UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

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

COMMISSION FILE NUMBER 1-34536

rue21, inc.

(Exact name of registrant as specified in its charter)

DELAWARE (State or Other Jurisdiction of Incorporation or Organization)		25-1311645 (I.R.S. Employer Identification No.)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

     The number of shares outstanding of the Registrant’s common stock was 24,399,356 as of May 23, 2011.

 

 

rue21, inc.

Form 10-Q

Quarter Ended April 30, 2011

INDEX

		Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets: April 30, 2011, January 29, 2011 and May 1, 2010			3
Consolidated Statements of Income: Thirteen weeks ended April 30, 2011 and May 1, 2010			4
Consolidated Statements of Cash Flows: Thirteen weeks ended April 30, 2011 and May 1, 2010			5
Notes to Unaudited Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3. Quantitative and Qualitative Disclosures about Market Risk			20
Item 4. Controls and Procedures			20
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			21
Item 1A. Risk Factors			21
Item 6. Exhibits			21
Signatures			22
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

rue21, inc. and subsidiaries

		April 30,				January 29,				May 1,
		2011				2011				2010
		(Unaudited)								(Unaudited)
		(in thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents		$	55,587			$	50,111			$	27,785
Accounts receivable			10,340				6,733				7,288
Merchandise inventory, net			105,630				96,051				86,689
Prepaid expenses and other current assets			12,463				10,580				7,609
Deferred tax assets			6,699				5,024				4,335
Total current assets			190,719				168,499				133,706
Property and equipment, net			97,977				91,371				76,718
Other assets			971				921				925
Total assets		$	289,667			$	260,791			$	211,349
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	89,909			$	82,075			$	74,346
Accrued expenses and other current liabilities			16,416				15,616				13,488
Accrued payroll and related taxes			9,216				12,053				8,222
Deferred rent and tenant allowances, current portion			7,759				7,033				6,088
Accrued income and franchise taxes			8,157				1,999				4,279
Total current liabilities			131,457				118,776				106,423
Non-current liabilities:
Long-term debt			—				—				—
Deferred rent, tenant allowances and other long-term liabilities			40,705				34,235				27,313
Deferred tax liabilities			4,684				5,651				3,677
Total non-current liabilities			45,389				39,886				30,990
Commitments and Contingencies			—				—				—
Stockholders’ equity:
Common stock— par value $0.001 per share; 200,000 shares authorized; 24,394, 24,380 and 24,266 shares issued and outstanding, respectively			24				24				24
Additional paid in capital			32,626				31,552				27,782
Retained earnings			80,171				70,553				46,130
Total stockholder’s equity			112,821				102,129				73,936
Total liabilities and stockholders’ equity		$	289,667			$	260,791			$	211,349

See accompanying notes to the unaudited consolidated financial statements.

rue21, inc. and subsidiaries

		Thirteen weeks ended
		April 30,				May 1,
		2011				2010
		(Unaudited)
		(in thousands, except per share data
Net sales		$	172,875			$	137,772
Cost of goods sold (includes certain buying, occupancy and distribution center expenses)			105,629				85,541
Gross profit			67,246				52,231
Selling, general, and administrative expense			45,373				37,294
Depreciation and amortization expense			6,103				4,983
Income from operations			15,770				9,954
Interest (income) expense, net			(22	)			28
Income before income taxes			15,792				9,926
Provision for income taxes			6,173				4,105
Net income		$	9,619			$	5,821
Basic income per common share		$	0.39			$	0.24
Diluted income per common share		$	0.38			$	0.23
Weighted average basic common shares outstanding			24,383				24,248
Weighted average diluted common shares outstanding			25,063				25,044

See accompanying notes to the unaudited consolidated financial statements.

