rue21, inc. (RUE)
Q2 2010 Earnings Call Transcript
August 25, 2010 4:30 pm ET
Joe Teklits – IR, ICR Inc.
Bob Fisch – President, CEO and Chairman
Kim Reynolds – SVP and General Merchandise Manager
Keith McDonough – SVP and CFO
Brian Tunick – JPMorgan
Lorraine Hutchinson – Bank of America/Merrill Lynch
Michelle Tan – Goldman Sachs
Janet Kloppenburg – JJK Research
Sean Naughton – Piper Jaffray
Previous Statements by RUE
» rue21 Inc. Q1 2010 Earnings Call Transcript
» rue21 Inc Q4 2009 Earnings Call Transcript
» rue21 Inc. Q3 2009 Earnings Call Transcript Introductory Remarks
Good day and welcome to the rue21 second quarter 2010 earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Joe Teklits, rue21 Investor Relations. Please go ahead.
Thank you. Good afternoon, everybody. Thanks for joining us for rue21’s second quarter 2010 conference call. Hosting today’s call will be Bob Fisch, President and Chief Executive Officer. And after management made its formal remarks, we will open the call to questions.
As you know, quickly, some of the statements made on the call during the prepared remarks and in response to your questions may constitute forward-looking statements and are made pursuant and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.
Those risks and uncertainties are described in the company’s annual report on Form 10-K filed on March 31st of 2010. Investors should not assume that the statements made during the conference call will remain operative at a later time, and rue21 undertakes no obligation to update any information discussed on the call.
And now, I will turn the call over to Bob Fisch, CEO.
Thank you, Joe. And thank you, everyone, for joining us for our second quarter conference call. Joining me today on the call is our CFO, Keith McDonough, and our Senior Vice President and General Merchandise Manager, Kim Reynolds. We are very pleased to be able to report earnings growth for the quarter that exceeded our guidance.
Our net sales increased 14.3% in the second quarter and we were able to drive net income growth of 20% even with incremental public company and share-based compensation costs. Year-to-date, net income increased 47%, and adjusting for incremental public company expenses and the share-based compensation costs, year-to-date net income increased 69%. See, we are coming off a very solid quarter and a terrific first half of the year.
Our management team has consistently delivered earnings growth in both strong and weak retail environments. The second quarter was a great example. While sales did not meet projections, but our earnings increase has certainly did. I think it is important to note that we have achieved 8.5 straight years or 34 straight quarters of substantial sales and profit growth. We believe that our business model would continue to deliver year-over-year profit gains.
Although today I will be highlighting some of our achievements for the second quarter and year-to-date, this team never loses sight of the future and executing to achieve the year-over-year growth targets we have set forth for this company. To deliver strong results this quarter, we focused on controlling inventory, running a tight operation, working with our vendors to maximize initial markups and managing promotions. Our gross margin increased 220 basis points to 38.2% from 36.0% in the second quarter of fiscal 2009, and we achieved a record merchandise margin this quarter.
Our ability to leverage our domestic base and domestic importer vendor network allows us improve initial markup through lowered cost of merchandise. Also, the control and flexibility we have in sourcing is an advantage to us when there are labor shortages or supply concerns in certain regions. We are not beholding to any one supplier, and we can maneuver around sourcing issues to avoid increases in costs. In fact, we can drive cost down by the fact that we are a growing retailer and a company that many vendors are eager to partner with right now.
We believe our promotional strategies for the short summer selling season were very effective. Although the second quarter is typically promotional in our retail demographic, we did hold price at many of our key seasonal items such as shorts and sandals. And we achieved our earning target by driving margin without taking a necessary markdown. We promoted where we felt it was right to do so and ended the quarter with controlled inventory levels that position us well for the back-to-school season.
While growing our top and bottom line, we also continued to grow our store base and position our company for the future. We opened 31 stores this quarter, bringing us to 62 new openings for the first half of the year. And we are very comfortable with our goal of 100 new stores for 2010. We have also continued to drive profits by converting our existing stores to our larger format etc! stores. Not only do these stores have more square footage, but they also highlight our higher margin accessory categories. And we are on plan to convert 30 stores to our etc! format in 2010.
Our real estate growth strategy has given us the ability to partner with our landlords and lock in lowered occupancy costs in our leases, which not only helps today but will benefit us for the next 10 years. We continue to focus on small and medium size markets in strip centers and in malls that attract customers start for fashion at a great value. We consistently see strong results and return on investments within one year on our new store openings.