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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTERLY PERIOD ENDED OCTOBER 29, 2011

OR

 

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

FOR THE TRANSITION PERIOD FROM            TO            

COMMISSION FILE NUMBER 1-34536

 

 

rue21, inc.

(Exact name of registrant as specified in its charter)

 

 

 

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

800 Commonwealth Drive

Warrendale, Pennsylvania 15086

(Address of principal executive office)

(724) 776-9780

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

The number of shares outstanding of the Registrant’s common stock was 24,463,329 as of November 21, 2011.

 

 

 

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rue21, inc.

Form 10-Q

Quarter Ended October 29, 2011

INDEX

 

				Page
Part I.		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Balance Sheets: October 29, 2011 (unaudited), January 29, 2011 and October 30, 2010 (unaudited)			3
		Consolidated Statements of Income: Thirteen and thirty-nine weeks ended October 29, 2011 (unaudited) and October 30, 2010 (unaudited)			4
		Consolidated Statements of Cash Flows: Thirty-nine weeks ended October 29, 2011 (unaudited) and October 30, 2010 (unaudited)			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			21
Item 4.		Controls and Procedures			21
Part II.		OTHER INFORMATION
Item 1.		Legal Proceedings			21
Item 1A.		Risk Factors			21
Item 6.		Exhibits			21

 

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

rue21, inc. and subsidiaries

Consolidated Balance Sheets

 

		October 29, 2011				January 29, 2011				October 30, 2010
		(Unaudited)								(Unaudited)
		(in thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents		$	36,071			$	50,111			$	18,696
Accounts receivable			11,221				6,733				8,464
Merchandise inventory, net			142,869				96,051				113,247
Prepaid expenses and other current assets			13,763				10,580				9,705
Deferred tax assets			6,527				5,024				5,831
Total current assets			210,451				168,499				155,943
Property and equipment, net			115,109				91,371				89,303
Other assets			961				921				940
Total assets		$	326,521			$	260,791			$	246,186
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	104,879			$	82,075			$	84,590
Accrued expenses and other current liabilities			16,020				15,616				14,502
Accrued payroll and related taxes			10,099				12,053				9,544
Deferred rent and tenant allowances, current portion			8,630				7,033				6,815
Accrued income and franchise taxes			2,252				1,999				4,165
Total current liabilities			141,880				118,776				119,616
Non-current liabilities:
Deferred rent, tenant allowances and other long-term liabilities			46,212				34,235				33,261
Deferred tax liabilities			5,599				5,651				3,578
Total non-current liabilities			51,811				39,886				36,839
Commitments and Contingencies			—				—				—
Stockholders’ equity:
Common stock— par value $0.001 per share; 200,000 shares authorized; 24,463, 24,380 and 24,325 shares issued and outstanding, respectively.			24				24				24
Additional paid in capital			36,224				31,552				30,043
Retained earnings			96,582				70,553				59,664
Total stockholder’s equity			132,830				102,129				89,731
Total liabilities and stockholders’ equity		$	326,521			$	260,791			$	246,186

See accompanying notes to the unaudited consolidated financial statements.

 

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rue21, inc. and subsidiaries

Consolidated Statements of Income

 

		Thirteen weeks ended								Thirty-nine weeks ended
		October 29, 2011				October 30, 2010				October 29, 2011				October 30, 2010
		(Unaudited)
		(in thousands, except per share data)
Net sales		$	194,761			$	163,913			$	540,406			$	444,635
Cost of goods sold (includes certain buying, occupancy and distribution center expenses)			123,361				103,860				334,130				277,807
Gross profit			71,400				60,053				206,276				166,828
Selling, general, and administrative expense			50,805				42,637				145,045				118,668
Depreciation and amortization expense			6,843				5,698				19,356				16,033
Income from operations			13,752				11,718				41,875				32,127
Interest (income) expense, net			16				18				(25	)			76
Income before income taxes			13,736				11,700				41,900				32,051
Provision for income taxes			4,995				4,557				15,870				12,696
Net income		$	8,741			$	7,143			$	26,030			$	19,355
Basic income per common share		$	0.36			$	0.29			$	1.07			$	0.80
Diluted income per common share		$	0.35			$	0.29			$	1.04			$	0.77
Weighted average basic common shares outstanding			24,461				24,310				24,407				24,267
Weighted average diluted common shares outstanding			25,066				24,972				25,057				25,003

See accompanying notes to the unaudited consolidated financial statements.