rue21, inc. and subsidiaries

		Thirteen weeks ended
		April 30,				May 1,
		2011				2010
		(Unaudited, in thousands)
Operating activities
Net income		$	9,619			$	5,821
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			6,103				4,983
Loss on fixed asset disposals			173				41
Impairment of long-lived assets			124				95
Deferred taxes			(2,643	)			(621	)
Stock based compensation			800				335
Excess tax benefits from stock-based compensation activities			(216	)			(267	)
Changes in:
Accounts receivable			(3,607	)			(3,454	)
Merchandise inventory, net			(9,579	)			(13,996	)
Prepaid expenses and other current assets			(1,883	)			(826	)
Accounts payable			7,834				14,383
Accrued payroll and related taxes			(2,837	)			(2,264	)
Accrued expenses and other current liabilities			801				(896	)
Deferred rent and tenant allowances			7,196				3,901
Accrued income and franchise taxes			6,375				2,145
Other			(81	)			(20	)
Net cash provided by operating activities			18,179				9,360
Investing activities
Acquisition of property and equipment			(12,974	)			(8,662	)
Proceeds from the sale of property and equipment			—				4
Net cash used for investing activities			(12,974	)			(8,658	)
Financing activities
Excess tax benefits from stock-based compensation activities			216				267
Proceeds from stock options exercised			55				65
Net cash provided by financing activities			271				332
Increase in cash and cash equivalents			5,476				1,034
Cash and cash equivalents, beginning of period			50,111				26,751
Cash and cash equivalents, end of period		$	55,587			$	27,785
Supplemental disclosure of cash flow information
Cash paid for interest		$	74			$	84
Cash paid for income taxes		$	2,332			$	2,607

See accompanying notes to the unaudited consolidated financial statements.

rue2l, inc. and subsidiaries

Notes to Unaudited Consolidated Financial Statements

NOTE 1 — Organization and Basis of Presentation

rue21, inc. (the Company or rue21) is a specialty retailer of girls and guys apparel and accessories with 677, 638 and 565 stores as of April 30, 2011, January 29, 2011 and May 1, 2010, respectively, in various strip centers, regional malls and outlet centers throughout the United States. Sales are generally transacted for cash or checks and through the acceptance of third-party credit and debit cards.

The consolidated financial statements include all of the accounts of the Company and its wholly-owned subsidiaries, r services, llc and rue services corporation. All intercompany transactions and balances have been eliminated in consolidation. At April 30, 2011, the Company operated in one reportable segment.

In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of consolidated financial position, results of operations, and cash flows for the interim periods presented. The accompanying unaudited consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to ensure that the information presented is not misleading. Accordingly, these unaudited consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year 2010 included in the Company’s Annual Report on Form 10-K.

The results of operations for the current and prior periods are not necessarily indicative of the operating results for the full fiscal year.

NOTE 2 — Summary of Significant Accounting Policies

Fiscal Year

The Company’s fiscal year is 52 or 53 weeks ending on the Saturday nearest to January 31 of the following year. As used herein, the “first quarter of 2011” and the “first quarter of 2010” refer to the thirteen week periods ending April 30, 2011 and May 1, 2010, respectively.

Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Seasonality

Our business is seasonal and historically we have realized a higher portion of our net sales, net income and operating cash flows in the second through the fourth fiscal quarters, attributable to the impact of the back-to-school and holiday selling seasons. As a result, our working capital requirements fluctuate during the year, increasing in mid-summer in anticipation of the back-to-school selling season. Our business is also subject, at certain times, to calendar shifts which may occur during key selling times such as school holidays, Easter and regional fluctuations in the calendar during the back-to-school selling season.

Recent Accounting Standards

In June 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance in connection with adding qualified special purpose entities into the scope of guidance for consolidation of variable interest entities. This literature also modifies the analysis by which a controlling interest of a variable interest entity is determined thereby requiring the controlling interest to

rue2l, inc. and subsidiaries

Notes to Unaudited Consolidated Financial Statements
Thirteen weeks ended April 30, 2011 and May 1, 2010
(Dollars in thousands unless otherwise indicated)

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 entity’s economic performance and (ii) the obligation to absorb losses of or receive benefits from the entity that could be potentially significant to the variable interest entity. The guidance is effective as of the beginning of the first annual reporting period beginning after November 15, 2009 and will be applied prospectively for interim and annual periods upon adoption. The Company has adopted the guidance without any impact on the consolidated financial statements.

In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, “Improving Disclosures about Fair Value Measurements” (ASU 2010-6). ASU 2010-6 amends the FASB’s authoritative guidance related to fair value measurements and disclosures to require additional disclosures related to transfers between levels in the hierarchy of fair value measurements. ASU 2010-6 is effective for interim and annual fiscal years beginning after December 15, 2009. The standard does not change how fair values are measured. The Company has adopted the guidance without any impact on the consolidated financial statements.

