cash depreciation and
amortization of $5.4 million, which reflects our increased
level of cumulative capital investments over the past several
fiscal years and improvements in our requirements for
merchandise inventory of $13.8 million as compared to
fiscal year 2008. In addition, other working capital components
increased by $8.9 million due to increases in accrued
expenses and in tenant allowances received from landlords as a
result of new store openings. These cash inflows and
improvements were offset by reduction in the level of accounts
payable, which decreased our cash from operating activities by
$24.6 million as compared to fiscal year 2008.
The $15.3 million improvement in net cash provided by
operating activities in fiscal year 2008 compared to fiscal year
2007 was due to the growth in net income of $3.5 million,
the increase in depreciation and amortization expense of
$3.4 million, an increase in accounts payable of
$19.0 million offset by an increase in merchandise
inventory of $10.7 million. The increase in trade payables
was a result of our ability to secure longer payment terms from
our vendors, which were partially offset by an increase in
merchandise inventory. Merchandise inventory increased
$19.7 million in fiscal year 2008 compared to an increase
of $9.0 million in fiscal year 2007. Increases to
merchandise inventory were due to actual and anticipated sales
increases related to comparable store sales and non-comparable
store count increases as well as new store openings planned for
the subsequent year.
Investing
Activities
Investing activities consist entirely of capital expenditures
for new and converted stores, as well as investment in
information technology and our distribution facility
enhancements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Capital expenditures, net of tenant allowances
|
|
$
|
(24,297
|
)
|
|
$
|
(17,555
|
)
|
|
$
|
(14,304
|
)
|
Tenant allowances
|
|
|
(9,333
|
)
|
|
|
(8,909
|
)
|
|
|
(5,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
(33,630
|
)
|
|
$
|
(26,464
|
)
|
|
$
|
(20,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal year 2009, capital expenditures, net of tenant
allowances increased $6.7 million as compared to fiscal
year 2008. Approximately $3.9 million of the increase
related to the distribution facility enhancements occurring
during fiscal year 2009. Capital expenditures, net of tenant
allowances, for the opening of new stores and conversions were
$11.5 million, $10.9 million and $7.8 million in
fiscal years 2009, 2008 and 2007, respectively.
43
The remaining increase in fiscal year 2009 was primarily due to
increases in investments in information technology. While there
can be no assurance that current expectations will be realized,
the Company expects capital expenditures, net of tenant
allowances to be approximately $30 to $33 million in 2010.
Financing
Activities
Financing activities consist principally of borrowings and
payments on our outstanding credit facilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net (payments) borrowings under revolver
|
|
$
|
(19,476
|
)
|
|
$
|
14,645
|
|
|
$
|
1,573
|
|
Payments on long-term debt
|
|
|
|
|
|
|
(23,326
|
)
|
|
|
(2,002
|
)
|
Proceeds from initial public offering, net
|
|
|
26,242
|
|
|
|
|
|
|
|
|
|
Proceeds from stock options exercised
|
|
|
110
|
|
|
|
1
|
|
|
|
|
|
Excess tax benefits from stock-based award activities
|
|
|
276
|
|
|
|
|
|
|
|
|
|
Debt financing costs
|
|
|
(161
|
)
|
|
|
(447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
$
|
6,991
|
|
|
$
|
(9,127
|
)
|
|
$
|
(429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We completed our initial public offering (IPO) on
November 13, 2009, which resulted in net proceeds to us of
$29.2 million after deducting underwriters discounts
and commissions. We incurred legal and other costs related to
our IPO of approximately $3.0 million, which is included as
a reduction of additional paid-in capital. We used the net
proceeds to us from the IPO to repay the $25.8 million
outstanding under the senior secured credit facilities.
In addition, during fiscal year 2009, we received
$0.1 million for the exercise of stock options, we
recognized a $0.3 million excess tax benefit related to
share based award activities and incurred $0.2 million
amount in fees and expenses to amend our senior secured credit
facility.
$23.3 million of the proceeds from our senior secured
credit facility in fiscal year 2008 were used to repay the
senior secured credit facility established on May 15, 2003,
or the Senior Revolver, and all term note loan facility
financing arrangements with BNP Paribas, or the Term Notes. The
outstanding borrowings under our senior secured credit facility
were then reduced to $19.5 million by the end of fiscal
year 2008, resulting in the $9.1 million use of cash.
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.
Under the agreement, we are able to increase the limit of the
senior secured credit facility in increments of
$5.0 million up to $85.0 million under certain defined
conditions. Availability under our senior secured credit
facility is collateralized by a first priority interest in all
of our assets.
On November 24, 2009, we amended our senior secured credit
facility with Bank of America, N.A. An amendment fee of
$0.1 million was paid on the effective date of the
amendment. Key provisions of the amendment included an increase
in the borrowing ceiling to $85 million from
$60 million, which is further expandable at our option in
increments of $5 million up to a limit of $100 million
under certain defined conditions. Additionally, the applicable
interest rate margins were increased. 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 now ranges from 1.25% to 3.00%.
Our senior secured credit facility accrues interest at the Bank
of America N.A. base rate, defined at our option as the prime
rate or the Eurodollar rate plus applicable margin, which ranges
from 1.25% to 3.0% set quarterly dependent upon average net
availability under our senior secured credit facility during the
previous quarter. The weighted-average interest rate under our
senior secured credit facility for the year ended
January 30, 2010 and January 31, 2009 was 2.75% and
3.22%, respectively. We had $85.0 million and
$40.5 million of availability under
44
our senior secured credit facility on January 30, 2010 and
January 31, 2009, respectively, excluding our option to
expand the facility.
Our senior secured credit facility includes a fixed charge
covenant applicable only if net availability falls below
thresholds of 10%. We are in compliance with all covenants under
our senior secured credit facility as of January 30, 2010
and expect to remain in compliance for the next twelve months.
We believe that our cash position, net cash provided by
operating activities and availability under our senior secured
credit facility will be adequate to finance working capital
needs and planned capital expenditures for at least the next
twelve months.
Related
Party Transactions
In May 2003, we entered into a letter agreement with Apax as
successor to Saunders Karp & Megrue, LLC, relating to
financial advisory services to be provided to the Company from
time to time. Under the letter agreement, we agreed to pay an
annual fee of $0.25 million to Apax and to reimburse Apax
for all reasonable
out-of-pocket
expenses incurred in connection with the letter agreement. In
addition, the letter agreement provided for customary
indemnification provisions and terminates once Apax and its
affiliates beneficially own, collectively, less than 25% of our
voting common stock. In November 2009, the letter agreement with
Apax was terminated and Apax received a termination fee of
$1.5 million, which was recorded as a component of selling,
general and administrative expenses. Amounts paid to Apax
totaled $1.7 million, $0.25 million and
$0.25 million for fiscal years ended January 30, 2010,
January 31, 2009 and February 2, 2008, respectively.
At January 30, 2010, funds advised by Apax owned
approximately 57% of our outstanding common stock. On
February 26, 2010, the Company completed an offering of
6,961,958 shares of common stock, including
908,081 shares of common stock subsequently sold pursuant
to the underwriters over-allotment option, of which
6,908,081 shares of common stock were sold by funds advised by
Apax thereby reducing their ownership to approximately 29% of
our outstanding common stock.
Off
Balance Sheet Arrangements
We are not a party to any off balance sheet arrangements.
Contractual
Obligations
The following table summarizes our contractual obligations as of
January 30, 2010 and the effect such obligations are
expected to have on our liquidity and cash flows in future
periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than 1 Year
|
|
|
1 - 3 Years
|
|
|
3 - 5 Years
|
|
|
More than 5 Years
|
|
|
|
(In thousands)
|
|
|
Operating lease obligations(1)
|
|
|
217,668
|
|
|
|
41,564
|
|
|
|
99,288
|
|
|
|
20,760
|
|
|
|
56,056
|
|
Merchandise inventory purchase commitments
|
|
|
83,345
|
|
|
|
83,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract for upgrade of distribution center
|
|
|
890
|
|
|
|
890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
301,903
|
|
|
$
|
125,799
|
|
|
$
|
99,288
|
|
|
$
|
20,760
|
|
|
$
|
56,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes common area maintenance (CAM) charges, real estate
taxes and certain other expenses which amounted to approximately
21% of minimum lease obligations in fiscal year 2009 which we
expect to be consistent for the next three years. |
45
Impact of
Inflation
Our results of operations and financial condition are presented
based on historical cost. While it is difficult to accurately
measure the impact of inflation due to the imprecise nature of
the estimates required, we believe the effects of inflation, if
any, on our consolidated results of operations and financial
condition have been immaterial.
Critical
Accounting Policies
Managements discussion and analysis of financial condition
and results of operations is based upon our consolidated
financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United
States. The preparation of these financial statements requires
estimates and judgments that affect the reported amounts of our
assets, liabilities, net sales and expenses. Management bases
estimates on historical experience and other assumptions it
believes to be reasonable given the circumstances and evaluates
these estimates on an ongoing basis. Actual results may differ
from these estimates under different assumptions or conditions.
We believe that the following critical accounting policies
involve a higher degree of judgment and complexity. See
Note 1 to our consolidated financial statements for the
fiscal year ended January 30, 2010 for a complete
discussion of our significant accounting policies. The following
reflect the significant estimates and judgments used in the
preparation of our consolidated financial statements.
Revenue
Recognition
Revenue is recognized upon purchase of merchandise by customers.
Allowances for sales returns are recorded as a reduction of
sales in the periods in which the sales are recognized. Deferred
revenue is established upon the purchase of gift cards by
customers, and revenue is recognized upon redemption of gift
cards for merchandise.
Inventory
Valuation
We value merchandise inventory at the lower of cost
(first-in,
first-out basis) or market using the retail inventory method. We
record merchandise receipts at the time they are delivered to
our consolidator, as we do not directly import any merchandise.