 

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rue21, inc. and subsidiaries

Consolidated Statements of Cash Flows

 

			$26,030				$26,030
		Thirty-nine weeks ended
		October 29, 2011				October 30, 2010
		(Unaudited, in thousands)
Operating activities:
Net income		$	26,030			$	19,355
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			19,356				16,033
Loss on fixed asset disposals			312				147
Impairment of long-lived assets			285				123
Deferred taxes			(1,555	)			(2,216	)
Stock based compensation			3,522				1,573
Excess tax benefits from stock-based compensation activities			(618	)			(1,010	)
Changes in:
Accounts receivable			(4,489	)			(4,630	)
Merchandise inventory, net			(46,818	)			(40,554	)
Prepaid expenses and other current assets			(3,183	)			(2,922	)
Accounts payable			22,804				24,627
Accrued payroll and related taxes			(1,954	)			(907	)
Accrued expenses and other current liabilities			404				118
Deferred rent and tenant allowances			13,574				10,576
Accrued income and franchise taxes			872				2,774
Other			(136	)			(99	)
Net cash provided by operating activities			28,406				22,988
Investing activities:
Acquisition of property and equipment			(43,595	)			(32,402	)
Proceeds from the sale of property and equipment			—				4
Net cash used for investing activities			(43,595	)			(32,398	)
Financing activities:
Excess tax benefits from stock-based compensation activities			618				1,010
Proceeds from stock options exercised			531				345
Net cash provided by financing activities			1,149				1,355
Decrease in cash and cash equivalents			(14,040	)			(8,055	)
Cash and cash equivalents, beginning of period			50,111				26,751
Cash and cash equivalents, end of period		$	36,071			$	18,696
Supplemental disclosure of cash flow information
Cash paid for interest (line of credit fees)		$	226			$	236
Cash paid for income taxes		$	16,462			$	12,249

See accompanying notes to the unaudited consolidated financial statements.

 

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Rue21, inc and subsidiaries

Noted to unaudited Consolidated Financial Statements

Thirteen and Thirty-Nine weeks ended October 29, 2011 and October 30, 2010

(Dollars in thousands unless otherwise indicated)

NOTE 1 — Organization and Basis of Presentation

rue21, inc. and subsidiaries (the Company or rue21) is a specialty retailer of girls and guys apparel and accessories with 740, 638 and 628 stores as of October 29, 2011, January 29, 2011 and October 30, 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 October 29, 2011, the Company operated in one reportable segment.

In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of consolidated financial position, results of operations, and cash flows for the interim periods presented. The accompanying unaudited consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to ensure that the information presented is not misleading. Accordingly, these unaudited consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended January 29, 2011 included in the 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 “third quarter of 2011” and the “third quarter of 2010” refer to the thirteen week periods ending October 29, 2011 and October 30, 2010, respectively. “Year-to-date 2011” and “year-to-date 2010” refer to the thirty-nine week periods ending October 29, 2011 and October 30, 2010, respectively.

Estimates

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

Seasonality

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

 

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Recent Accounting Standards

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

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:

 

		Thirteen weeks ended								Thirty-nine weeks ended
		October 29, 2011				October 30, 2010				October 29, 2011				October 30, 2010
		(in thousands, except per share data)
Net income		$	8,741			$	7,143			$	26,030			$	19,355
Weighted average basic common shares outstanding			24,461				24,310				24,407				24,267
Impact of dilutive securities			605				662				650				736
Weighted average diluted common shares outstanding			25,066				24,972				25,057				25,003
Per common share:
Basic income per common share		$	0.36			$	0.29			$	1.07			$	0.80
Diluted income per common share		$	0.35			$	0.29			$	1.04			$	0.77

Equity awards to purchase 787,406, and 670,270 shares of common stock during the third quarter of 2011 and year-to-date 2011, respectively, and 393,000 and 311,000 shares of common stock for the third quarter of 2010 and year-to-date 2010, respectively, were outstanding, but were not included in the computation of weighted average diluted common share amounts as the effect of doing so would have been anti-dilutive.

NOTE 4 — Stock-Based Compensation

In November 2009, the Company adopted the 2009 Omnibus Incentive Plan (the 2009 Plan) in connection with the 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 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, 753,378 stock options and 163,798 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.

On November 11, 2011, the Compensation Committee approved a new form of Restricted Stock Unit Award Agreement (the “RSU Agreement”) for the 2009 Plan, which replaces the prior form of Restricted Stock Award Agreement filed as Exhibit 10.18 to the Company’s Annual Report on Form 10-K filed March 29, 2011. The RSU Agreement clarifies delivery and withholding procedures upon vesting of awards. The material terms of an award of restricted stock units, including applicable vesting terms, the treatment of

 

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awards upon termination of employment and potential tax consequences, were not affected by the Committee’s approval of the RSU Agreement. The summary of the RSU Agreement is qualified in its entirety by reference to the full text of the RSU Agreement, which is attached to this Quarterly Report on Form 10-Q as Exhibit 10.1.