The FASB issues ASUs to amend the authoritative literature in Accounting Standards Codification (ASC). There have been a number of ASUs to date that amend the original text of ASC. Except for the ASU listed above, those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company.

Reclassifications

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

NOTE 3 — Earnings Per Share

Earnings per common share has been computed as follows (in thousands, except per share data):

		Thirteen weeks ended
		April 30,				May 1,
		2011				2010
		(in thousands, except per share data)
Net income		$	9,619			$	5,821
Weighted average basic common shares outstanding			24,383				24,248
Impact of dilutive securities			680				796
Weighted average diluted common shares outstanding			25,063				25,044
Per common share:
Basic income per common share		$	0.39			$	0.24
Diluted income per common share		$	0.38			$	0.23

Equity awards to purchase 459,257 and 694,000 shares of common stock for the thirteen weeks ended April 30, 2011 and May 1, 2010, respectively, were outstanding, but were not included in the computation of weighted average diluted common share amounts as the effect of doing so would have been anti-dilutive.

NOTE 4 — Stock-Based Compensation

In November 2009, the Company adopted the 2009 Omnibus Incentive Plan (the 2009 Plan) in connection with the Company’s initial public offering, pursuant to which key employees, officers, and directors shall be eligible to receive grants of stock options, stock appreciation rights, restricted stock or restricted stock units to purchase or receive, as applicable, up to an aggregate of 3,626,000 shares of common stock based on eligibility, vesting, and performance standards established by the board of directors. Stock

rue2l, inc. and subsidiaries

Notes to Unaudited Consolidated Financial Statements
Thirteen weeks ended April 30, 2011 and May 1, 2010
(Dollars in thousands unless otherwise indicated)

options granted are generally exercisable ratably over three or four years, subject to certain employment terms and conditions. The stock options generally expire ten years from the date of issuance. To date, 516,132 stock options and 28,598 restricted stock units have been granted and no stock appreciation rights or restricted stock have been issued under the 2009 Plan.

Effective May 15, 2003, the Company adopted the 2003 Ownership Incentive Plan (the 2003 Plan) pursuant to which key employees, officers, and directors were eligible to receive options to purchase common stock for an aggregate of up to 19.8% of the number of shares of the common stock outstanding upon adoption of the 2003 Plan based on eligibility, vesting, and performance standards established by the board of directors. Upon adopting the 2009 Plan, the Company discontinued use of the 2003 Plan and no further equity awards have been or will be made under the 2003 Plan.

The following table represents stock options granted, vested, and expired under the existing share-based compensation plans for the thirteen weeks ended April 30, 2011.

										Weighted
						Weighted-				Average
		Common				Average				Remaining				Aggregate
		Stock				Exercise				Contractual				Intrinsic
		Options				Price				Term				Value
		(in thousands)				(per share)				(in years)
Outstanding January 29, 2011			1,441			$	15.63				7.83			$	21,349
Granted			37			$	30.07
Exercised			(14	)		$	3.98
Expired or forfeited			(6	)			27.76
Outstanding April 30, 2011			1,458			$	16.06				7.65			$	21,919
Vested at April 30, 2011			646			$	9.51				6.64			$	13,644

As of April 30, 2011, the Company had 3,081,270 shares available for stock grants. The Company recognized $800 and $335 in compensation expense related to stock options for the thirteen weeks ended April 30, 2011 and May 1, 2010, respectively. The weighted average fair value of stock options at the grant date was $16.13 and $18.44 for the thirteen weeks ended April 30, 2011 and May 1, 2010, respectively. The intrinsic value of options exercised was $369 and $849 for the thirteen weeks ended April 30, 2011 and May 1, 2010, respectively. All outstanding vested options are currently exercisable as of April 30, 2011.

