Note 1 Business and Summary of Significant Accounting Policies
Organization
rue21, inc. (the Company or rue21) is a specialty retailer of junior girls and young mens apparel and accessories with 877, 755, and 638 stores as of February 2, 2013, January 28, 2012 and
January 29, 2011 respectively, in various strip centers, regional malls and outlet centers throughout the United States. Sales are generally transacted for cash, checks and through the acceptance of third-party credit and debit cards.
On November 13, 2009, the Company completed an initial public offering of 7,780,252 shares of common stock at a
price to the public of $19.00 per share, of which 1,650,000 shares were sold by the Company, 6,130,252 were sold by the selling stockholders (including 913,590 by members of the Companys management). Upon completion of the offering, the
Company received proceeds of approximately $29.2 million, net of underwriters discounts and commissions. On February 26, 2010, the Company completed an offering of 6,961,958 shares of common stock, including 908,081 shares of common stock
subsequently sold pursuant to the underwriters over-allotment option, at a price of $28.50 per share, all of which were sold by funds advised by Apax Partners L.P., the Companys principal stockholder and certain members of the
Companys management. The Company received no proceeds from the offering and incurred approximately $0.6 million in expense related to the offering.
The Companys authorized capital stock consists of 200,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share.
Principles of Consolidation
The consolidated financial statements include all the accounts of the Company and its wholly owned subsidiaries r services, llcand rue services corporation. All intercompany
transactions and balances have been eliminated in consolidation. At February 2, 2013, the Company operated as one segment.
Fiscal Year
The Companys fiscal year is 52 or 53 weeks ending on the Saturday nearest to January 31 of the following year. These consolidated financial statements were prepared for the 53 weeks
ended February 2, 2013, Fiscal Year 2012. As used herein Fiscal Year 2011 and Fiscal Year 2010 refer to the 52 week period ended January 28, 2012 and January 29, 2011, respectively.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current year presentation.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual
results could differ from those estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.
43
rue21, inc.
Notes to Consolidated Financial Statements Continued
Seasonality
Our business is seasonal and historically has consisted of two principal seasons: Spring (the first and second quarters) and Fall (the third and fourth quarters). Generally, our highest sales volume
occurs in the fourth quarter, which includes the holiday selling season. Our business is also subject, at certain times, to calendar shifts which may occur during key selling times such as school holidays, Easter and regional fluctuations in the
calendar during the back-to-school selling season.
Segment Reporting
Business or operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision maker in
deciding how to allocate resources and assess performance.
The Financial Accounting Standard Board (FASB) has established
authoritative guidance for reporting information about a companys operating segments, including disclosures related to a companys products and services, geographic areas and major customers. The Company does not have multiple operating
segments or business components for which discrete financial information is prepared. The Company operates in and reports as a single operating segment which is the operation of its retail stores which are only located in the United States. The
Companys Chief Executive Officer (CEO) is the chief decision maker. The Companys CEO utilizes a consolidated approach to assess performance and allocate resources. The Company has no international sales. Net sales are primarily generated
through the retail store sale of merchandise to consumers. All of the Companys identifiable assets are located in the United States.
Business Concentration
The Company sells a diversified product mix that seeks a complementary balance to attract our core customers. The table below indicates our product mix as a percentage of net sales as of the fiscal year
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Girls
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apparel
|
|
|
57.5
|
%
|
|
|
56.6
|
%
|
|
|
55.9
|
%
|
|
|
|
|
Accessories
|
|
|
23.6
|
%
|
|
|
25.0
|
%
|
|
|
25.7
|
%
|
|
|
|
|
Guys Apparel and Accessories
|
|
|
18.9
|
%
|
|
|
18.4
|
%
|
|
|
18.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Financial Instruments
The FASB has established authoritative guidance that requires management to disclose the estimated fair value of certain assets and
liabilities defined as financial instruments. As of February 2, 2013 and January 28, 2012, management believes that the carrying amounts of cash and cash equivalents, receivables, and payables approximate fair value because of the short
maturity of these financial instruments.
Cash and Cash Equivalents
Cash includes cash equivalents, which includes credit and debit card transactions. Credit and debit card transactions are typically paid
to the Company on the next business day. The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents.
44
rue21, inc.