This is the point at which title and risk of loss transfer to us.
We review our inventory levels to identify slow-moving
merchandise and generally use markdowns to clear slow-moving
merchandise. We record a markdown reserve based on estimated
future markdowns related to current inventory to clear
slow-moving inventory. Each period we evaluate the selling
trends experienced and the related promotional events or pricing
strategies in place to sell through the current inventory
levels. Markdowns may occur when inventory exceeds customer
demand for reasons of style, seasonal adaptation, changes in
customer preference, lack of consumer acceptance of fashion
items, competition, or if it is determined that the inventory in
stock will not sell at its currently ticketed price. Such
markdowns may have an adverse impact on earnings, depending on
the extent and amount of inventory affected. The anticipated
deployment of new seasonal merchandise is reflected within the
estimated future markdowns reserve used in valuing current
inventory, as such new inventory in certain circumstances will
displace merchandise units currently on-hand. The markdown
reserve is recorded as an increase to cost of goods sold in the
consolidated statements of income.
We also estimate a shrinkage reserve for the period of time
between the last physical count and the balance sheet date. The
estimate for shrinkage reserve can be affected by changes in
merchandise mix and changes in actual shrinkage trends.
Asset
Impairment
We are exposed to potential impairment if the book value of our
assets exceeds their expected future cash flows. The major
components of our long-lived assets are store fixtures,
equipment and leasehold improvements. We have recognized
impairment charges related to store conversions and may
recognize impairment charges in the future. The impairment of
unamortized costs is measured at the store level and the
unamortized cost is reduced to fair value if it is determined
that the sum of expected discounted future net cash flows is
less than net book value.
46
Income
Taxes
We account for income taxes in accordance with the authoritative
guidance issued by the Financial Accounting Standards Board
(FASB) , which requires the use of the asset and liability
method. Under this method, deferred tax assets and liabilities
are recognized based on the difference between our consolidated
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using the tax rates, based on
certain judgments regarding enacted tax laws and published
guidance, in effect in the years when those temporary
differences are expected to reverse. A valuation allowance is
established against the deferred tax assets when it is more
likely than not that some portion or all of the deferred taxes
may not be realized. Changes in the level and composition of
earnings, tax laws or the deferred tax valuation allowance, as
well as the results of tax audits may materially impact our
effective tax rate.
We recognize income tax liabilities related to unrecognized tax
benefits in accordance with the FASBs authoritative
guidance related to uncertain tax positions and adjust these
liabilities when our judgment changes as the result of the
evaluation of new information. We classify interest and
penalties as an element of tax expense.
The calculation of the deferred tax assets and liabilities, as
well as the decision to recognize a tax benefit from an
uncertain position and to establish a valuation allowance
require management to make estimates and assumptions. We believe
that our assumptions and estimates are reasonable, although
actual results may have a positive or negative material impact
on the balances of deferred tax assets and liabilities,
valuation allowances, or net income.
Share-Based
Compensation
We account for share-based compensation in accordance with the
FASBs authoritative guidance for share-based compensation.
Under this guidance, share-based compensation cost is estimated
at the grant date based on the awards fair value as
calculated by the Black-Scholes option-pricing model and is
recognized as expense over the requisite service period. The
Black-Scholes model requires various highly judgmental
assumptions including volatility, expected option life, risk
free interest rate and dividend yield. The expected volatility
reflects the application of SAB Topic 14s
interpretive guidance and, accordingly, incorporates historical
volatility of similar entities whose share prices are publicly
available. The expected option life reflects the application of
the simplified method set out in SAB Topic 14. The
simplified method defines the life as the average of the
contractual term of the options and the weighted-average vesting
period for all option tranches. The risk-free interest rate is
based on
5-year
U.S. Treasury instruments whose maturities are similar to
those of the expected term of the award being valued. The
expected dividend yield was based on our expectation of not
paying dividends on our common stock for the foreseeable future.
If any of the assumptions used in the Black-Scholes model change
significantly, share-based compensation expense may differ
materially in the future from that recorded in the current
period. In addition, we are required to estimate the expected
forfeiture rate and only recognize expense for those shares
expected to vest. We estimate the forfeiture rate based on
historical experience. Further, to the extent our actual
forfeiture rate is different from our estimate; share-based
compensation expense is adjusted accordingly.
Prior to our initial public offering on November 13, 2009,
all share-based awards granted to employees had been incentive
stock options (ISOs). The recipient of an ISO must hold the
underlying shares for at least two years from the date of grant
and one year from the date of exercise in order to receive
favorable capital gains tax treatment on any profit
realized from the sale of those shares. If this holding period
is not met, a disqualifying disposition has occurred
and all or a portion of the profit realized by the individual is
taxed at ordinary income tax rates. If we include this profit in
an individuals taxable compensation, then we can deduct it
as compensation expense on our corporate tax return. These
benefits are generally recorded as a reduction to income taxes
payable. Under the FASBs authoritative guidance, we
account for any disqualifying dispositions under the individual
award method. We do not expect that the application of this
method to our accounting for disqualifying dispositions related
to ISOs currently outstanding will materially affect our
provision for income taxes or our effective tax rate for the
foreseeable future. Subsequent to our initial public offering,
we anticipate that employee stock option grants will be
non-qualified options.
47
Recent
Accounting Pronouncements
In June 2009, the FASB established authoritative United States
GAAP, codifying and superseding all pre-existing accounting
standards and literature. This newly codified GAAP is effective
for financial statements issued for interim and annual periods
ending after September 15, 2009. We adopted the guidance
without any impact on the consolidated financial statements.
Effective February 1, 2009, we adopted the FASBs
authoritative guidance related to fair value measurements for
non-financial assets and non-financial liabilities that are
measured on a non-recurring basis. We adopted the guidance
without any impact on the consolidated financial statements.
In May 2009, the FASB issued authoritative guidance in
connection with subsequent events. The guidance establishes
general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial
statements are issued or are available to be issued. The
literature renames type one and type two subsequent events as
recognized subsequent events and
non-recognized subsequent events. For recognized
subsequent events, an entity shall recognize in the financial
statements the effects of all subsequent events that provide
additional evidence about conditions that existed at the date of
the balance sheet, including the estimates inherent in the
process of preparing financial statements. For unrecognized
subsequent events, an entity shall not recognize subsequent
events about conditions that did not exist at the date of the
balance sheet but that arose after the balance sheet date. In
February 2010, the FASB issued several technical amendments to
the authoritative guidance for subsequent events, including
removing the requirement for SEC filers (as defined) to disclose
the date through which an entity has evaluated subsequent
events. We adopted the guidance without any impact on the
consolidated financial statements.
In June 2009, the FASB issued authoritative guidance in
connection with adding qualified special purpose entities into
the scope of guidance for consolidation of variable interest
entities. This literature also modifies the analysis by which a
controlling interest of a variable interest entity is determined
thereby requiring the controlling interest to consolidate the
variable interest entity. A controlling interest exists if a
party to a variable interest entity has both (i) the power
to direct the activities of a variable interest entity that most
significantly impact the entitys economic
performance and (ii) the obligation to absorb losses
of or receive benefits from the entity that could be potentially
significant to the variable interest entity. The guidance
becomes effective as of the beginning of the first annual
reporting period beginning after November 15, 2009 and will
be applied prospectively for interim and annual periods upon
adoption. We do not believe that the adoption of the
authoritative guidance will have a material impact on our
consolidated financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
Our principal market risk relates to interest rate sensitivity,
which is the risk that future changes in interest rates will
reduce our net income or net assets. Our senior secured credit
facility accrues interest at the Bank of America N.A. base rate,
defined at our option as the prime rate or the Eurodollar rate
plus applicable margin, which ranges from 1.25% to 3.00% set
quarterly dependent upon average net availability under our
senior secured credit facility during the previous quarter.
During fiscal year 2009, the weighted-average interest rate on
our borrowings was 2.75%. Based upon a sensitivity analysis at
January 30, 2010, assuming average outstanding borrowings
during fiscal 2009 of $16.6 million a 50 basis point
increase in interest rates would result in an increase of our
annual interest expense by approximately $0.1 million.
48
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
rue21,
inc. and subsidiary
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
49
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of rue21, inc.
We have audited the accompanying consolidated balance sheets of
rue21, inc. and subsidiary as of January 30, 2010 and
January 31, 2009 and the related consolidated statements of
income, stockholders equity (deficit), and cash flows for
each of the three years in the period ended January 30,
2010. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of rue21, inc. and subsidiary at
January 30, 2010 and January 31, 2009, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended January 30,
2010, in conformity with U.S. generally accepted accounting
principles.