The fair value of stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following range of assumptions:

		Thirteen weeks ended
		April 30,				May 1,
		2011				2010
Risk-free interest rate (1)			2.1%-2.9	%			3.0%-3.4	%
Dividend yield			—				—
Volatility factors for the expected market price of the Company’s common stock (2)			55.0	%			53.0	%
Weighted average expected term (3)		6.0 years				6.3 years

rue2l, inc. and subsidiaries

Notes to Unaudited Consolidated Financial Statements
Thirteen weeks ended April 30, 2011 and May 1, 2010
(Dollars in thousands unless otherwise indicated)

The following table summarizes information regarding non-vested outstanding stock options as of April 30, 2011:

						Weighted
						Averaged Fair
						Value at Grant
		Shares				Date
		(in thousands)				(per share)
Non-vested as of January 29, 2011			881			$	11.16
Granted			37			$	16.13
Vested			(100	)		$	16.37
Cancelled			(6	)			15.11
Non-vested as of April 30, 2011			812			$	11.04

As of April 30, 2011, there was $8,974 of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized over a weighted-average period of 1.42 years. The total fair value of shares vested during the thirteen weeks ended April 30, 2011 and May 1, 2010, was $1,629 and $361, respectively.

Restricted Stock Units

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

The following table summarizes information regarding non-vested outstanding restricted stock units as of April 30, 2011:

						Weighted
						Averaged Fair
						Value at Grant
		Shares				Date
		(in thousands)				(per share)
Non-vested as of January 29, 2011			25			$	30.49
Granted			4			$	29.77
Vested			—			$	—
Cancelled			—				—
Non-vested as of April 30, 2011			29			$	30.39

As of April 30, 2011, there was $869 of unrecognized compensation expense related to non-vested restricted stock unit awards that is expected to be recognized over a weighted-average period of 1.68 years. There was $0 total fair value of shares vested during the thirteen weeks ended April 30, 2011 and May 1, 2010, respectively.

rue2l, inc. and subsidiaries

Notes to Unaudited Consolidated Financial Statements
Thirteen weeks ended April 30, 2011 and May 1, 2010
(Dollars in thousands unless otherwise indicated)

NOTE 5 — Property, Plant and Equipment

		April 30,				January 29,				May 1,
		2011				2011				2010
Furniture and fixtures		$	77,613			$	73,635			$	61,867
Leasehold improvements			82,509				75,445				58,938
Computer equipment, software and other			18,932				18,044				16,406
			179,054				167,124				137,211
Less accumulated depreciation and amortization			(81,077	)			(75,753	)			(60,493	)
		$	97,977			$	91,371			$	76,718

In accordance with the FASB’s authoritative guidance related to the impairment or disposal of long-lived assets, impairment losses may be recorded on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. If such a condition occurs, the assets are adjusted to their estimated fair value, which is determined based upon prices for similar assets. Impairment charges of $124 and $95 were recognized for the thirteen weeks ended April 30, 2011 and May 1, 2010, 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.

NOTE 6 — Fair Value

The FASB’s authoritative guidelines require the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:

	•		Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities. The Company’s cash and cash equivalents of $55,587, $50,111 and $27,785 as of April 30, 2011, January 29, 2011 and May 1, 2010, respectively, are reported at fair value utilizing Level 1 inputs.
	•		Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
	•		Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. The Company determined that the fair value measurements related to the impaired long lived assets disclosed in Note 5 are derived from significant other observable inputs. These non-financial assets are measured on a non-recurring basis when events and circumstances warrant.

   In accordance with ASC 820, the following tables represent the fair value hierarchy for the Company’s financial assets (cash equivalents) measured at fair value on a recurring basis as of April 30, 2011 and May 1, 2010:

rue2l, inc. and subsidiaries

Notes to Unaudited Consolidated Financial Statements
Thirteen weeks ended April 30, 2011 and May 1, 2010
(Dollars in thousands unless otherwise indicated)

		Fair Value Measurements at April 30, 2011
						Quoted Market
						Prices in Active								Significant
						Markets for				Significant Other				Unobservable
		Carrying				Identical Assets				Observable				Inputs
		Amount				(Level 1)				Inputs (Level 2)				(level 3)
Cash and cash Equivalents
Cash		$	55,587			$	55,587			$	—			$	—
Total		$	55,587			$	55,587			$	—			$	—

NOTE 7— Income Taxes

The provision for income taxes is based on the current estimate of the annual effective tax rate and is adjusted as necessary for discrete events occurring in a particular period. The effective income tax rate for the thirteen weeks ended April 30, 2011 was 39.1% as compared to 41.4% for the thirteen weeks ended May 1, 2010. The lower effective income tax rate was primarily due to a discrete item we incurred for $0.6 million in expense related to our secondary offering of common stock completed in March 2010. The Company classifies interest and penalties as an element of tax expense. The amount of tax related interest and penalties for the thirteen weeks ended April 30, 2011 and May 1, 2010, respectively, was not material.