Notes to Consolidated Financial Statements Continued
Short term investments
As of February 2, 2013, short term investments included deposits primarily held in money market accounts with a maturity greater than three months but less than one year.
Accounts Receivable
Accounts receivable generally represent tenant allowances due from lessors. The Company evaluates collectability and has determined that no allowance is necessary. As of fiscal year end 2012, receivables
consisted of: construction allowances $7.7 million; third party sell offs $1.9 million; and other $1.0 million. This compares to fiscal year end 2011 of: construction allowances $6.0 million; and other $0.7
million.
Merchandise Inventory
Merchandise inventory is valued at the lower of cost (first-in, first-out basis) or market using the retail inventory method. The Company records merchandise receipts at the time they are delivered to our
consolidator, as we are not directly importing any merchandise. This is the point at which title and risk of loss transfer to the Company.
The Company reviews its inventory levels to identify slow-moving merchandise and generally uses markdowns to clear slow-moving merchandise. The Company records a markdown reserve based on estimated future
markdowns related to current inventory. Each period the Company evaluates the selling trends experienced and the related promotional events or pricing strategies in place to sell through the current inventory levels. Markdowns may occur when
inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer acceptance of fashion items, competition, or if it is determined that the inventory in stock will not sell at its currently
ticketed price. Such markdowns may have an adverse impact on earnings, depending on the extent and amount of inventory affected. The anticipated deployment of new seasonal merchandise is reflected within the estimated future markdowns reserve
utilized in valuing current inventory, as such new inventory in certain circumstances will displace merchandise units currently on-hand. The markdown reserve is recorded as an increase to cost of goods sold in the accompanying Consolidated
Statements of Income.
The Company also estimates a shrinkage reserve for the period of time between the last physical count
and the balance sheet date. The estimate for shrinkage reserve can be affected by changes in merchandise mix and changes in actual shrinkage trends.
Property and Equipment
Property and equipment are recorded on the basis of cost with depreciation and amortization computed utilizing the straight-line method
over the estimated useful lives as follows:
|
|
|
|
|
Furniture and fixtures
|
|
7 years
|
|
|
Leasehold improvements
|
|
Lesser of 10 years or lease term
|
|
|
Automobiles
|
|
5 years
|
|
|
Computer equipment and software
|
|
3 to 5 years
|
|
|
In accordance with the FASBs authoritative guidance related to the impairment or disposal of long-lived assets,
impairment losses may be recorded on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets. If such a condition occurs, the assets are adjusted to their estimated fair value. Impairment charges of $0.1 million, $0.3 million and $0.2 million were recognized for the fiscal years 2012, 2011, and 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.
45
rue21, inc.
Notes to Consolidated Financial Statements Continued
Deferred Rent and Tenant Allowances
Deferred rent is recognized when a lease contains a predetermined fixed escalation of minimum rent. The Company recognizes the related
rent expense on a straight-line basis from possession date and records the difference between the recognized rental expense and the amounts payable under the lease as deferred rent liability. Also included in deferred rent are tenant allowances
received from landlords in accordance with negotiated lease terms. The tenant allowances are amortized as a reduction to rent expense on a straight-line basis over the term of the lease (including the pre-opening build-out period). The short-term
portion of deferred rent is recorded in accrued expenses and other current liabilities and the long-term portion is included in deferred rent, tenant allowances and other long-term liabilities in the accompanying Consolidated Balance Sheets.
Insurance and Self-Insurance
The Company uses a combination of insurance and self-insurance for a number of risk management activities including workers
compensation, general liability, automobile liability, and employee-related health care benefits, a portion of which is paid by the employees. Costs related to claims are accrued based on known claims and historical experiences of incurred but not
reported claims received from our insurers. The Company believes that it has adequately reserved for its self-insurance liability, which is capped through the use of stop-loss contracts and specified retentions with insurance companies. However, any
significant variation of future claims from historical trends could cause actual results to differ from the accrued liability.
Revenue Recognition
Revenue is recognized upon purchase of merchandise by customers. Allowances for sales returns are recorded as a reduction of net sales in the periods in which the sales are recognized. Consistent with our
merchandise return policy of 30 days, the allowance for sales returns at each period end is calculated and recorded based upon an estimate of expected returns over a subsequent 30-day period. The allowance for sales returns was $0.7 million,
$0.6 million, and $0.4 million for the fiscal years 2012, 2011, and 2010 respectively. Sales tax collected from customers is excluded from revenue and is included as part of accrued expenses and other current liabilities on the Companys
Consolidated Balance Sheets.