The following table represents stock options granted, vested, and expired under the existing share-based compensation plans during the year-to-date 2011 period.

 

		Common Stock Options				Weighted- Average Exercise Price				Weighted Average Remaining Contractual Term				Aggregate Intrinsic Value
		(in thousands)				(per share)				(in years)
Outstanding January 29, 2011			1,441			$	15.63				7.83			$	21,349
Granted			274			$	30.02
Exercised			(83	)		$	6.39
Expired or forfeited			(45	)		$	24.79
Outstanding October 29, 2011			1,587			$	18.34				7.53			$	17,328
Vested at October 29, 2011			773			$	9.88				6.36			$	13,984

As of October 29, 2011, the Company had 2,708,824 shares available for stock grants. The Company recognized $1.4 million and $3.5 million in compensation expense related to stock options during the third quarter of 2011 and year-to-date 2011, respectively, and $0.6 million and $1.6 million in compensation expense related to stock options for the third quarter of 2010 and year-to-date 2010, respectively. The weighted average fair value of stock options at the grant date was $19.02 and $16.45 during the third quarter of 2011 and year-to-date 2011, respectively, and $14.24 and $18.18 for the third quarter 2010 and year-to-date 2010, respectively. The intrinsic value of options exercised was $0.1 million and $2.1 million during the third quarter of 2011 and year-to-date 2011, respectively, and $0.4 million and $2.4 million for the third quarter of 2010 and year-to-date 2010, respectively. All outstanding vested options are currently exercisable as of October 29, 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								Thirty-nine weeks ended
		October 29, 2011				October 30, 2010				October 29, 2011				October 30, 2010
Risk-free interest rate (1)			1.2%-2.3	%			1.5%-1.9	%			1.2%-2.9	%			1.5%-3.4	%
Dividend yield			—				—				—				—
Volatility factors for the expected market price of the Company’s common stock (2)			55.0	%			55.0	%			55.0	%			53.0% -55.0	%
Weighted average expected term (3)			6.0 years				6.4 years				6.0 years				6.3 years

 

(1)	Based on the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of stock options.

(2)	Expected stock price volatility is based on comparable volatilities of peer companies within rue21’s industry.

(3)

Represents the period of time options are expected to be outstanding. The weighted-average expected option term was determined using the “simplified method” as allowed by Staff Accounting Bulletin Topic 14. The expected term used to value a share option grant under the simplified method is the midpoint between the vesting date and the contractual term of the share option.

 

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The following table summarizes information regarding non-vested outstanding stock options as of October 29, 2011:

 

		Shares				Weighted Averaged Fair Value at Grant Date
		(in thousands)				(per share)
Non-vested as of January 29, 2011			881			$	11.16
Granted			274			$	16.45
Vested			(299	)		$	7.90
Cancelled			(42	)		$	13.27
Non-vested as of October 29, 2011			814			$	14.34

As of October 29, 2011, there was $11.7 million of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized over a weighted-average period of 1.37 years. The total fair value of shares vested during the third quarter of 2011 and year-to-date 2011 was $0.2 million and $2.4 million, respectively, and $3.1 million and $6.5 million for the third quarter of 2010 and year-to-date 2010, respectively.

Restricted Stock Units

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

The following table summarizes information regarding non-vested outstanding restricted stock units as of October 29, 2011:

 

		Shares				Weighted Averaged Fair Value at Grant Date
		(in thousands)				(per share)
Non-vested as of January 29, 2011			25			$	30.49
Granted			139			$	26.52
Vested			(1	)		$	20.16
Cancelled			(3	)		$	30.12
Non-vested as of October 29, 2011			160			$	27.08

As of October 29, 2011, there was $4.3 million of unrecognized compensation expense related to non-vested restricted stock unit awards that is expected to be recognized over a weighted-average period of 1.44 years. The total fair value of shares vested during the third quarter of 2011 and year-to-date 2011 was $0 and $15 for both respective periods. For the third quarter of 2010 and year-to-date 2010, no restricted stock units vested.

The Company’s director compensation policy allows non-employee directors to defer all or any portion of any cash retainer in exchange for receipt of fully vested deferred stock units. As of October 29, 2011, 744 deferred stock units had vested. As of October 30, 2010, no deferred stock units had vested.