The Company recognizes income tax liabilities related to unrecognized tax benefits in accordance with the FASB’s authoritative guidance related to uncertain tax positions and adjusts these liabilities when its judgment changes as the result of the evaluation of new information. The Company does not anticipate any significant changes to the unrecognized tax benefits recorded at the consolidated balance sheet date within the next 12 months.

NOTE 8 — Commitments and Contingencies

From time to time, the Company is involved in litigation relating to claims arising out of the normal course of business. As of the date hereof, the Company is not involved in any litigation at this time that the Company believes will have a material adverse effect on its consolidated financial condition, results of operation, or liquidity.

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

FORWARD-LOOKING STATEMENTS

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

•

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

•

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

•

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

•

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

•

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

•

our failure to protect our brand image;

•

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

•

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

•

seasonality of our business;

•

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

•

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

•

disruptions in our supply chain and distribution facility;

•

damage or interruption to our information systems;

•

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

•

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

•

the incurrence of material uninsured losses or excessive insurance costs;

•

our failure to maintain effective internal controls and

•

other factors discussed in other reports or filings filed by us with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended January 29, 2011.

     Our Business

     We operate on a fiscal year calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31 of the following year. For example, references to “fiscal year 2010” refer to the fiscal year ended January 29, 2011.

     rue21 is a fast growing specialty apparel retailer offering the newest fashion trends for girls and guys at a great value. Although many of our customers are teenagers, we believe our merchandise appeals to anyone who wants to look or feel 21. Our product offerings fall into three categories: girls apparel; guys apparel and accessories; and girls accessories or our rue21 etc! category. As of April 30, 2011, we operated 677 stores in 45 states.

     Performance Metrics

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

Net Sales

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

Comparable Store Sales

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

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

•

consumer preferences, buying trends and overall economic trends;

•

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

•

competition;

•

changes in our merchandise mix;

•

pricing;

•

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

•

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

•

our ability to source and distribute products efficiently; and

•

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

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

     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 proportionately with net sales. As a result, selling, general and administrative expense as a percentage of net sales is usually higher in lower volume quarters and lower in higher volume quarters. The components of our selling, general and administrative expense may not be comparable to those of other retailers. We expect that our selling, general and administrative expense will increase in future periods due to our continuing store growth and in part to additional legal, accounting, insurance and other expenses we expect to incur as a result of being a public company. Among other things, we expect that compliance with the Sarbanes-Oxley Act and related rules and regulations will result in significant legal and accounting costs.

Selected First Quarter Highlights:

•

Net sales increased 25.5% to $172.9 million in the first quarter of 2011, compared to $137.8 million in the first quarter of 2010. Comparable store sales increased by 5.2% in the first quarter of 2011 as compared to an increase of 7.7% in the first quarter of 2010

•

Gross margin increased 100 basis points to 38.9% from 37.9% in the first quarter of 2010.

•

Inventory per square foot at the end of the first quarter 2011 decreased 2.9% compared to the first quarter of 2010.

Results of Operations

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

		Thirteen weeks ended
		April 30,				May 1,
		2011				2010
		(Unaudited)
		(in thousands, except operating data)
Net sales		$	172,875			$	137,772
Cost of goods sold			105,629				85,541
Gross profit			67,246				52,231
Selling, general and administrative expenses			45,373				37,294
Depreciation and amortization expense			6,103				4,983
Income from operations			15,770				9,954
Interest (income) expense, net			(22	)			28
Income before income taxes			15,792				9,926
Provision for income taxes			6,173				4,105
Net income		$	9,619			$	5,821
Net income per common share
Basic			0.39				0.24
Diluted			0.38				0.23
Weighted average common shares outstanding
Basic			24,383				24,248
Diluted			25,063				25,044
Net sales			100.0	%			100.0	%
Cost of goods sold			61.1	%			62.1	%
Gross margin			38.9	%			37.9	%
Selling, general and administrative expenses			26.2	%			27.1	%
Depreciation and amortization expense			3.5	%			3.6	%
Income from operations			9.1	%			7.2	%
Interest (income) expense, net			0.0	%			0.0	%
Income before income taxes			9.1	%			7.2	%
Provision for income taxes			3.6	%			3.0	%
Net income			5.6	%			4.2	%
Effective Tax Rate			39.1	%			41.4	%
Operating Data (unaudited)
Number of stores open at the end of the period			677				565
Comparable store sales change			5.2	%			7.7	%

