Rue21, Inc.'s CEO Discusses Q2 2012 Results - Earnings Call Transcript

rue21, inc. (RUE)

Q2 2012 Earnings Conference Call

August 23, 2012, 16:30 PM ET

Executives

Bob Fisch – President and CEO

Kim Reynolds – SVP and General Merchandise Manager

Keith McDonough – SVP and CFO

Joe Teklits – ICR, Inc.

Analysts

Lorraine Hutchinson – Bank of America

Paul Lejuez – Nomura

Steph Wissink – Piper Jaffray

Janet Kloppenburg – JJK Research

Adrienne Tennant – Janney Capital Markets

Presentation

Operator

Good day and welcome to the rue21, Inc. Second Quarter Fiscal 2012 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Joe Teklits. You may now begin, sir.

Joe Teklits

Thank you. Good afternoon everyone and welcome to rue21's second quarter 2012 conference call. The speakers today are Bob Fisch, Kim Reynolds, and Keith McDonough. As a reminder, statements made during today's call will contain forward-looking information about our financial performance and prospects. Results could differ materially from those contained in our forward-looking statements made today.

The risks that could cause our business and financial results to differ materially from those we currently expect are included in the fiscal 2011 Form 10-K and in subsequent filings we made with the SEC, as well as the earnings press release we issued today. All these documents can be found on the Investor Relations website at rue21.com. The information discussed on this call is as of today, August 23, 2012. And the Company undertakes no duty to update this information to reflect future events or circumstances.

And with that, I'll turn the call over to Bob.

Bob Fisch

Thank you, Joe, great job and good afternoon to everyone. For the second quarter of 2012, we achieved total sales growth of 17% consisting of both strong new store productivity and positive comp store sales. Merchandise margin increased 10 basis points and overall gross margin increased 30 basis points to a record 39.4%, the highest in rue's history.

Net income increased by over 18%, so we were pleased with our performance and ability to again show top and bottom line growth in what was certainly a volatile period for retail. The industry is seeing a trend of customers buying closer to need and with schools opening later than last year and the important tax free days in August, we did see end of July business move into the third quarter.

The shifted business due to later back-to-school openings is even more pronounced than last year. For example, the state of Texas, our largest volume state where we have 92 stores is going back-to-school one complete week later this year, next week. That happened in a significant amount of states where our stores are located and impacted our sales.

Through the middle of July, our comps were approximately a point higher than where we ended up. This positive side of this is that we are getting the business back in focus that we did expect and we are very pleased with the customers' reaction to our back-to-school assortments. But before I go into the third quarter, I want to go over with you some of the strengths of our business model that drove our results in the second quarter.

On every call like a broken record, I speak about the importance of consistency and delivering predictable results. We were again successful in the second quarter because of our core three three-prong strategy of diversification. We don't need to rely on just one channel or category of merchandise for profit growth.

As a reminder, our multi-prong strategy includes the following; number one, a flexible real estate strategy where we operate in strips, outlets and malls. Two, diversified product where we offer our customers girls and guys apparel and a wide assortment of etc! accessory categories including footwear, beauty, jewelry and tarea our intimate apparel. And three, balance sales growth that includes new store growth, conversion store growth and comparable sales store growth.

So first looking at a flexible real estate model, some or many of our mall stores performed better than our stores and outlets and strips. And why? There was oppressive heat across much of the country in July and in areas where many of our stores are located and people didn't want to shop outside. We capitalized on the traffic in the malls when business in the outside shopping centers like that was kind of tougher. The key for rue is that we are in all three channels and not reliant on one just -- one type of business for sales.

Next in merchandise, we don't just carry growth we also have a great mix of guys apparel and accessories. We are seeing a resurgence of dual gendered merchandise. We haven't seen that in a while. And we are in a position to capitalize on this trend. And in each category we don't just offer fashion, we have a balance assortment of key volume business drivers as well as the latest fashion trends.

This quarter, our girls sportswear performed well led by dresses, shorts and woven tops. And our guys business was our number one performer and also delivered strong results. In accessories, we were up against some great fashion trends from last year, so our accessory business particularly in jewelry was a little tougher.

However, footwear was a strong category and our broad product assortment enabled us to weather the underperforming jewelry accessory category without seeing detrimental impact to our overall sales or our gross margins. And more important, our fast sourcing model has allowed us to refocus our accessory assortments for back-to-school. That is always our secret sauce.

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