 

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NOTE 5 — Property, Plant and Equipment

 

		October 29, 2011				January 29, 2011				October 30, 2010
		(in thousands)
Furniture and fixtures		$	89,148			$	73,635			$	70,960
Leasehold improvements			98,949				75,445				71,451
Computer equipment, software and other			20,559				18,044				17,522
			208,656				167,124				159,933
Less accumulated depreciation and amortization			(93,547	)			(75,753	)			(70,630	)
		$	115,109			$	91,371			$	89,303

In accordance with the FASB’s authoritative guidance related to the impairment or disposal of long-lived assets, impairment losses may be recorded on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. If such a condition occurs, the assets are adjusted to their estimated fair value, which is determined based upon prices for similar assets. Impairment charges are recorded in selling, general, and administrative expense in the accompanying Consolidated Statements of Income.

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 $36.1 million, $50.1 million and $18.7 million as of October 29, 2011, January 29, 2011 and October 30, 2010, respectively, are reported at fair value utilizing Level 1 inputs.

 

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Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

 

•

Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. The Company determined that the fair value measurements related to the impaired long lived assets disclosed in Note 5 are derived from significant other observable inputs. These non-financial assets are measured on a non-recurring basis when events and circumstances warrant.

In accordance with ASC 820, the following tables represent the fair value hierarchy for the Company’s financial assets (cash equivalents) measured at fair value on a recurring basis as of October 29, 2011 and October 30, 2010:

 

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		Fair Value Measurements at October 29, 2011
		Carrying Amount				Quoted Market Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Cash and cash Equivalents
Cash		$	36,071			$	36,071			$	—			$	—
Total		$	36,071			$	36,071			$	—			$	—
		Fair Value Measurements at October 30, 2010
		Carrying Amount				Quoted Market Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Cash and cash Equivalents
Cash		$	18,696			$	18,696			$	—			$	—
Total		$	18,696			$	18,696			$	—			$	—

NOTE 7— Income Taxes

The provision for income taxes is based on the current estimate of the annual effective tax rate and is adjusted as necessary for discrete events occurring in a particular period. The effective income tax rate for the third quarter of 2011 was 36.4% as compared to 38.9% for the third quarter of 2010. The lower effective income tax rate was primarily due to discrete events relating to lower non-deductible permanent items over the prior year. The Company classifies interest and penalties as an element of tax expense. The amount of tax related interest and penalties for the third quarter and year-to-date of 2011 and 2010, respectively, was not material.

The year-to-date 2011 effective income tax rate was 37.9% as compared to 39.6% for the year-to-date 2010 period. The lower effective income tax rate was principally due to state income tax credits, disqualifying dispositions of stock options as well as lower permanent tax differences in the current year.

The Company recognizes income tax liabilities related to unrecognized tax benefits in accordance with the FASB’s authoritative guidance related to uncertain tax positions and adjusts these liabilities when its judgment changes as 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 that the Company believes will have a material adverse effect on its consolidated financial condition, results of operations, or liquidity.

 

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

FORWARD-LOOKING STATEMENTS

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

our failure to protect our brand image;

 

•

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

 

•

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

 

•

seasonality of our business;

 

•

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

 

•

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

 

•

disruptions in our supply chain and distribution facility;

 

•

damage or interruption to our information systems;

 

•

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.

 

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Our Business

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

rue21 is a fast growing specialty apparel retailer offering the newest fashion trends for girls and guys at a great value. Although many of our customers are teenagers, we believe our merchandise appeals to anyone who wants to look or feel 21. Our product offerings fall into three categories: girls apparel; guys apparel and accessories; and girls accessories or our rue21 etc! category. As of October 29, 2011, we operated 740 stores in 46 states.

Performance Metrics

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

Net Sales

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

Comparable Store Sales

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

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

 

•

consumer preferences, buying trends and overall economic trends;

 

•

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

 

•

competition;

 

•

changes in our merchandise mix;

 

•

pricing;

 

•

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

 

•

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

 

•

our ability to source and distribute products efficiently; and

 

•

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

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

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

 

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conditions and the level of disposable consumer income, consumer debt, interest rates and consumer confidence.

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

Gross Profit

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

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

Selling, General and Administrative Expense

Selling, general and administrative expense includes administration, share-based compensation and store expenses, but excludes store occupancy costs and freight to stores. These expenses do not generally vary proportionately with net sales. As a result, selling, general and administrative expense as a percentage of net sales is usually higher in lower volume quarters and lower in higher volume quarters. The components of our selling, general and administrative expense may not be comparable to those of other retailers. We expect that our selling, general and administrative expense will increase in future periods due to our continuing store growth and in part to additional legal, accounting, insurance and other expenses we expect to incur as a result of being a public company. Among other things, we expect that compliance with the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act and related rules and regulations will result in significant legal and accounting costs.