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

		Thirteen weeks ended
		April 30,				May 1,
		2011				2010
Girls
Apparel			57.1	%			57.0	%
Accessories			26.3	%			25.3	%
Guys Apparel and Accessories			16.6	%			17.7	%
Total			100.0	%			100.0	%

Thirteen Weeks Ended April 30, 2011 Compared to Thirteen Weeks Ended May 1, 2010

Net Sales

In the thirteen weeks ended April 30, 2011, our net sales increased 25.5%, or $35.1 million, to $172.9 million as compared to $137.8 million in the thirteen weeks ended May 1, 2010. This increase in net sales was due to an increase of approximately 18% in the number of transactions, primarily driven by new store openings during fiscal year 2011. Net sales also increased due to an increase of approximately 6% in the average dollar value of transactions. During the thirteen weeks ended April 30, 2011, we opened 39 new stores with no store closures compared to 31 new stores and closed 1 store in the thirteen weeks ended May 1, 2010. Our comparable store sales increased 5.2% in the thirteen weeks ended April 30, 2011 compared to an increase of 7.7% in the thirteen weeks ended May 1, 2010. There were 533 comparable stores and 144 non-comparable stores open at April 30, 2011 compared to 445 and 120, respectively, at May 1, 2010.

In the thirteen weeks ended April 30, 2011, net sales of girls apparel, girls accessories and guys apparel and accessories represented 57.1%, 26.3% and 16.6%, respectively, of total net sales as compared to 57.0%, 25.3% and 17.7%, respectively, for the thirteen weeks ended May 1, 2010. In the thirteen weeks ended April 30, 2011, net sales from the girls apparel, girls accessories and guys apparel and accessories categories grew by approximately 26%, 30% and 17%, respectively, as compared to the thirteen weeks ended May 1, 2010. The increase in girls accessories as a percentage of total net sales was due to management efforts to expand the number of items in the girls accessories category.

Gross Profit

Gross profit increased 28.7%, or $15.0 million, in the thirteen weeks ended April 30, 2011 to $67.2 million as compared to $52.2 million in the thirteen weeks ended May 1, 2010. Gross margin increased 100 basis points to 38.9% for the thirteen weeks ended April 30, 2011 from 37.9% for the thirteen weeks ended May 1, 2010. This increase in gross margin was primarily attributable to a 70 basis point improvement in store occupancy, freight and distribution costs. Additionally, merchandise margin improved 30 basis points, driven primarily from reduced markdowns.

Selling, General and Administrative Expense

Selling, general and administrative expense increased 21.7%, or $8.1 million, to $45.4 million in the thirteen weeks ended April 30, 2011 as compared to $37.3 million in the thirteen weeks ended May 1, 2010. As a percentage of net sales, selling, general and administrative expense decreased to 26.2% in the thirteen weeks ended April 30, 2011 as compared to 27.1% in the thirteen weeks ended May 1, 2010. During the thirteen weeks ended May 1, 2010, we incurred $0.6 million in expense related to our secondary offering of common stock completed in March 2010. Excluding the impact of these secondary offering costs, selling, general and administrative expenses as a percentage of net sales, would have decreased to 26.6% in the thirteen weeks ended May 1, 2010.

Store operating expenses increased by $6.3 million in the thirteen weeks ended April 30, 2011 as compared to the thirteen weeks ended May 1, 2010, due primarily to the operation of 677 stores as of April 30, 2011 compared to the operation of 565 stores as of May 1, 2010. As a percentage of net sales, store operating expenses decreased to 18.8% for the thirteen weeks ended April 30, 2011 as

compared to 19.0% in the thirteen weeks ended May 1, 2010, primarily as a result of leveraging of store payroll and related costs.