Pittsburgh, Pennsylvania
March 31, 2010
50
rue21,
inc. and subsidiary
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,751
|
|
|
$
|
4,611
|
|
Accounts receivable
|
|
|
3,834
|
|
|
|
2,527
|
|
Merchandise inventory, net
|
|
|
72,693
|
|
|
|
66,838
|
|
Prepaid expenses and other current assets
|
|
|
6,783
|
|
|
|
6,637
|
|
Deferred tax assets
|
|
|
4,286
|
|
|
|
3,135
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
114,347
|
|
|
|
83,748
|
|
Property and equipment, net
|
|
|
73,147
|
|
|
|
56,687
|
|
Other assets
|
|
|
937
|
|
|
|
765
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
188,431
|
|
|
$
|
141,200
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
59,963
|
|
|
$
|
60,449
|
|
Accrued expenses and other current liabilities
|
|
|
14,384
|
|
|
|
10,812
|
|
Accrued payroll and related taxes
|
|
|
10,486
|
|
|
|
7,532
|
|
Deferred rent and tenant allowances, current portion
|
|
|
5,509
|
|
|
|
4,157
|
|
Accrued income and franchise taxes
|
|
|
2,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
92,743
|
|
|
|
82,950
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
19,476
|
|
Deferred rent, tenant allowances and other long-term liabilities
|
|
|
23,991
|
|
|
|
18,440
|
|
Deferred tax liabilities
|
|
|
4,249
|
|
|
|
1,941
|
|
Total long-term liabilities
|
|
|
28,240
|
|
|
|
39,857
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
120,983
|
|
|
|
122,807
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock par value $0.001 per share;
200,000 shares authorized; 24,237 shares issued and
outstanding at January 30, 2010, par value $0.004 per
share; 50,000 shares authorized; 22,090 shares issued
and outstanding at January 31, 2009
|
|
|
24
|
|
|
|
88
|
|
Additional paid in capital
|
|
|
27,115
|
|
|
|
13
|
|
Retained earnings
|
|
|
40,309
|
|
|
|
18,292
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
67,448
|
|
|
|
18,393
|
|
Total liabilities and stockholders equity
|
|
$
|
188,431
|
|
|
$
|
141,200
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
51
rue21,
inc. and subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Net sales
|
|
$
|
525,600
|
|
|
$
|
391,414
|
|
|
$
|
296,887
|
|
Cost of goods sold (includes certain buying, occupancy and
distribution center expenses)
|
|
|
337,693
|
|
|
|
257,853
|
|
|
|
195,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
187,907
|
|
|
|
133,561
|
|
|
|
101,853
|
|
Selling, general, and administrative expense
|
|
|
134,078
|
|
|
|
99,886
|
|
|
|
76,039
|
|
Depreciation and amortization expense
|
|
|
16,898
|
|
|
|
11,532
|
|
|
|
8,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
36,931
|
|
|
|
22,143
|
|
|
|
17,573
|
|
Interest expense, net
|
|
|
532
|
|
|
|
1,477
|
|
|
|
2,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
36,399
|
|
|
|
20,666
|
|
|
|
15,053
|
|
Provision for income taxes
|
|
|
14,382
|
|
|
|
8,027
|
|
|
|
5,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,017
|
|
|
$
|
12,639
|
|
|
$
|
9,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
|
$
|
0.99
|
|
|
$
|
0.58
|
|
|
$
|
0.42
|
|
Diluted income per common share
|
|
$
|
0.96
|
|
|
$
|
0.55
|
|
|
$
|
0.40
|
|
Weighted average basic common shares outstanding
|
|
|
22,267
|
|
|
|
21,914
|
|
|
|
21,705
|
|
Weighted average diluted common shares outstanding
|
|
|
23,037
|
|
|
|
22,814
|
|
|
|
22,842
|
|
See accompanying notes to the consolidated financial statements.
52
rue21,
inc. and subsidiary
Consolidated
Statements of Stockholders Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Retained
|
|
|
|
|
|
|
$0.004 Par Value
|
|
|
$0.001 Par Value
|
|
|
Paid-in
|
|
|
Earnings
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance February 3, 2007
|
|
|
21,695
|
|
|
$
|
87
|
|
|
|
|
|
|
$
|
|
|
|
$
|
(144
|
)
|
|
$
|
(3,480
|
)
|
|
$
|
(3,537
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,133
|
|
|
|
9,133
|
|
Share-based compensation and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157
|
|
|
|
|
|
|
|
157
|
|
Stock issued for stock option exercises
|
|
|
174
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance February 2, 2008
|
|
|
21,869
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
5,653
|
|
|
|
5,753
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,639
|
|
|
|
12,639
|
|
Stock issued for stock option exercises
|
|
|
221
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 31, 2009
|
|
|
22,090
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
18,292
|
|
|
|
18,393
|
|
Conversion of common stock, $0.004 par value to common
stock, $.001 par value
|
|
|
(22,090
|
)
|
|
|
(88
|
)
|
|
|
22,090
|
|
|
|
22
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in initial public offering (net of
issuance costs)
|
|
|
|
|
|
|
|
|
|
|
1,650
|
|
|
|
2
|
|
|
|
26,240
|
|
|
|
|
|
|
|
26,242
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,017
|
|
|
|
22,017
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
410
|
|
|
|
|
|
|
|
410
|
|
Stock issued for stock option exercises
|
|
|
|
|
|
|
|
|
|
|
497
|
|
|
|
|
|
|
|
110
|
|
|
|
|
|
|
|
110
|
|
Excess tax benefits from share-based award activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
276
|
|
|
|
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 30, 2010
|
|
|
|
|
|
$
|
|
|
|
|
24,237
|
|
|
$
|
24
|
|
|
$
|
27,115
|
|
|
$
|
40,309
|
|
|
$
|
67,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
53
rue21,
inc. and subsidiary
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,017
|
|
|
$
|
12,639
|
|
|
$
|
9,133
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
16,994
|
|
|
|
11,624
|
|
|
|
8,241
|
|
Loss on fixed asset disposals
|
|
|
|
|
|
|
349
|
|
|
|
44
|
|
Impairment of long-lived assets
|
|
|
273
|
|
|
|
219
|
|
|
|
13
|
|
Deferred taxes
|
|
|
1,158
|
|
|
|
1,900
|
|
|
|
(522
|
)
|
Share based compensation
|
|
|
410
|
|
|
|
|
|
|
|
34
|
|
Excess tax benefits from stock-based award activities
|
|
|
(276
|
)
|
|
|
|
|
|
|
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,307
|
)
|
|
|
122
|
|
|
|
(36
|
)
|
Merchandise inventory, net
|
|
|
(5,855
|
)
|
|
|
(19,685
|
)
|
|
|
(8,977
|
)
|
Prepaid expenses and other current assets
|
|
|
(146
|
)
|
|
|
(3,180
|
)
|
|
|
(1,041
|
)
|
Accounts payable
|
|
|
(486
|
)
|
|
|
24,134
|
|
|
|
5,141
|
|
Accrued payroll and related taxes
|
|
|
2,954
|
|
|
|
1,433
|
|
|
|
1,966
|
|
Accrued expenses and other current liabilities
|
|
|
6,247
|
|
|
|
987
|
|
|
|
3,587
|
|
Deferred rent and tenant allowances
|
|
|
6,903
|
|
|
|
6,259
|
|
|
|
3,300
|
|
Other
|
|
|
(107
|
)
|
|
|
58
|
|
|
|
629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
48,779
|
|
|
|
36,859
|
|
|
|
21,512
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(33,630
|
)
|
|
|
(26,464
|
)
|
|
|
(20,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(33,630
|
)
|
|
|
(26,464
|
)
|
|
|
(20,265
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolver
|
|
|
98,381
|
|
|
|
125,371
|
|
|
|
66,799
|
|
Payments under revolver
|
|
|
(117,857
|
)
|
|
|
(110,726
|
)
|
|
|
(65,226
|
)
|
Payments on long-term debt
|
|
|
|
|
|
|
(23,326
|
)
|
|
|
(2,002
|
)
|
Deferred financing costs
|
|
|
(161
|
)
|
|
|
(447
|
)
|
|
|
|
|
Excess tax benefits from stock-based award activities
|
|
|
276
|
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering, net
|
|
|
26,242
|
|
|
|
|
|
|
|
|
|
Proceeds from stock options exercised
|
|
|
110
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
6,991
|
|
|
|
(9,127
|
)
|
|
|
(429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
22,140
|
|
|
|
1,268
|
|
|
|
818
|
|
Cash and cash equivalents, beginning of period
|
|
|
4,611
|
|
|
|
3,343
|
|
|
|
2,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
26,751
|
|
|
$
|
4,611
|
|
|
$
|
3,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
417
|
|
|
$
|
2,771
|
|
|
$
|
1,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
13,510
|
|
|
$
|
7,935
|
|
|
$
|
7,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
54
rue21,
inc. and subsidiary
Notes to Consolidated Financial Statements
For the Fiscal Years Ended January 30, 2010,
January 31, 2009 and February 2, 2008
(Dollars in thousands, unless otherwise indicated)
Note 1
Business and Summary of Significant Accounting
Policies
Organization
rue21, inc. (the Company or rue21) is a specialty retailer of
junior and young mens apparel and accessories with 535,
449, and 352 stores as of January 30, 2010,
January 31, 2009 and February 2, 2008 respectively, in
various strip centers, regional malls and outlet centers
throughout the United States. Sales are generally transacted for
cash or checks and through the acceptance of third-party credit
and debit cards.
On November 13, 2009, the Company completed an initial
public offering of 7,780,252 shares of common stock at a
price to the public of $19.00 per share, of which
1,650,000 shares were sold by the Company, 6,130,252 were
sold by the selling shareholders (including 913,590 by members
of the Companys management). Upon completion of the
offering, the Company received proceeds of approximately
$29,156, net of underwriters discounts and commissions.
In conjunction with the initial public offering of common stock,
the Company was reincorporated in Delaware. The Companys
authorized capital stock consists of 200,000,000 shares of
common stock, par value $0.001 per share, and
10,000,000 shares of preferred stock, par value $0.001 per
share. The consolidated financial statements do not reflect the
reclassification of the common stock, $0.004 par value to
common stock, $0.001 par value, other than the related
adjustment to par value and the increase in the number of
authorized shares.
Principles
of Consolidation
The consolidated financial statements include all the accounts
of the Company and its wholly owned subsidiary r services,
llc. All intercompany transactions and balances have been
eliminated in consolidation.
Fiscal
Year
The Companys fiscal year is 52 or 53 weeks ending on
the Saturday nearest to January 31 of the following year. These
consolidated financial statements were prepared for the
52 weeks ended January 30, 2010, January 31, 2009
and February 2, 2008, respectively.