Selected Third Quarter and Year-to-Date Highlights:

 

•

Net sales increased 18.8% to $194.8 million in the third quarter of 2011, compared to $163.9 million in the third quarter of 2010. Comparable store sales were flat in the third quarter of 2011 as compared to an increase of 1.8% in the third quarter of 2010. For the year-to-date 2011 period, net sales increased 21.5% to $540.4 million, as compared to $444.6 million in the year-to-date 2010 period. Comparable sales increased by 1.5% in the year-to-date 2011 period as compared to an increase of 2.4% in the year-to-date 2010 period.

 

•

In the third quarter of 2011, gross margin increased 10 basis points to 36.7% from 36.6% in the third quarter of 2010. Gross margin year-to-date increased 70 basis points to 38.2% in the year-to-date 2011 period as compared to 37.5% in the year-to-date period of 2010.

 

•

Diluted net income per common share was $0.35 in the third quarter of 2011 compared to diluted income per common share of $0.29 in the third quarter of 2010. For the year-to-date, diluted income was $1.04, as compared to $0.77 in the year to date 2010 period.

 

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Results of Operations

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

 

		Thirteen weeks ended								Thirty-nine weeks ended
		October 29, 2011				October 30, 2010				October 29, 2011				October 30, 2010
		(Unaudited)
		(in thousands, except operating data)
Net sales		$	194,761			$	163,913			$	540,406			$	444,635
Cost of goods sold			123,361				103,860				334,130				277,807
Gross profit			71,400				60,053				206,276				166,828
Selling, general and administrative expenses			50,805				42,637				145,045				118,668
Depreciation and amortization expense			6,843				5,698				19,356				16,033
Income from operations			13,752				11,718				41,875				32,127
Interest (income) expense, net			16				18				(25	)			76
Income before income taxes			13,736				11,700				41,900				32,051
Provision for income taxes			4,995				4,557				15,870				12,696
Net income		$	8,741			$	7,143			$	26,030			$	19,355
Net income per common share
Basic			0.36				0.29				1.07				0.80
Diluted			0.35				0.29				1.04				0.77
Weighted average common shares outstanding
Basic			24,461				24,310				24,407				24,267
Diluted			25,066				24,972				25,057				25,003
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of goods sold			63.3	%			63.4	%			61.8	%			62.5	%
Gross margin			36.7	%			36.6	%			38.2	%			37.5	%
Selling, general and administrative expenses			26.1	%			26.0	%			26.8	%			26.7	%
Depreciation and amortization expense			3.5	%			3.5	%			3.6	%			3.6	%
Income from operations			7.1	%			7.1	%			7.8	%			7.2	%
Interest (income) expense, net			0.0	%			0.0	%			0.0	%			0.0	%
Income before income taxes			7.1	%			7.1	%			7.8	%			7.2	%
Provision for income taxes			2.6	%			2.8	%			2.9	%			2.9	%
Net income			4.5	%			4.3	%			4.8	%			4.3	%
Effective Tax Rate			36.4	%			38.9	%			37.9	%			39.6	%
Operating Data (unaudited)
Number of stores open at the end of the period			740				628				740				628
Comparable store sales change			0.0	%			1.8	%			1.5	%			2.4	%

 

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

 

		Thirteen weeks ended								Thirty-nine weeks ended
		October 29, 2011				October 30, 2010				October 29, 2011				October 30, 2010
Girls
Apparel			56.2	%			57.7	%			56.8	%			57.7	%
Accessories			25.2	%			24.2	%			25.6	%			24.5	%
Guys Apparel and Accessories			18.6	%			18.1	%			17.6	%			17.8	%
Total			100.0	%			100.0	%			100.0	%			100.0	%

Third Quarter of 2011 Compared to Third Quarter of 2010

Net Sales

During the third quarter of 2011, our net sales increased 18.8%, or $30.9 million, to $194.8 million as compared to $163.9 million in the third quarter of 2010. This increase in net sales was due to an approximate 15% increase in the number of transactions, driven by new store openings during fiscal year 2011. Net sales also increased due to an increase of approximately 3% in the average dollar value of transactions. The average dollar value of transactions increased due to an increase in average unit retail offset by a slight decrease in units per transaction. During the third quarter of 2011, we opened 30 new stores compared to 33 new stores in the third quarter of 2010. Our comparable store sales were flat in the third quarter of 2011 compared to an increase of 1.8% in the third quarter of 2010. There were 580 comparable stores and 160 non-comparable stores open at October 29, 2011 compared to 493 and 135, respectively, at October 30, 2010.