Administrative and general expenses decreased as a percentage of net sales to 7.4% for the thirteen weeks ended April 30, 2011 as compared to 8.0% in the thirteen weeks ended May 1, 2010. The decrease in costs as a percent of sales was a result of lower salary and related costs offset by stock compensation costs. Additionally, as mentioned, the Company incurred $0.6 million in secondary offering costs in March 2010.

Depreciation and Amortization Expense

Depreciation and amortization expenses increased by $1.1 million to $6.1 million in the thirteen weeks ended April 30, 2011 as compared to $5.0 million in the thirteen weeks ended May 1, 2010. Depreciation and amortization expense decreased as a percentage of net sales to 3.5% for the thirteen weeks ended April 30, 2011 as compared to 3.6% in the thirteen weeks ended May 1, 2010. The increase in depreciation and amortization expense was primarily due to the continued opening of new stores and conversions as well as distribution center infrastructure investments.

Interest (Income) Expense, Net

Interest income increased by $50 to $22 interest income for the thirteen weeks ended April 30, 2011 as compared to interest expense of $28 for the thirteen weeks ended May 1, 2010 as a result of the Company increasing its cash balance on hand. The Company had no borrowings under the senior secured credit facility during the thirteen weeks ended April 30, 2011.

Provision for Income Taxes

The provision for income taxes increased $2.1 million to $6.2 million in the thirteen weeks ended April 30, 2011 as compared to $4.1 million in the thirteen weeks ended May 1, 2010. This increase was due primarily to the $5.9 million increase in pre-tax income. The effective tax rates were 39.1% and 41.4% for the thirteen weeks ended April 30, 2011 and the thirteen weeks ended May 1, 2010, respectively. The lower effective income tax rate for the thirteen weeks ended May 1, 2010 was primarily due to a discrete item the Company incurred for $0.6 million in expense related to our secondary offering of common stock completed in March 2010.

Net Income

Net income increased 65.2%, or $3.8 million, to $9.6 million for the thirteen weeks ended April 30, 2011 as compared to $5.8 million in the thirteen weeks ended May 1, 2010. This increase was due to the factors discussed above.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operations and availability under our senior secured credit facility. Our primary cash needs are for capital expenditures in connection with opening new stores and converting existing stores to the rue21 etc! format, including the additional working capital required for the related increase in merchandise inventories. Cash is also required for investment in information technology and distribution facility enhancements and funding normal working capital requirements. The most significant components of our working capital are cash and cash equivalents, merchandise inventories, accounts payable and other current liabilities.

As of April 30, 2011, we had cash and cash equivalents totaling $55.6 million. Our cash and cash equivalents consist of cash on deposit and credit and debit card transactions. Our cash and cash equivalents balance at April 30, 2011 increased by $5.5 million from $50.1 million at January 29, 2011. Components of this change in cash for the thirteen weeks ended April 30, 2011, as well as for change in cash for the thirteen weeks ended May 1, 2010, are provided below in more detail.

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

		Thirteen weeks ended
		April 30,				May 1,
		2011				2010
		(in thousands)
Provided by operating activities		$	18,179			$	9,360
Used for investing activities			(12,974	)			(8,658	)
Provided by for financing activities			271				332
Increase in cash and cash equivalents		$	5,476			$	1,034

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.

		Thirteen weeks ended
		April 30,				May 1,
		2011				2010
		(in thousands)
Net income		$	9,619			$	5,821
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			6,103				4,983
Deferred taxes			(2,643	)			(621	)
Stock-based compensation			800				335
Merchandise inventory			(9,579	)			(13,996	)
Accounts payable			7,834				14,383
Other working capital components			5,964				(1,414	)
All other			81				(131	)
Net cash provided by operating activities		$	18,179			$	9,360

Net cash provided by operating activities was $18.2 million and $9.4 million for the thirteen weeks ended April 30, 2011 and the thirteen weeks ended May 1, 2010, respectively. The increase of $8.8 million in the thirteen weeks ended April 30, 2011 as compared to the thirteen weeks ended May 1, 2010 was primarily due to an increase in net income ($3.8 million), reduced merchandise inventory growth ($4.4 million) and improvement in other working capital components ($7.4 million), primarily deferred rent and tenant allowances. These cash inflows were principally offset by a reduction in the increase in accounts payable ($6.5 million).