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets
and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of net sales and expenses during the reporting
period. Actual results could differ from those estimates. On an
ongoing basis, management reviews its estimates based on
currently available information. Changes in facts and
circumstances may result in revised estimates.
Seasonality
Our business is seasonal and historically we have realized a
higher portion of our net sales, net income and operating cash
flows in the second through the fourth fiscal quarters,
attributable to the impact of the summer and holiday selling
seasons. As a result, our working capital requirements fluctuate
during the year, increasing in mid-summer in anticipation of the
holiday selling season. 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.
55
rue21,
inc. and subsidiary
Notes to Consolidated Financial
Statements (Continued)
For the Fiscal Years Ended January 30, 2010,
January 31, 2009 and February 2, 2008
(Dollars in thousands, unless otherwise indicated)
Segment
Reporting
The Financial Accounting Standard Board (FASB) has established
authoritative guidance for reporting information about a
companys operating segments, including disclosures related
to a companys products and services, geographic areas and
major customers. The Company operates in and reports as a single
operating segment which is the operation of its retail stores
which are only located in the United States. The Company has no
international sales. Net sales are generated through the retail
store sale of merchandise to consumers only. All of the
Companys identifiable assets are located in the United
States.
Fair
Value of Financial Instruments
The FASB has established authoritative guidance that requires
management to disclose the estimated fair value of certain
assets and liabilities defined as financial instruments. As of
January 30, 2010 and January 31, 2009, management
believes that the carrying amounts of cash and cash equivalents,
receivables, and payables approximate fair value because of the
short maturity of these financial instruments. Additionally,
management believes the fair value of the long-term debt
approximates carrying value at January 31, 2009, as the
debt instrument has a variable interest rate that resets
quarterly.
Cash and
Cash Equivalents
Cash includes cash equivalents, which includes credit and debit
card transactions. Credit and debit card transactions are
typically paid to the Company on the next business day. Amounts
due from credit and debit card transactions totaled $2,369 and
$1,982 on January 30, 2010 and January 31, 2009,
respectively. The Company considers all highly liquid
investments purchased with an initial maturity of three months
or less to be cash equivalents.
Accounts
Receivable
Accounts receivable generally represent tenant allowances due
from lessors. The Company evaluates collectability and has
determined that no allowance is necessary.
Merchandise
Inventory
Merchandise inventory is valued at the lower of cost
(first-in,
first-out basis) or market using the retail inventory method.
The Company records merchandise receipts at the time they are
delivered to our consolidator, as we are not directly importing
any merchandise. This is the point at which title and risk of
loss transfer to the Company.
The Company reviews its inventory levels to identify slow-moving
merchandise and generally uses markdowns to clear slow-moving
merchandise. The Company records a markdown reserve based on
estimated future markdowns related to current inventory to clear
slow-moving inventory. Each period the Company evaluates the
selling trends experienced and the related promotional events or
pricing strategies in place to sell through the current
inventory levels. Markdowns may occur when inventory exceeds
customer demand for reasons of style, seasonal adaptation,
changes in customer preference, lack of consumer acceptance of
fashion items, competition, or if it is determined that the
inventory in stock will not sell at its currently ticketed
price. Such markdowns may have an adverse impact on earnings,
depending on the extent and amount of inventory affected. The
anticipated deployment of new seasonal merchandise is reflected
within the estimated future markdowns reserve utilized in
valuing current inventory, as such new inventory in certain
circumstances will displace merchandise units currently on-hand.
The markdown reserve is recorded as an increase to cost of goods
sold in the accompanying Consolidated Statements of Income.
56
rue21,
inc. and subsidiary
Notes to Consolidated Financial
Statements (Continued)
For the Fiscal Years Ended January 30, 2010,
January 31, 2009 and February 2, 2008
(Dollars in thousands, unless otherwise indicated)
The Company also estimates a shrinkage reserve for the period of
time between the last physical count and the balance sheet date.
The estimate for shrinkage reserve can be affected by changes in
merchandise mix and changes in actual shrinkage trends.
Property
and Equipment
Property and equipment are recorded on the basis of cost with
depreciation and amortization computed utilizing the
straight-line method over the estimated useful lives as follows:
|
|
|
Furniture and fixtures
|
|
7 years
|
Leasehold improvements
|
|
Lesser of 5 to 10 years or lease term
|
Automobiles
|
|
5 years
|
Computer equipment and software
|
|
3 to 5 years
|
In accordance with the FASBs authoritative guidance
related to the impairment or disposal of long-lived assets,
impairment losses may be recorded on long-lived assets used in
operations when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the
carrying amounts of those assets. If such a condition occurs,
the assets are adjusted to their estimated fair value, which is
determined based upon prices for similar assets. Impairment
charges of $273, $219 and $13 were recognized for the fiscal
years ended January 30, 2010, January 31, 2009 and
February 2, 2008, respectively, for assets related to
stores to be converted and are recorded in selling, general, and
administrative expense in the accompanying Consolidated
Statements of Income.
Deferred
Rent and Tenant Allowances
Deferred rent is recognized when a lease contains a
predetermined fixed escalation of minimum rent. The Company
recognizes the related rent expense on a straight-line basis
from possession date and records the difference between the
recognized rental expense and the amounts payable under the
lease as deferred rent liability. Also included in deferred rent
are tenant allowances received from landlords in accordance with
negotiated lease terms. The tenant allowances are amortized as a
reduction to rent expense on a straight-line basis over the term
of the lease (including the pre-opening build-out period). The
short-term portion of deferred rent is recorded in accrued
expenses and other current liabilities and the long-term portion
is included in deferred rent, tenant allowances and other
long-term liabilities in the accompanying Consolidated Balance
Sheets.
Insurance
and Self-Insurance
The Company uses a combination of insurance and self-insurance
for a number of risk management activities including
workers compensation, general liability, automobile
liability, and employee-related health care benefits, a portion
of which is paid by the employees. Costs related to claims are
accrued based on known claims and historical experiences of
incurred but not reported claims received from our insurers. The
Company believes that it has adequately reserved for its
self-insurance liability, which is capped through the use of
stop-loss contracts and specified retentions with insurance
companies. However, any significant variation of future claims
from historical trends could cause actual results to differ from
the accrued liability.
Revenue
Recognition
Revenue is recognized upon purchase of merchandise by customers.
Allowances for sales returns are recorded as a reduction of net
sales in the periods in which the sales are recognized.
Consistent with our merchandise return policy of 30 days,
the allowance for sales returns at each period end is calculated
and recorded based upon an estimate of expected returns over a
subsequent
30-day
period. The allowance for sales returns was $349 and $299
57
rue21,
inc. and subsidiary
Notes to Consolidated Financial
Statements (Continued)
For the Fiscal Years Ended January 30, 2010,
January 31, 2009 and February 2, 2008
(Dollars in thousands, unless otherwise indicated)
for the fiscal years ended January 30, 2010 and
January 31, 2009, respectively. Sales tax collected from
customers is excluded from revenue and is included as part of
accrued expenses and other current liabilities on the
Companys Consolidated Balance Sheets.
Deferred revenue is established upon the purchase of gift cards
by customers, and revenue is recognized upon redemption of gift
cards for merchandise. The Company evaluated unredeemed gift
cards and determined that the likelihood of certain gift cards
being redeemed by the customer after 18 months was remote,
based upon historical redemption patterns of gift cards. We have
established a wholly-owned subsidiary to administer the gift
card program within a state jurisdiction that does not require
remittance of unclaimed property. For those gift cards that were
determined redemption would be remote, the Company reversed the
liability, and recorded gift card breakage income. Gift card
breakage income of $224, $535 and $0 was recognized for the
fiscal years ended January 30, 2010, January 31, 2009
and February 2, 2008, respectively. The amount recognized
for the fiscal year ended January 31, 2009 represented the
initial recognition and includes income related to gift cards
sold since the inception of the gift card program. Gift card
breakage income is recorded as reduction to cost of goods sold.
Cost of
Goods Sold
Cost of goods sold includes costs related to merchandise sold,
distribution and warehousing, freight from the distribution
center to the stores, store occupancy, and buying and
merchandising department expenses. Cost of goods sold is reduced
by certain vendor allowances received, primarily for markdowns,
merchandise marked out of stock and vendor non-compliance
charges.
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.
Income
Taxes
The Company accounts for income taxes in accordance with the
authoritative guidance issued by the FASB, which requires the
use of the asset and liability method. Under this method,
deferred tax assets and liabilities are recognized based on the
difference between the carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using the tax rates, based on
certain judgments regarding enacted tax laws and published
guidance, in effect in the years when those temporary
differences are expected to reverse. A valuation allowance is
established against the deferred tax assets when it is more
likely than not that some portion or all of the deferred taxes
may not be realized. Changes in the level and composition of
earnings, tax laws or the deferred tax valuation allowance, as
well as the results of tax audits may materially impact the
effective tax rate.
The Company recognizes income tax liabilities related to
unrecognized tax benefits in accordance with the FASBs
authoritative guidance related to uncertain tax positions and
adjust these liabilities when our judgment changes as the result
of the evaluation of new information. The Company classifies
interest and penalties as an element of tax expense.
The calculation of the deferred tax assets and liabilities, as
well as the decision to recognize a tax benefit from an
uncertain position and to establish a valuation allowance
require management to make estimates and assumptions. The
Company believes that its assumptions and estimates are
reasonable, although actual results may have a positive or
negative material impact on the balances of deferred tax assets
and liabilities, valuation allowances, or net income.
58
rue21,
inc. and subsidiary
Notes to Consolidated Financial
Statements (Continued)
For the Fiscal Years Ended January 30, 2010,
January 31, 2009 and February 2, 2008
(Dollars in thousands, unless otherwise indicated)
Share
Based Compensation
The Company accounts for share based compensation awards in
accordance with the FASBs authoritative guidance, which
requires companies recognize all share based payments to
employees, including grants of employee stock options, in the
consolidated financial statements based on the grant date fair
value of the equity or liability instruments issued. The Company
recognizes compensation expense for stock option awards on a
straight-line basis over the requisite service period of the
award. The Company has historically issued new shares of common
stock upon the exercise of employee stock options.