During the third quarter of 2011, net sales from the girls apparel, girls accessories and guys apparel and accessories categories grew by approximately 16%, 24% and 22%, respectively, as compared to the third quarter of 2010. The increase in girls accessories as a percentage of total net sales was due to management efforts to expand the number of items in the girls accessories category.

Gross Profit

Gross profit increased 18.9%, or $11.3 million, in the third quarter of 2011 to $71.4 million as compared to $60.1 million in the third quarter of 2010. Gross margin increased 10 basis points to 36.7% for the third quarter of 2011 from 36.6% for the third quarter of 2010. This increase in gross margin was attributable to improvement in merchandise margin, driven primarily from increased initial markup and lower distribution and freight costs offset by higher store occupancy costs.

Selling, General and Administrative Expense

Selling, general and administrative expense increased 19.2%, or $8.2 million, to $50.8 million in the third quarter of 2011 as compared to $42.6 million in the third quarter of 2010. As a percentage of net sales, selling, general and administrative expense increased to 26.1% in the third quarter of 2011 as compared to 26.0% in the third quarter of 2010.

Store operating expenses increased by $6.3 million in the third quarter of 2011 as compared to the third quarter of 2010 due primarily to the operation of 740 stores as of October 29, 2011 compared to the operation of 628 stores as of October 30, 2010. As a percentage of net sales, store operating expenses increased to 19.5% for the third quarter of 2011 as compared to 19.4% in the third quarter of 2010, primarily as a result of store payroll and utility costs offset by lower benefit expenses.

Administrative and general expenses decreased as a percentage of net sales to 6.5% for the third quarter of 2011 as compared to 6.6% in the third quarter of 2010.

 

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Depreciation and Amortization Expense

Depreciation and amortization expenses increased by $1.1 million to $6.8 million in the third quarter of 2011 as compared to $5.7 million in the third quarter of 2010. Depreciation and amortization expense was flat as a percentage of net sales at 3.5% during the third quarter of 2011 and 2010.

Provision for Income Taxes

The provision for income taxes increased $0.4 million to $5.0 million in the third quarter of 2011 as compared to $4.6 million in the third quarter of 2010. This increase was due primarily to the $2.0 million increase in pre-tax income. The effective tax rates were 36.4% and 38.9% for the third quarter of 2011 and 2010, respectively. The lower effective income tax rate for the third quarter of 2011 was primarily due to discrete events relating to lower non-deductible permanent items over the prior year.

Net Income

Net income increased 22.4%, or $1.6 million, to $8.7 million for the third quarter of 2011 as compared to $7.1 million in the third quarter of 2010. This increase was due to the factors discussed above.

Year-to-date 2011 Compared to Year-to-date 2010

Net Sales

Net Sales increased 21.5%, or $95.8 million, to $540.4 million for the year-to-date 2011 from $444.6 million for the year-to-date 2010. The increase in net sales was due to an approximately 16% increase in the number of transactions, primarily driven by new stores opened in 2011. Net sales also increased due to an increase of approximately 5% in the average dollar value of transactions. The average dollar value of transactions increased due to an increase in average unit retail offset by a slight decrease in units per transaction. During the year-to-date 2011 period, we opened 103 new stores and closed 1 store as compared to 95 new stores and 2 closures in the year-to-date 2010 period. Our comparable store sales increased 1.5% for the year-to-date 2011 period compared to an increase of 2.4% for the year-to-date 2010 period. There were 580 comparable and 160 non-comparable stores at October 29, 2011 compared to 493 and 135, respectively, at October 30, 2010.

During year-to-date 2011, net sales from the girls apparel, girls accessories and guys apparel and accessories categories grew by approximately 20%, 27% and 19%, respectively, as compared to the year-to-date 2010 period. The increase in girls accessories as a percentage of total net sales was due to management efforts to expand the number of items in the girls accessories category.

Gross Profit

Gross profit increased 23.6%, or $39.5 million, in the year-to-date 2011 period to $206.3 million as compared to $166.8 million in the year-to-date 2010 period. Gross margin increased 70 basis points to 38.2% for the year-to-date 2011 period from 37.5% for the year-to-date 2010 period. The increase in gross margin was primarily attributable to increased merchandise margin. Gross margin also improved due to lower freight and distribution center costs partially offset by occupancy costs as a percentage of sales.