Deferred revenue is established upon the purchase of gift cards by customers, and revenue is
recognized upon redemption of gift cards for merchandise. The Company evaluated unredeemed gift cards and determined that the likelihood of certain gift cards being redeemed by the customer after 18 months was remote, based upon historical
redemption patterns of gift cards. We have established a wholly-owned subsidiary to administer the gift card program within a state jurisdiction that does not require remittance of unclaimed property. For those gift cards that were determined
redemption would be remote, the Company reversed the liability, and recorded gift card breakage income. Gift card breakage income of $0.7 million, $0.8 million and $0.3 million was recognized for the fiscal years 2012, 2011, and 2010,
respectively. Gift card breakage income is recorded as reduction to cost of goods sold.
Cost of Goods Sold
Cost of goods sold includes costs related to merchandise sold, distribution and warehousing, freight from the distribution center to the stores, store occupancy, and buying and merchandising department
expenses. Cost of goods sold is reduced by certain vendor allowances received, primarily for markdowns, merchandise marked out of stock and vendor non-compliance charges.
Selling, General and Administrative Expense
Selling, general and administrative expense includes administration, share-based compensation and store expenses but excludes store
occupancy costs and freight to stores.
46
rue21, inc.
Notes to Consolidated Financial Statements Continued
Income Taxes
The Company accounts for income taxes in accordance with the authoritative guidance issued by the FASB, which requires the use of the asset and liability method. Under this method, deferred tax assets and
liabilities are recognized based on the difference between the carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the tax rates, based on certain judgments
regarding enacted tax laws and published guidance, in effect in the years when those temporary differences are expected to reverse. A valuation allowance is established against the deferred tax assets when it is more likely than not that some
portion or all of the deferred taxes may not be realized. Changes in the level and composition of earnings, tax laws or the deferred tax valuation allowance, as well as the results of tax audits may materially impact the effective tax rate.
The Company recognizes income tax liabilities related to unrecognized tax benefits in accordance with the FASBs
authoritative guidance related to uncertain tax positions and adjust these liabilities when our judgment changes as the result of the evaluation of new information. The Company classifies interest and penalties as an element of tax expense.
The calculation of the deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from an
uncertain position and to establish a valuation allowance require management to make estimates and assumptions. The Company believes that its assumptions and estimates are reasonable, although actual results may have a positive or negative material
impact on the balances of deferred tax assets and liabilities, valuation allowances, or net income.
Stock Based Compensation
The Company accounts for share based compensation awards in accordance with the FASBs authoritative guidance, which requires
companies recognize all share based payments to employees, including grants of employee stock options, in the consolidated financial statements based on the grant date fair value of the equity or liability instruments issued. The Company recognizes
compensation expense for stock option awards on a straight-line basis over the requisite service period of the award. The Company recognizes compensation expense for time-based restricted stock units over the requisite service period. For the
performance-based restricted share unit grants in fiscal year 2012, the Company recognized compensation expense on an accelerated attribution method. The Company has historically issued new shares of common stock upon the exercise of employee stock
options. See Note 5 Stock-Based Compensation.
Store Pre-opening Costs
Store pre-opening costs, which consist primarily of occupancy costs and payroll, are expensed as incurred and are included in selling,
general and administrative expense in the accompanying Consolidated Statements of Income.
Advertising Costs
The Company expenses advertising costs when incurred. Advertising expense, which is classified in selling, general, and administrative expense in the accompanying Consolidated Statements of Income, was
$6.3 million, $5.1 million and $4.0 million for the fiscal years 2012, 2011, and 2010, respectively.
Repairs and Maintenance
The Company capitalizes costs that extend the life of an asset and that meet certain minimal dollar thresholds depending on asset
category. All other costs including maintenance agreements are charged to selling, general and
47
rue21, inc.
Notes to Consolidated Financial Statements Continued
administrative expense in the accompanying Consolidated Statements of Income. Repairs and maintenance expense was $2.6 million, $2.1 million and $1.8 million for the fiscal years 2012, 2011, and
2010, respectively. Repairs and maintenance expense does not include any costs for store conversions.