Prior to the Companys initial public offering on
November 13, 2009, all share-based awards granted to
employees had been incentive stock options (ISOs). The recipient
of an ISO must hold the underlying shares for at least two years
from the date of grant and one year from the date of exercise in
order to receive favorable capital gains tax
treatment on any profit realized from the sale of those shares.
If this holding period is not met, a disqualifying
disposition has occurred and all or a portion of the
profit realized by the individual is taxed at ordinary income
tax rates. If the Company includes this profit in an
individuals taxable compensation, then it can deduct it as
compensation expense on its corporate tax return. These benefits
are generally recorded as a reduction to income taxes payable.
Under the FASBs authoritative guidance, the Company
accounts for any disqualifying dispositions under the individual
award method.
Store
Preopening Costs
Store preopening costs, which consist primarily of occupancy
costs and payroll, are expensed as incurred and are included in
selling, general and administrative expense in the accompanying
Consolidated Statements of Income.
Advertising
Costs
The Company expenses advertising costs when incurred.
Advertising expense, which is classified in selling, general,
and administrative expense in the accompanying Consolidated
Statements of Income, was $3,000, $2,381 and $1,795 for the
fiscal years ended January 30, 2010, January 31, 2009
and February 2, 2008, respectively.
Repairs
and Maintenance
The Company capitalizes costs that extend the life of an asset
and that meet certain minimal dollar thresholds depending on
asset category. All other costs including maintenance agreements
are charged to selling, general and administrative expense in
the accompanying Consolidated Statements of Income. Repairs and
maintenance expense was $1,464, $1,204 and $850 for the fiscal
years ended January 30, 2010, January 31, 2009 and
February 2, 2008, respectively. Repairs and maintenance
expense does not include any costs for store conversions.
Legal
Proceedings and Claims
The Company is subject to certain legal proceedings and claims
arising out of the conduct of its business. In accordance with
the FASBs authoritative guidance for contingent losses
management records a reserve for estimated losses when the loss
is probable and the amount can be reasonably estimated. If a
range of possible loss exists and no anticipated loss within the
range is more likely than any other anticipated loss, the
Company records the accrual at the low end of the range. As the
Company believes that it has provided adequate reserves, it
anticipates that the ultimate outcome of any matter currently
pending against the Company will not materially affect the
consolidated financial position or results of operations of the
Company.
59
rue21,
inc. and subsidiary
Notes to Consolidated Financial
Statements (Continued)
For the Fiscal Years Ended January 30, 2010,
January 31, 2009 and February 2, 2008
(Dollars in thousands, unless otherwise indicated)
Earnings
per Share
Basic earnings per common share amounts are calculated using the
weighted average number of common shares outstanding for the
period. Diluted earnings per common share amounts are calculated
using the weighted average number of common shares outstanding
plus the additional dilution for all potentially dilutive stock
options utilizing the treasury stock method.
The following table shows the amounts used in computing earnings
per share and the effect on net income and the weighted average
number of shares of potential dilutive common stock (stock
options):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Net income
|
|
$
|
22,017
|
|
|
$
|
12,639
|
|
|
$
|
9,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
22,267
|
|
|
|
21,914
|
|
|
|
21,705
|
|
Impact of dilutive securities
|
|
|
770
|
|
|
|
900
|
|
|
|
1,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
23,037
|
|
|
|
22,814
|
|
|
|
22,842
|
|
Per common share :
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
|
$
|
0.99
|
|
|
$
|
0.58
|
|
|
$
|
0.42
|
|
Diluted income per common share
|
|
$
|
0.96
|
|
|
$
|
0.55
|
|
|
$
|
0.40
|
|
Equity awards to purchase 400, 314 and 236 shares of common
stock for the fiscal years ended January 30, 2010,
January 31, 2009 and February 2, 2008, 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.
Reclassifications
Certain reclassifications have been made to the Consolidated
Financial Statements for prior periods in order to conform to
the fiscal year 2009 presentation.
Recent
Accounting Standards
In June 2009, the FASB established authoritative United States
GAAP, codifying and superseding all pre-existing accounting
standards and literature. This newly codified GAAP is effective
for financial statements issued for interim and annual periods
ending after September 15, 2009. The Company has adopted
the guidance without any impact on the consolidated financial
statements.
Effective February 1, 2009, the Company adopted the
FASBs authoritative guidance related to fair value
measurements for non-financial assets and non-financial
liabilities that are measured on a non-recurring basis. The
Company has adopted the guidance without any impact on the
consolidated financial statements.
In May 2009, the FASB issued authoritative guidance in
connection with subsequent events. The guidance establishes
general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial
statements are issued or are available to be issued. The
literature renames type one and type two subsequent events as
recognized subsequent events and
non-recognized subsequent events. For recognized
subsequent events, an entity shall recognize in the financial
statements the effects of all subsequent events that provide
additional evidence about conditions that existed at the date of
the balance sheet, including the estimates inherent in the
process of preparing financial statements. For unrecognized
subsequent events, an entity shall not
60
rue21,
inc. and subsidiary
Notes to Consolidated Financial
Statements (Continued)
For the Fiscal Years Ended January 30, 2010,
January 31, 2009 and February 2, 2008
(Dollars in thousands, unless otherwise indicated)
recognize subsequent events about conditions that did not exist
at the date of the balance sheet but that arose after the
balance sheet date. In February 2010, the FASB issued several
technical amendments to the authoritative guidance for
subsequent events, including removing the requirement for SEC
filers (as defined) to disclose the date through which an entity
has evaluated subsequent events. The Company has adopted the
guidance without any impact on the consolidated financial
statements.
In June 2009, the FASB issued authoritative guidance in
connection with adding qualified special purpose entities into
the scope of guidance for consolidation of variable interest
entities. This literature also modifies the analysis by which a
controlling interest of a variable interest entity is determined
thereby requiring the controlling interest to consolidate the
variable interest entity. A controlling interest exists if a
party to a variable interest entity has both (i) the power
to direct the activities of a variable interest entity that most
significantly impact the entitys economic performance and
(ii) the obligation to absorb losses of or receive benefits
from the entity that could be potentially significant to the
variable interest entity. The guidance becomes effective as of
the beginning of the first annual reporting period beginning
after November 15, 2009 and will be applied prospectively
for interim and annual periods upon adoption. The Company does
not believe that the adoption of the authoritative guidance will
have a material impact the consolidated financial statements.
Subsequent
Events
On February 26, 2010, the Company completed an offering of
6,961,958 shares of common stock, including
908,081 shares of common stock subsequently sold pursuant
to the underwriters over-allotment option, at a price of
$28.50 per share, all of which were sold by funds advised by
Apax Partners L.P., the Companys principal stockholder and
certain members of the Companys management. The Company
received no proceeds from the offering.
The Company has evaluated its activities subsequent to
January 30, 2010, and concluded that no additional material
subsequent events have occurred that would require recognition
in the consolidated financial statements or disclosure in the
notes to the consolidated financial statements.
Note 2
Fair Value Measurements
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 $26,751 and $4,611
as of January 30, 2010 and January 31, 2009,
respectively, are reported at fair value utilizing Level 1
inputs.
|
|
|
|
Level 2: Observable inputs other than
those included in Level 1. For example, quoted prices for
similar assets or liabilities in active markets or quoted prices
for identical assets or liabilities in inactive markets. The
Company determined that the fair value measurements related to
the impaired long lived assets disclosed in Note 1 are
derived from significant other observable inputs. These
non-financial assets are measured on a non-recurring basis when
events and circumstances warrant.
|
|
|
|
Level 3: Unobservable inputs reflecting
managements own assumptions about the inputs used in
pricing the asset or liability.
|
61
rue21,
inc. and subsidiary
Notes to Consolidated Financial
Statements (Continued)
For the Fiscal Years Ended January 30, 2010,
January 31, 2009 and February 2, 2008
(Dollars in thousands, unless otherwise indicated)
Note 3
Property and Equipment
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Furniture and fixtures
|
|
$
|
58,518
|
|
|
$
|
43,327
|
|
Leasehold improvements
|
|
|
54,715
|
|
|
|
42,284
|
|
Computer equipment, software and other
|
|
|
15,937
|
|
|
|
11,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,170
|
|
|
|
96,889
|
|
Less accumulated depreciation and amortization
|
|
|
(56,023
|
)
|
|
|
(40,202
|
)
|
|
|
$
|
73,147
|
|
|
$
|
56,687
|
|
|
|
|
|
|
|
|
|
|
Note 4
Long-Term Debt
Effective April 10, 2008, the Company established a
five-year $60,000 senior secured revolving credit facility (the
Senior Secured Credit Facility) with Bank of America N.A. The
ceiling is expandable at the Companys option in increments
of $5,000 up to a limit of $85,000 under certain defined
conditions. The Senior Secured Credit Facility initial borrowing
was $27,217. Proceeds from the initial borrowing were used for
the extinguishment of all of the Companys existing
long-term debt facilities and the Bank of America N.A.
commitment fee. Availability under the Senior Secured Credit
Facility is collateralized by a first priority interest in all
the Companys assets. On November 24, 2009, the
Company amended its Senior Secured Credit Facility with Bank of
America, N.A. An amendment fee of $125 was paid on the effective
date of the amendment. Key provisions of the amendment include
an increase in the borrowing ceiling to $85,000 from $60,000,
which is further expandable at the Companys option in
increments of $5,000 up to a limit of $100,000 under certain
defined conditions. Interest accrues at the higher of the
Federal Funds rate plus 0.50%, the prime rate or the adjusted
LIBOR rate plus the applicable margin which ranges from 1.25% to
3.00% set quarterly dependent upon average net availability on
the facility during the previous quarter. The weighted-average
interest rate under the Senior Secured Credit Facility was 2.75%
and 3.22% for the fiscal years ended January 30, 2010 and
January 31, 2009, respectively. The Senior Secured Credit
Facility includes a fixed charge covenant applicable only if net
availability falls below thresholds of 10%. The Company is in
compliance with all covenants under the Senior Secured Credit
Facility at January 30, 2010. The Senior Secured Credit
Facility matures in April 2013. As of January 30, 2010, $0
was outstanding under the Senior Secured Credit Facility.