Selling, General and Administrative Expense

Selling, general and administrative expense increased 22.2%, or $26.4 million, to $145.0 million in the year-to-date 2011 period as compared to $118.7 million in the year-to-date 2010 period. As a percentage of net sales, selling, general and administrative expense increased to 26.8% in the year-to-date 2011 period as compared to 26.7% in the year-to-date 2010 period. During the year-to-date 2010 period, we incurred $0.6 million in expense related to our secondary offering of common stock completed in March 2010. Excluding the impact of these secondary offering costs, selling, general and administrative expenses as a percentage of net sales, would have decreased to 26.6% in the year-to-date 2010 period. Store operating expenses increased by $20.7 million in the year-to-date 2011 period as compared to the year-to-date 2010 period, due primarily to the operation of 740 stores as of October 29, 2011 compared to the operation of 628 stores as of October 30, 2010. As a percentage of net sales, store operating expenses increased to 20.1% for the year-to-date 2011 period as compared to 19.8% in the year-to-date 2010 period, primarily as a result of increasing costs of store payroll partially offset by lower benefit costs.

Administrative and general expenses decreased as a percentage of net sales to 6.7% for the year-to-date 2011 period as compared to 6.9% in the year-to-date 2010 period. The decrease in costs as a percent of sales was primarily a result of lower salary and related costs offset by stock compensation costs. Additionally, as mentioned, the Company incurred $0.6 million in secondary offering costs in March 2010.

Depreciation and Amortization Expense

Depreciation and amortization expenses increased by $3.4 million to $19.4 million in the year-to-date 2011 period as compared to $16.0 million in the year-to-date 2010 period. The increase in depreciation and amortization expense was primarily due to the continued opening of new stores and converting existing stores as well as other non-store infrastructure investments. Depreciation and

 

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amortization expense remained flat as a percentage of net sales at 3.6% for the year-to-date 2011 and year-to-date 2010 period.

Provision for Income Taxes

The provision for income taxes increased $3.2 million to $15.9 million in the year-to-date 2011 period as compared to $12.7 million in the year-to-date 2010 period. This increase was due primarily to the $9.8 million increase in pre-tax income. The effective tax rates were 37.9% and 39.6% for the year-to-date 2011 and the year-to-date 2010 periods, respectively. The lower effective income tax rate for the year-to-date 2011 period was due to state income tax credits, disqualifying dispositions of stock options as well as lower permanent tax differences in the current year. The higher effective rate for the year-to-date 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 34.5%, or $6.6 million, to $26.0 million for the year-to-date 2011 period from $19.4 million for the year-to-date 2010 period. The increase was due to the factors discussed above.

Liquidity and Capital Resources

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

As of October 29, 2011, we had cash and cash equivalents totaling $36.1 million. Our cash and cash equivalents consist of cash on deposit and credit and debit card transactions. Our cash and cash equivalents balance at October 29, 2011 decreased by $14.0 million from $50.1 million at January 29, 2011. Components of this change in cash for the year-to-date 2011 period, as well as for change in cash for the year-to-date 2010 period, are provided below in more detail.

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

 

			$(14,040)				$(14,040)
		Thirty-nine weeks ended
		October 29, 2011				October 30, 2010
		(in thousands)
Provided by operating activities		$	28,406			$	22,988
Used for investing activities			(43,595	)			(32,398	)
Provided by for financing activities			1,149				1,355
Decrease in cash and cash equivalents		$	(14,040	)		$	(8,055	)

 

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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.

 

		Thirty-nine weeks ended
		October 29, 2011				October 30, 2010
		(in thousands)
Net income		$	26,030			$	19,355
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			19,356				16,033
Deferred taxes			(1,555	)			(2,216	)
Stock-based compensation			3,522				1,573
Merchandise inventory			(46,818	)			(40,554	)
Accounts payable			22,804				24,627
Other working capital components			5,088				4,910
All other			(21	)			(740	)
Net cash provided by operating activities		$	28,406			$	22,988

Net cash provided by operating activities was $28.4 million and $23.0 million for the year-to-date 2011 period and the year-to-date 2010 period, respectively. The increase of $5.4 million in the year-to-date 2011 period as compared to the year-to-date 2010 period was primarily due to an increase in net income ($6.7 million), offset by increased merchandise inventory growth ($6.3 million) and slower growth in accounts payable ($1.8 million). Depreciation and amortization increased $3.3 million.