Investing Activities

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

		Thirteen weeks ended
		April 30,				May 1,
		2011				2010
		(in thousands)
Capital expenditures, net of tenant allowances and proceeds from the sale of property and equipment		$	(7,187	)		$	(5,040	)
Tenant allowances			(5,787	)			(3,618	)
Capital expenditures		$	(12,974	)		$	(8,658	)

For the thirteen weeks ended April 30, 2011 capital expenditures increased $4.3 million to $13.0 million as compared to $8.7 million in the thirteen weeks ended May 1, 2010. During the thirteen weeks ended April 30, 2011, we opened 39 new stores and converted 12 existing stores as compared to 31 new stores and 13 store conversions in the thirteen weeks ended May 1, 2010, respectively. Capital expenditures for the new stores and conversions of existing stores increased $1.9 million to $5.0 million during the thirteen weeks ended April 30, 2011 as compared to $3.1 million in the comparable prior year period. Additionally, capital expenditures for store fixtures increased $0.5 million during the thirteen weeks ended April 30, 2011 as compared to the thirteen weeks ended May 1, 2010. These increases were offset by lower capital expenditures for the distribution center of $0.5 million versus the comparable prior year period.

Financing Activities

Financing activities consist principally of proceeds from the exercise of employee stock options and excess tax benefits from share-based award activities.

		Thirteen weeks ended
		April 30,				May 1,
		2011				2010
		(in thousands)
Proceeds from stock options exercised			55				65
Excess tax benefits from stock-based award activities			216				267
Net cash provided by financing activities		$	271			$	332

Net cash of $0.3 million was provided by financing activities in the thirteen weeks ended April 30, 2011, which was primarily utilized to fund general corporate activities in the current fiscal year, compared to $0.3 million for the same period in 2010.

Senior Secured Credit Facility

   Effective April 10, 2008, we established a five-year $60.0 million senior secured credit facility with Bank of America, N.A., which was amended on November 24, 2009. Key provisions of the amendment included an increase in the borrowing ceiling to $85 million from $60 million, which is further expandable at our option in increments of $5 million up to a maximum of $100 million under certain defined conditions. Interest accrues at the higher of the Federal Funds rate plus .50%, the prime rate or the adjusted LIBOR rate plus 1.00% plus the applicable margin which ranges from 1.25% to 3.00%. Availability under our senior secured credit facility is

collateralized by a first priority interest in all of our assets.

   Our senior secured credit facility accrues interest at the Bank of America N.A. base rate, defined at our option as the prime rate or the Eurodollar rate plus applicable margin, which ranges from 1.25% to 3.00%, set quarterly depending upon average net availability under our senior secured credit facility during the previous quarter. As of April 30, 2011 and May 1, 2010, $0 was outstanding under the senior secured credit facility.

   Our senior secured credit facility includes a fixed charge covenant applicable only if net availability falls below a 10% threshold. We are in compliance with all covenants under our senior secured credit facility as of April 30, 2011 and expect to remain in compliance for the next twelve months.

Off Balance Sheet Arrangements

We are not a party to any off balance sheet arrangements.

Contractual Obligations

There have been no significant changes to our contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011, other than those which occur in the normal course of business.

Critical Accounting Policies and Estimates

The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the consolidated financial statements. There have been no significant changes to our critical accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes to the quantitative and qualitative information concerning our market risk since the end of the most recent fiscal year as disclosed in our Annual Report on Form 10-K for the year ended January 29, 2011. For further information, see Item 7A of the Company’s Annual Report on Form 10-K for the year ended January 29, 2011.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rule 13(a)-15(e), as of the end of the period covered by this Quarterly Report on Form 10-Q pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent or detect all error and all fraud. While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting during the thirteen weeks ended April 30, 2011 that have

materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company is involved in litigation relating to claims arising out of the normal course of business. As of the date hereof, the Company is not involved in any litigation at this time that the Company believes will have a material adverse effect on its consolidated financial condition, results of operation, or liquidity.

Item 1A. Risk Factors

There have been no significant changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

Item 6. Exhibits

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.