Note 5
Share-Based Compensation
In November 2009, the Company adopted the 2009 Omnibus Incentive
Plan (the 2009 Plan) in connection with the Companys
initial public offering pursuant to which key employees,
officers, and directors shall be eligible to receive the grants
of stock options, stock appreciation rights, restricted stock or
restricted stock units to employees (including officers and
directors who are also employees) of the Company to purchase 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 in the future
are generally exercisable ratably over four years subject to
certain employment terms and conditions. The stock options begin
to expire ten years from the date of issuance. Restricted stock
granted under the 2009 Plan vest one year from the date of the
grant. To date, no stock appreciation rights or restricted stock
units have been issued under the 2009 Plan. 41,000 options to
purchase common stock were granted under the 2009 Plan during
fiscal year 2009.
62
rue21,
inc. and subsidiary
Notes to Consolidated Financial
Statements (Continued)
For the Fiscal Years Ended January 30, 2010,
January 31, 2009 and February 2, 2008
(Dollars in thousands, unless otherwise indicated)
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 shares of the common stock outstanding based on
eligibility, vesting, and performance standards established by
the board of directors. Upon adopting the 2009 Plan, the Company
terminated the 2003 Plan and no further option grants will be
made under the 2003 Plan.
The following table represents stock options granted, vested,
and expired under the existing share based compensation plans
for fiscal year ended January 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
Common
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
(Per share)
|
|
|
(In years)
|
|
|
|
|
|
Outstanding January 31, 2009
|
|
|
1,214
|
|
|
$
|
2.91
|
|
|
|
7.50
|
|
|
$
|
2,143
|
|
Granted
|
|
|
454
|
|
|
$
|
12.68
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(498
|
)
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
Expired or forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 30, 2010
|
|
|
1,170
|
|
|
$
|
7.84
|
|
|
|
8.13
|
|
|
$
|
23,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at January 30, 2010
|
|
|
481
|
|
|
$
|
3.19
|
|
|
|
6.91
|
|
|
$
|
11,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 30, 2010, the Company had
3,585,000 shares available for stock grants. The Company
recognized $410, $0 and $34 in compensation expense related to
stock options for the fiscal years ended January 30, 2010,
January 31, 2009 and February 2, 2008, respectively.
The weighted-average fair value of stock options at the grant
date was $6.92, $0.43 and $0.38 for the fiscal years ended
January 30, 2010, January 31, 2009 and
February 2, 2008, respectively. The intrinsic value of
options exercised was $13,834, $617 and $311 for the fiscal
years ended January 30, 2010, January 31, 2009 and
February 2, 2008, respectively. All outstanding vested
options are currently exercisable as of January 30, 2010.
The fair value of stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the
following range of weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
January 30,
|
|
January 31,
|
|
February 2,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Risk-free interest rate(1)
|
|
|
2.6%-3.3%
|
|
|
|
4.7%
|
|
|
|
4.7%
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility factors for the expected market price of the
Companys common stock(2)
|
|
|
53%-60%
|
|
|
|
55.0%
|
|
|
|
55.0%
|
|
Weighted average expected term(3)
|
|
|
6.3 years
|
|
|
|
6.3 years
|
|
|
|
7.5 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 |
63
rue21,
inc. and subsidiary
Notes to Consolidated Financial
Statements (Continued)
For the Fiscal Years Ended January 30, 2010,
January 31, 2009 and February 2, 2008
(Dollars in thousands, unless otherwise indicated)
|
|
|
|
|
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 January 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Averaged Fair Value
|
|
|
|
Shares
|
|
|
at Grant Date
|
|
|
|
(In thousands)
|
|
|
(Per share)
|
|
|
Non-vested as of January 31, 2009
|
|
|
810
|
|
|
$
|
0.18
|
|
Granted
|
|
|
454
|
|
|
$
|
6.92
|
|
Vested
|
|
|
(575
|
)
|
|
$
|
0.10
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of January 30, 2010
|
|
|
689
|
|
|
$
|
4.70
|
|
|
|
|
|
|
|
|
|
|
As of January 30, 2010, there was $2,868 of unrecognized
compensation expense related to nonvested stock option awards
that is expected to be recognized over a weighted-average period
of 3.54 years. The total fair value of shares vested during
the fiscal years ended January 30, 2010, January 31,
2009 and February 2, 2008, was $5,312, $851 and $578,
respectively.
Note 6
Lease Commitments
All of the Companys operations are conducted from leased
premises. Store leases provide for base rentals, some of which
increase over time, and the payment of a percentage of sales as
additional rent when sales exceed specified levels. Minimum
rentals relating to these leases are recorded on a straight-line
basis. Generally, lease terms are five years in length excluding
renewal options. In addition, the Company is typically
responsible under its leases for maintenance, common area
charges, real estate taxes, and certain other expenses. Point of
sale equipment is also leased by the Company in terms of four
years. All leases are classified as operating leases.
A summary of fixed minimum and contingent rent expense for all
operating leases follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Store Rent :
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed minimum
|
|
$
|
35,665
|
|
|
$
|
28,057
|
|
|
$
|
20,649
|
|
Contingent
|
|
|
2,425
|
|
|
|
1,039
|
|
|
|
1,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total store rent, excluding common maintenance charges, real
estate taxes and certain other expenses
|
|
|
38,090
|
|
|
|
29,096
|
|
|
|
21,676
|
|
Offices, distribution facilities and equipment
|
|
|
3,165
|
|
|
|
3,050
|
|
|
|
2,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rent expense
|
|
$
|
41,255
|
|
|
$
|
32,146
|
|
|
$
|
24,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company leases an approximately 190,000 square foot
distribution and office facility, which is accounted for as an
operating lease. The lease agreement expires in fiscal year 2011
with options to renew for two additional five-year terms. Our
principal executive office, approximating 53,000 square
feet, is also under an operating lease agreement. This lease
agreement expires in fiscal year 2017 with an option to renew
for an additional five-year term.
64
rue21,
inc. and subsidiary
Notes to Consolidated Financial
Statements (Continued)
For the Fiscal Years Ended January 30, 2010,
January 31, 2009 and February 2, 2008
(Dollars in thousands, unless otherwise indicated)
The table below summarizes future annual minimum lease
obligations under all operating leases as required by the lease
agreements:
|
|
|
|
|
Fiscal Year
|
|
|
|
|
2010
|
|
$
|
41,564
|
|
2011
|
|
|
38,039
|
|
2012
|
|
|
33,281
|
|
2013
|
|
|
27,969
|
|
2014
|
|
|
20,759
|
|
Thereafter
|
|
|
56,056
|
|
|
|
|
|
|
Total future lease obligations
|
|
$
|
217,668
|
|
|
|
|
|
|
Note 7
401(k) Profit Sharing Plan
The Company sponsors a qualified 401(k) plan with a contributory
profit-sharing feature (the Plan) for eligible employees.
Effective January 1, 2010, the Plan was amended to permit
participants of the Plan to contribute up to 50% of pretax
annual compensation as defined in the Plan, subject to certain
limitations. Also, effective January 1, 2010, the Company
will match 100% of participant contributions up to 4% of pretax
annual compensation as defined in the Plan. Prior to this
amendment, participants of the Plan could contribute up to 15%
of pretax annual compensation as defined in the Plan, subject to
certain limitations and the Company matched 25% of the first 6%
of base compensation that a participant contributes to the Plan.
Profit-sharing contributions to the Plan, as
determined by the Board of Directors, are discretionary, but
generally may not exceed 15% of defined annual compensation paid
to all participating employees. 401(k) matching contributions
and profit-sharing contributions to the Plan were $184, $119 and
$116 for the fiscal years ended January 30, 2010,
January 31, 2009 and February 2, 2008, respectively,
and are included in selling, general, and administrative expense
in the Consolidated Statements of Income.