Investing Activities

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

 

		Thirty-nine weeks ended
		October 29, 2011				October 30, 2010
		(in thousands)
Capital expenditures, net of tenant allowances and proceeds from the sale of property and equipment		$	(26,633	)		$	(19,948	)
Tenant allowances			(16,962	)			(12,450	)
Net cash used for investing activities		$	(43,595	)		$	(32,398	)

For the year-to-date 2011 period capital expenditures increased $11.2 million to $43.6 million as compared to $32.4 million in the year-to-date 2010 period. During the year-to-date 2011 period, we opened 103 new stores and converted 34 existing stores as compared to 95 new stores and 31 store conversions in the year-to-date 2010 period, respectively. Capital expenditures, net of tenant allowances, for the new stores and conversions of existing stores increased $4.6 million to $17.9 million during the year-to-date 2011 period as compared to $13.3 million in the comparable prior year period. Capital expenditures for store fixtures increased $0.8 million to $2.9 million during the year-to-date 2011 period as compared to $2.1 million for the year-to-date 2010 period. Additionally, capital expenditures for corporate service center increased $0.9 million to support the Company’s expansion. The company expects total capital expenditures, net of tenant allowances, for fiscal year 2011 to be approximately $33.0 million.

 

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Financing Activities

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

 

		Thirty-nine weeks ended
		October 29, 2011				October 30, 2010
		(in thousands)
Proceeds from stock options exercised		$	531			$	345
Excess tax benefits from stock-based award activities			618				1,010
Net cash provided by financing activities		$	1,149			$	1,355

Net cash of $1.1 million was provided by financing activities in the year-to-date 2011 period compared to $1.4 million for the year-to date 2010 period.

Senior Secured Credit Facility

Effective April 10, 2008, we established a five-year $60.0 million senior secured credit facility with Bank of America, N.A., which was amended on November 24, 2009. Key provisions of the amendment include an increase in the borrowing ceiling to $85 million from $60 million, which is further expandable at our option in increments of $5 million up to a maximum of $100 million under certain defined conditions. On November 18, 2011 a second amendment was executed. The key provision of the second amendment allows the Company to provide guarantees to third party lenders in connection with purchase orders in the ordinary course of business if such guarantees are considered necessary by the Company. Interest accrues at the higher of the Federal Funds rate plus .50%, the prime rate or the adjusted LIBOR rate plus 1.00% plus the applicable margin which ranges from 1.25% to 3.00%. Availability under our senior secured credit facility is collateralized by a first priority interest in all of our assets. As of October 29, 2011 and October 30, 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 October 29, 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

Except as previously disclosed in prior quarterly periods and as set forth below, there have been no material changes outside of the ordinary course of business 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.

On July 8, 2011, the Company entered into a Lease (the “New Lease”) with the West Virginia Economic Development Authority (“Landlord”) in order to expand its distribution center facility located in Weirton, West Virginia (the “DC Facility”). The expansion portion of the DC facility covered by the New Lease is now expected to be delivered in the first quarter of 2012.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United

 

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting during the third quarter of 2011 period 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

We are subject to various legal proceedings and claims which arise in the ordinary course of our business. If a potential loss arising from these lawsuits, claims and pending actions is probable and reasonably estimable, we record the estimated liability based on circumstances and assumptions existing at the time. Management does not believe that the outcome of current litigation will have a material adverse effect on our consolidated results of operations or financial condition, and believes that the recorded liabilities are adequate. However, there are inherent limitations in projecting the outcome of these matters and in the estimation process, and if future actual liabilities exceed projected liabilities, it could have a material adverse effect on our consolidated financial condition or on our operations.

Item 1A. Risk Factors

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

Item 6. Exhibits

 

10.1*		Second Amendment to Credit Agreement by and among rue21, as the Lead Borrower, rue services corporation, 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 18, 2011.

 

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10.2*		Form of Restricted Stock Unit Agreement, as amended, under the 2009 Omnibus Incentive Plan.
31.1*		Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of rue21, inc. (Section 302 of the Sarbanes-Oxley Act of 2002)
31.2*		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of rue21, inc. (Section 302 of the Sarbanes-Oxley Act of 2002)
32.1**		Certification of the Chief Executive Officer of rue21, inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 **		Certification of the Chief Financial Officer of rue21, inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101***		Interactive Data File

 

*	Filed herewith

**	Furnished herewith

***

Pursuant to Rule 406T of SEC Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these Sections.

SIGNATURES

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

 

				rue21, inc.
Date: December 2, 2011				By		/s/ Robert Fisch
						Robert Fisch Chairman and Chief Executive Officer
Date: December 2, 2011				By		/s/ Keith McDonough
						Keith McDonough Senior Vice President and Chief Financial Officer

 

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