Legal Proceedings and Claims
The Company is subject to certain legal proceedings and claims arising out of the conduct of its business. In accordance with the
FASBs authoritative guidance for contingent losses management records a reserve for estimated losses when the loss is probable and the amount can be reasonably estimated. If a range of possible loss exists and no anticipated loss within the
range is more likely than any other anticipated loss, the Company records the accrual at the low end of the range. As the Company believes that it has provided adequate reserves, it anticipates that the ultimate outcome of any matter currently
pending against the Company will not materially affect the consolidated financial position or results of operations of the Company.
Reserves are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, ruling, advice of counsel and other information pertinent to a particular matter. Significant
differences could exist between the actual cost required to investigate, litigate and/or settle a claim or the ultimate outcome of a suit and managements estimate.
Earnings per Share
Basic earnings per common share amounts are calculated using the weighted average number of common shares outstanding for the period. Diluted earnings per common share amounts are calculated using the
weighted average number of common shares outstanding plus the additional dilution for all potentially dilutive stock options utilizing the treasury stock method.
The following table shows the amounts used in computing earnings per share and the effect on net income and the weighted average number of shares of potential dilutive common stock (stock options):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 2,
2013
|
|
|
January 28,
2012
|
|
|
January 29,
2011
|
|
|
|
(in thousands, except per share data)
|
|
Net income
|
|
$
|
43,901
|
|
|
$
|
38,950
|
|
|
$
|
30,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
24,287
|
|
|
|
24,417
|
|
|
|
24,277
|
|
Impact of dilutive securities
|
|
|
616
|
|
|
|
634
|
|
|
|
725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
24,903
|
|
|
|
25,051
|
|
|
|
25,002
|
|
Per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
|
$
|
1.81
|
|
|
$
|
1.60
|
|
|
$
|
1.25
|
|
Diluted income per common share
|
|
$
|
1.76
|
|
|
$
|
1.55
|
|
|
$
|
1.21
|
|
Equity awards to purchase 0.8 million, 0.6 million, and 0.3 million shares of common stock for the
fiscal years 2012, 2011 and 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.
48
rue21, inc.
Notes to Consolidated Financial Statements Continued
Note 2 Fair Value Measurements
The FASBs authoritative guidelines require the categorization of assets and liabilities into three levels based
upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
|
|
|
Level 1:
Unadjusted quoted prices in active markets for identical assets and liabilities. The Companys cash, cash equivalents
and short term investments of $63.5 million and $72.0 million as of February 2, 2013 and January 28, 2012, respectively, are reported at fair value utilizing Level 1 inputs. The carrying value of these instruments approximate fair
value because of their short-term maturity.
|
|
|
|
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 managements 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 1 are derived from significant unobservable 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 Companys financial assets (cash equivalents) measured at fair value on a recurring basis as of February 2, 2013 and January 28, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at February 2, 2013
|
|
|
|
Carrying
Amount
|
|
|
Quoted Market
Prices in
Active
Markets
for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs
(level
3)
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Cash and cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
43,519
|
|
|
$
|
43,519
|
|
|
$
|
|
|
|
$
|
|
|
Short Term Investments
|
|
$
|
20,000
|
|
|
$
|
20,000
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
63,519
|
|
|
$
|
63,519
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at January 28, 2012
|
|
|
|
Carrying
Amount
|
|
|
Quoted Market
Prices in Active
Markets for
Identical Assets
(Level
1)
|
|
|
Significant Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs
(level
3)
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Cash and cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
41,960
|
|
|
$
|
41,960
|
|
|
$
|
|
|
|
$
|
|
|
Short Term Investments
|
|
$
|
30,000
|
|
|
$
|
30,000
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
71,960
|
|
|
$
|
71,960
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
rue21, inc.
Notes to Consolidated Financial Statements Continued
Note 3 Property and Equipment
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
January 28,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Furniture and fixtures
|
|
$
|
114,992
|
|
|
$
|
93,301
|
|
Leasehold improvements
|
|
|
129,750
|
|
|
|
102,731
|
|
Computer equipment, software and other
|
|
|
32,494
|
|
|
|
22,541
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost
|
|
|
277,236
|
|
|
|
218,573
|
|
Less accumulated depreciation and amortization
|
|
|
(132,384
|
)
|
|
|
(100,775
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
144,852
|
|
|
$
|
117,798
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $33.0 million, $26.6 million, and $22.0 million for fiscal years 2012, 2011
and 2010, respectively.