Note 8
Income Taxes
The provision for income taxes at for the fiscal years ended
January 30, 2010, January 31, 2009 and
February 2, 2008 consists of the current and deferred
elements in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
10,943
|
|
|
$
|
4,693
|
|
|
$
|
5,422
|
|
State
|
|
|
2,282
|
|
|
|
1,434
|
|
|
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
13,225
|
|
|
|
6,127
|
|
|
|
6,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,237
|
|
|
|
1,967
|
|
|
|
(536
|
)
|
State
|
|
|
(80
|
)
|
|
|
(67
|
)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
1,157
|
|
|
|
1,900
|
|
|
|
(522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
14,382
|
|
|
$
|
8,027
|
|
|
$
|
5,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
rue21,
inc. and subsidiary
Notes to Consolidated Financial
Statements (Continued)
For the Fiscal Years Ended January 30, 2010,
January 31, 2009 and February 2, 2008
(Dollars in thousands, unless otherwise indicated)
The Companys income taxes determined at the statutory rate
for the fiscal years ended January 30, 2010,
January 31, 2009 and February 2, 2008 differ from the
actual rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
January 30,
|
|
January 31,
|
|
February 2,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Effective Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes
|
|
|
3.8
|
%
|
|
|
4.4
|
%
|
|
|
4.5
|
%
|
Non-deductible expenses
|
|
|
0.7
|
%
|
|
|
0.4
|
%
|
|
|
0.3
|
%
|
Other
|
|
|
|
|
|
|
(1.0
|
)%
|
|
|
(0.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
39.5
|
%
|
|
|
38.8
|
%
|
|
|
39.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of temporary differences, the Company has the
following net deferred tax amounts at January 30, 2010,
January 31, 2009 and February 2, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fin 48 temporary differences
|
|
$
|
42
|
|
|
$
|
169
|
|
|
$
|
241
|
|
Deferred Rent
|
|
|
11,371
|
|
|
|
8,618
|
|
|
|
6,016
|
|
Accrued Compensation
|
|
|
959
|
|
|
|
740
|
|
|
|
499
|
|
Accrued Reserve
|
|
|
162
|
|
|
|
143
|
|
|
|
552
|
|
Inventory
|
|
|
941
|
|
|
|
547
|
|
|
|
435
|
|
Other
|
|
|
|
|
|
|
24
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
13,475
|
|
|
|
10,241
|
|
|
|
7,783
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
(13,438
|
)
|
|
|
(9,047
|
)
|
|
|
(4,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
37
|
|
|
$
|
1,194
|
|
|
$
|
3,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current-deferred tax assets
|
|
$
|
4,286
|
|
|
$
|
3,135
|
|
|
$
|
2,595
|
|
Noncurrent-deferred tax assets (liabilities)
|
|
|
(4,249
|
)
|
|
|
(1,941
|
)
|
|
|
499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37
|
|
|
$
|
1,194
|
|
|
$
|
3,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
rue21,
inc. and subsidiary
Notes to Consolidated Financial
Statements (Continued)
For the Fiscal Years Ended January 30, 2010,
January 31, 2009 and February 2, 2008
(Dollars in thousands, unless otherwise indicated)
The following table summarizes the activity related to our
unrecognized tax benefits:
|
|
|
|
|
Gross balance as of February 3, 2007
|
|
$
|
|
|
Prior period tax positions increase
|
|
|
228
|
|
|
|
|
|
|
Gross balance as of February 2, 2008
|
|
|
228
|
|
Prior period tax positions (decrease)
|
|
|
(82
|
)
|
|
|
|
|
|
Gross balance as of January 31, 2009
|
|
|
146
|
|
Prior period tax positions (decrease)
|
|
|
(111
|
)
|
|
|
|
|
|
Gross balance as of January 30, 2010
|
|
$
|
35
|
|
The gross amount of unrecognized tax benefits at
January 30, 2010, January 31, 2009 and
February 2, 2008 was $35, $146 and $228, respectively, of
which $6 would affect the effective tax rate if recognized. Over
the next 12 months the company believes that there will be
no material change in unrecognized tax benefits.
The Company classifies interest and penalties as an element of
tax expense. The amount of tax related interest and penalties
for fiscal years ended January 30, 2010, January 31,
2009 and February 2, 2008, respectively, was not material.
The Company files a consolidated U.S. Federal Tax returns
as well as various state tax returns. The Companys
U.S. Federal tax returns are open for further audit by
taxing authorities for the periods of 2005 through 2008. The
principal state jurisdictions that remain open to examination
for the periods 2004 and forward are: Pennsylvania, Texas, North
Carolina, Illinois, and West Virginia.
Note 9
Commitments and Contingencies
From time to time, the Company is involved in litigation
relating to claims arising out of the normal course of business.
As of the date hereof, the Company is involved in no litigation
that the Company believes will have a material adverse effect on
its consolidated financial condition, results of operation, or
liquidity.
Note 10
Related Party Transactions
In May 2003, the Company entered into a letter agreement with
Apax Partners, L.P. (Apax) as successor to Saunders
Karp & Megrue, LLC, relating to financial advisory
services to be provided to the Company from time to time. Under
the letter agreement, the Company agreed to pay an annual fee of
$250 to Apax and to reimburse Apax for all reasonable
out-of-pocket
expenses incurred in connection with the letter agreement. In
addition, the letter agreement provided for customary
indemnification provisions and terminates once Apax and its
affiliates beneficially own, collectively, less than 25% of the
Companys voting common stock. In November 2009, the letter
agreement with Apax was terminated and Apax received a
termination fee of $1,500, which was recorded as a component of
selling, general and administrative expenses. Amounts paid to
Apax totaled $1,696, $250 and $250 for fiscal years ended
January 30, 2010, January 31, 2009 and
February 2, 2008, respectively.
At January 30, 2010, funds advised by Apax owned
approximately 57% of the Companys outstanding common
stock. As a result of the offering on February 26, 2010, as
discussed in Note 1, funds advised by Apax now own
approximately 29% of the Companys outstanding common stock.
67
rue21,
inc. and subsidiary
Notes to Consolidated Financial
Statements (Continued)
For the Fiscal Years Ended January 30, 2010,
January 31, 2009 and February 2, 2008
(Dollars in thousands, unless otherwise indicated)
Note 11
Selected Quarterly Financial Data (Unaudited)
The following table sets forth certain unaudited quarterly
financial information (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
May 2,
|
|
|
August 1,
|
|
|
October 31,
|
|
|
January 30,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
Fiscal Year 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
107,998
|
|
|
$
|
125,106
|
|
|
$
|
137,110
|
|
|
$
|
155,386
|
|
Gross profit
|
|
|
37,918
|
|
|
|
44,992
|
|
|
|
49,571
|
|
|
|
55,426
|
|
Net income
|
|
|
2,989
|
|
|
|
5,328
|
|
|
|
5,978
|
|
|
|
7,722
|
|
Basic income per common share
|
|
|
0.14
|
|
|
|
0.24
|
|
|
|
0.27
|
|
|
|
0.33
|
|
Diluted income per common share
|
|
|
0.13
|
|
|
|
0.23
|
|
|
|
0.26
|
|
|
|
0.32
|
|
Weighted average basic common shares outstanding
|
|
|
22,090
|
|
|
|
22,090
|
|
|
|
22,201
|
|
|
|
23,530
|
|
Weighted average diluted common shares outstanding
|
|
|
23,006
|
|
|
|
23,008
|
|
|
|
23,058
|
|
|
|
24,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
May 3,
|
|
|
August 2,
|
|
|
November 1,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
Fiscal Year 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
76,779
|
|
|
$
|
98,058
|
|
|
$
|
97,464
|
|
|
$
|
119,113
|
|
Gross profit
|
|
|
25,218
|
|
|
|
34,714
|
|
|
|
35,149
|
|
|
|
38,480
|
|
Net income
|
|
|
836
|
|
|
|
4,315
|
|
|
|
2,890
|
|
|
|
4,598
|
|
Basic income per common share
|
|
|
0.04
|
|
|
|
0.20
|
|
|
|
0.13
|
|
|
|
0.21
|
|
Diluted income per common share
|
|
|
0.04
|
|
|
|
0.19
|
|
|
|
0.13
|
|
|
|
0.20
|
|
Weighted average basic common shares outstanding
|
|
|
21,873
|
|
|
|
21,895
|
|
|
|
21,953
|
|
|
|
22,046
|
|
Weighted average diluted common shares outstanding
|
|
|
22,849
|
|
|
|
22,850
|
|
|
|
22,822
|
|
|
|
22,846
|
|
68
|
|
Item 9.
|
Changes
In and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
Item 9A.
|
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 Annual Report on
Form 10-K
pursuant to
Rule 13a-15(b)
under 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
Annual Report on
Form 10-K
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.
Managements
Report on Internal Control over Financial Reporting
This annual report does not include a report of
managements assessment regarding internal control over
financial reporting or an attestation report of the
Companys independent registered public accounting firm due
to a transition period established by the Securities and
Exchange Commission for newly public companies.
Changes
in Internal Control over Financial Reporting
There was no change in the Companys internal control over
financial reporting that occurred during the Companys
fourth quarter of fiscal year 2009 that has materially affected,
or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
|
|
Item 9B.
|
Other
Information.
|
On November 12, 2009, all of the holders of shares of the
Companys common stock approved the following matters by
written consent: the amended and restated certificate of
incorporation of the Company to be effective in connection with
the Companys initial public offering; the amended and
related bylaws of the Company to be effective in connection with
the Companys initial public offering; the indemnification
agreement to be entered into with the Companys directors,
officers and certain of its employees; the adoption of the
rue21, inc. 2009 Omnibus Incentive Plan; and the election of
Douglas E. Coltharp to the Board of Directors of the Company.
Part III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
The information required by this item is incorporated herein by
reference to the sections entitled
Proposal No. 1-Election
of Directors, Information Concerning Our Board of
Directors Audit Committee , Information
Concerning Executive Officers ,Section 16(a)
Beneficial Ownership Reporting Compliance and
Information Concerning Our Board of Directors
Code of Business Conduct and Ethics in the 2010 Proxy
Statement.
The Company has adopted a code of ethics, our Code of Business
Conduct and Ethics (the Code) that applies to all
employees including our principal executive officer, principal
financial officer, controller and persons performing similar
functions. Our Code of Business Conduct and Ethics is available
on our website, www.rue21.com, under Investor Relations,
Corporate Governance and in print to any person who
requests it. Any amendments to, or waivers from, a provision of
our Code that applies to our principal executive officer,
principal financial officer or persons performing similar
functions and that relates to any element of the Code enumerated
in paragraph (b) of Item 406 of
Regulation S-K
shall be disclosed by posting such information on our website.
69
|
|
Item 11.
|
Executive
Compensation.
|
The information required by this item is incorporated herein by
reference to the sections entitled Information Concerning
our Board of Directors Director Compensation and
Understanding Our Director Compensation Table and
Executive Compensation Information Concerning
our Board of Directors Compensation
Committee Compensation Committee Interlocks and
Insider Participation and Compensation Committee
Report in the 2010 Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this item is incorporated herein by
reference to the sections entitled Stock Ownership
and Equity Compensation Plan Information in the 2010
Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by this item is incorporated herein by
reference to the sections Certain Relationships and
Transactions with Related Persons, Information
Concerning our Board of Directors Compensation
Committee Compensation Committee Interlocks and
Insider Participation and in Information Concerning Our
Board of Directors Director Independence in
the 2010 Proxy Statement.
|
|
Item 14.
|
Principal
Accountant Fees and Services.
|
The information required by this item is incorporated herein by
reference to the section entitled
Proposal 2 Ratification of Independent
Registered Public Accounting Firm For Fiscal Year 2010 - Audit
and Non-Audit Fees and Independent Public Accountants in
the 2010 Proxy Statement.
Part IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules.
|
1. Financial Statements: See
Index to Consolidated Financial Statements in
Part II, Item 8 of this
Form 10-K.
2. Financial Statement
Schedule: Schedules are included in the
Consolidated Financial Statements or notes of this
Form 10-K
or are not required.
3. Exhibits: The exhibits listed in the
accompanying index to exhibits are filed or incorporated by
reference as part of this
Form 10-K.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Name: Robert N. Fisch
|
|
|
|
Title:
|
President and Chief Executive Officer
|
Date: March 31, 2010
|
|
|
|
By:
|
/s/ Keith
A. McDonough
|
Name: Keith A. McDonough
|
|
|
|
Title:
|
Senior Vice President and Chief Financial Officer
|
Date: March 31, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Robert
N. Fisch
Robert
N. Fisch
|
|
President, Chief Executive Officer and Chairman (principal
executive
officer)
|
|
March 31, 2010
|
|
|
|
|
|
/s/ Keith
A. McDonough
Keith
A. McDonough
|
|
Senior Vice President and Chief Financial Officer (principal
financial officer and principal accounting
officer)
|
|
March 31, 2010
|
|
|
|
|
|
/s/ Arnold
S. Barron
Arnold
S. Barron
|
|
Director
|
|
March 31, 2010
|
|
|
|
|
|
/s/ Macon
F. Brock Jr.
Macon
F. Brock
|
|
Director
|
|
March 31, 2010
|
|
|
|
|
|
/s/ Douglas
E. Coltharp
Douglas
E. Coltharp
|
|
Director
|
|
March 31, 2010
|
|
|
|
|
|
/s/ John
F. Megrue, Jr.
John
F. Megrue, Jr.
|
|
Director
|
|
March 31, 2010
|
|
|
|
|
|
/s/ Alex
S. Pellegrini
Alex
S. Pellegrini
|
|
Director
|
|
March 31, 2010
|
71
Exhibit Index
|
|
|
|
|
|
3
|
.1
|
|
Registrants Amended and Restated Certificate of
Incorporation, incorporated by reference to Exhibit 4.1 to the
Registrants Post-Effective Amendment No. 1 to Registration
Statement on Form S-8 (SEC File No. 333-164401) filed on
February 19, 2010.
|
|
3
|
.2
|
|
Registrants Amended and Restated By-laws, incorporated by
reference to Exhibit 4.2 to the Registrants Post-Effective
Amendment No. 1 to Registration Statement on Form S-8 (SEC File
No. 333-164401) filed on February 19, 2010.
|
|
4
|
.1
|
|
Specimen Common Stock Certificate, incorporated by reference to
Exhibit 4.1 to the Registrants Form S-1/A (File No.
333-161850) filed on November 10, 2009.
|
|
10
|
.1
|
|
Employment Agreement dated as of January 1, 2008, by and between
Robert Fisch and rue21, inc., incorporated by reference to
Exhibit 10.1 to Registrants Form S-1 (File No. 333-161850)
filed on September 10, 2009.
|
|
10
|
.2
|
|
Shareholders Agreement, dated as of May 15, 2003, between
rue21, inc., SKM Equity Fund II, L.P., SKM Investment Fund II,
funds advised by Apax Partners, L.P., BNP Paribas of North
America, Inc., UnionBalCal Equities, Inc. and National City Bank
of Pennsylvania, incorporated by reference to Exhibit 10.2 to
Registrants Form S-1 (File No. 333-161850) filed on
September 10, 2009.
|
|
10
|
.3
|
|
rue21, inc. Second Amended and Restated 2003 Ownership Incentive
Plan, incorporated by reference to Exhibit 4.3 to the
Registrants Post-Effective Amendment No. 1 to Registration
Statement on Form S-8 (SEC File No. 333-164401) filed on
February 19, 2010.
|
|
10
|
.4
|
|
rue21, inc. 2009 Omnibus Incentive Plan, incorporated by
reference to Exhibit 4.4 to the Registrants Post-Effective
Amendment No. 1 to Registration Statement on Form S-8 (SEC File
No. 333-164401) filed on February 19, 2010.
|
|
10
|
.5
|
|
Credit Agreement, dated April 10, 2008, among rue21, inc., as
lead borrower, the borrowers named therein, r services llc, as
guarantor and Bank of America, N.A. as administrative agent,
collateral agent, swing line lender and letter of credit issuer,
and the other lender parties thereto, incorporated by reference
to Exhibit 10.5 to Registrants Form S-1 (File No.
333-161850) filed on October 13, 2009.
|
|
10
|
.6
|
|
Security Agreement, dated April 10, 2008, by and among rue21,
inc., as lead borrower, r services llc, as guarantor, and Bank
of America, N.A., as collateral agent, incorporated by reference
to Exhibit 10.6 to Registrants Form S-1 (File No.
333-161850) filed on September 10, 2009.
|
|
10
|
.7
|
|
Guaranty, dated April 10, 2008, by r services llc, as guarantor,
in favor of Bank of America, N.A., as administrative agent and
collateral agent, incorporated by reference to Exhibit 10.7 to
Registrants Form S-1 (File No. 333-161850) filed on
September 10, 2009.
|
|
10
|
.8
|
|
First Amendment to Credit Agreement by and among rue21, inc., as
the Lead Borrower, r services llc, as Guarantor, and Bank of
America, N.A., as Lender, Administrative Agent, Collateral
Agent, Swing Line Lender and Letter of Credit Issuer, dated
November 24, 2009, incorporated by reference to Exhibit 10.1 of
the Current Report on Form 8-K filed on December 1, 2009.
|
|
10
|
.9
|
|
First Amendment to Security Agreement by and among rue21, inc.,
as the Lead Borrower, r services llc, as Guarantor, and Bank of
America, N.A. as Collateral Agent, dated November 24, 2009,
incorporated by reference to Exhibit 10.2 of the Current Report
on Form 8-K filed on December 1, 2009.
|
|
10
|
.10
|
|
First Amendment to Intellectual Property Security Agreement by
and among rue21, inc., as the Lead Borrower, r services llc, as
Guarantor, and Bank of America, N.A. as Collateral Agent, dated
November 24, 2009, incorporated by reference to Exhibit 10.3 of
the Current Report on Form 8-K filed on December 1, 2009.
|
|
10
|
.11
|
|
Lease Agreement, dated June 28, 1999, by and between West
Virginia Economic Development Authority, as landlord, and
Pennsylvania Fashions, Inc., as tenant, incorporated by
reference to Exhibit 10.8 to Registrants Form S-1 (File
No. 333-161850) filed on September 10, 2009.
|
|
10
|
.12
|
|
First Amendment to Lease, dated April 1, 2002, by and between
West Virginia Economic Development Authority, as landlord, and
Pennsylvania Fashions, Inc., as tenant, incorporated by
reference to Exhibit 10.8.1 to Registrants Form S-1
(File No. 333-161850) filed on October 13, 2009.
|
|
10
|
.13
|
|
Letter Agreement, dated May 15, 2003, by and between Apax
Partners, L.P., as successors to Saunders Karp & Megrue,
LLC and rue21, inc., incorporated by reference to Exhibit 10.10
to Registrants Form S-1 (File No. 333-161850), filed on
September 10, 2009.
|
72
|
|
|
|
|
|
10
|
.14
|
|
Termination Agreement , by and between rue21, inc. and Apax
Partners, L.P. incorporated by reference to Exhibit 10.11 to
Registrants Form S-1 (File No. 333-161850) filed on
October 13, 2009.
|
|
10
|
.15
|
|
Form of Indemnification Agreement for Directors, incorporated by
reference to Exhibit 10.12 to Registrants Form S-1/A (File
No. 333-161850) filed on November 9, 2009.
|
|
10
|
.16
|
|
Form of Indemnification Agreement for Officers, incorporated by
reference to Exhibit 10.17 to Registrants Form S-1/A (File
No. 333-161850) filed on November 9, 2009.
|
|
10
|
.17
|
|
Form of Non-Qualified Stock Option Agreement, incorporated by
reference to Exhibit 10.13 to Registrants Form S-1/A (File
No. 333-161850) filed on November 2, 2009.
|
|
10
|
.18
|
|
Form of Stock Appreciation Rights Agreement, incorporated by
reference to Exhibit 10.14 to Registrants Form S-1/A (File
No. 333-161850) filed on November 2, 2009.
|
|
10
|
.19
|
|
Form of Restricted Stock Unit Agreement, incorporated by
reference to Exhibit 10.15 to Registrants Form S-1/A (File
No. 333-161850) filed on November 2, 2009.
|
|
10
|
.20
|
|
Form of Restricted Stock Agreement, incorporated by reference to
Exhibit 10.16 to Registrants Form S-1/A (File No.
333-161850) filed on November 2, 2009.
|
|
21
|
.1*
|
|
List of subsidiaries of rue21, inc.
|
|
23
|
.1*
|
|
Consent of Ernst & Young LLP, independent registered public
accounting firm.
|
|
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.
|
73