Note 4 Long-Term Debt
Effective April 10, 2008, the Company established a five-year $60 million senior secured revolving credit facility
(the Senior Secured Credit Facility) with Bank of America N.A. The ceiling is expandable at the Companys option in increments of $5 million up to a limit of $85 million under certain defined conditions. The Senior Secured Credit Facility
initial borrowing was $27.2 million. Proceeds from the initial borrowing were used for the extinguishment of all of the Companys existing long-term debt facilities and the Bank of America N.A. commitment fee. Availability under the Senior
Secured Credit Facility is collateralized by a first priority interest in all the Companys assets. On November 24, 2009, the Company amended its Senior Secured Credit Facility with Bank of America, N.A. Key provisions of the amendment
include an increase in the borrowing ceiling to $85 million from $60 million, which is further expandable at the Companys option in increments of $5 million up to a limit of $100 million under certain defined conditions. Interest accrues at
the higher of the Federal Funds rate plus 0.50%, the prime rate or the adjusted LIBOR rate plus the applicable margin which ranges from 1.25% to 3.00% set quarterly dependent upon average net availability on the facility during the previous quarter.
As of February 2, 2013 and January 28, 2012, there were no outstanding borrowings under the Senior Secured Credit Facility. Accordingly, the weighted-average interest rate under the Senior Secured Credit Facility was nil for both of the
fiscal years ended February 2, 2013 and January 28, 2012. The Senior Secured Credit Facility includes a fixed charge covenant applicable only if net availability falls below thresholds of 10%. The Company is in compliance with all
covenants under the Senior Secured Credit Facility at February 2, 2013. The Senior Secured Credit Facility matures in April 2013.
We are currently finalizing an amendment and restatement of our senior secured credit facility with Bank of America, due to mature on April 10, 2013. We expect that the facility, as amended and restated,
will be a five-year $100 million senior secured revolving credit facility which is further expandable at our option in increments of $10 million up to a maximum of $130 million under certain defined conditions.
Note 5 Stock-Based Compensation
In November 2009, the Company adopted the 2009 Omnibus Incentive Plan (the 2009 Plan) in connection with the
Companys initial public offering, pursuant to which key employees, officers, and directors shall be eligible to receive 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
50
rue21, inc.
Notes to Consolidated Financial Statements Continued
years from the date of issuance. On March 9, 2012, the Compensation Committee approved a form of Performance Share Unit Award Agreement (the PRSU Agreement) for the 2009 Plan.
For 2012, performance share units were earned over a performance period of one year, and vest ratably over three years. To date, 902,508 stock options, 357,152 restricted stock units, and 154,973 performance share unit awards have been granted and
no stock appreciation rights or restricted stock have been issued under the 2009 Plan. The Company expects to reissue from treasury stock for future issuances of share based payments.
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 option grants will be made under the 2003 Plan.
Stock Option Activity
The following table represents stock options granted, vested, and expired under the existing share based compensation plans for fiscal year ended February 2, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
(in thousands)
|
|
|
(per share)
|
|
|
(in years)
|
|
|
|
|
Outstanding January 29, 2012
|
|
|
1,600
|
|
|
$
|
18.41
|
|
|
|
7.32
|
|
|
$
|
15,680
|
|
Granted
|
|
|
125
|
|
|
|
27.33
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(157
|
)
|
|
|
6.93
|
|
|
|
|
|
|
|
|
|
Expired or forfeited
|
|
|
(15
|
)
|
|
|
21.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding February 2, 2013
|
|
|
1,553
|
|
|
$
|
20.26
|
|
|
|
6.66
|
|
|
$
|
16,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at February 2, 2013
|
|
|
953
|
|
|
$
|
15.55
|
|
|
|
5.89
|
|
|
$
|
14,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 2, 2013, the Company had 2,211,340 shares available for stock grants. The Company recognized
$10.5 million, $4.9 million, and $2.2 million in compensation expense related to stock options for the fiscal years 2012, 2011, and 2010, respectively. The weighted-average fair value of stock options at the grant date was $13.67,
$16.13 and $17.37 for the fiscal years 2012, 2011, and 2010, respectively. The intrinsic value of options exercised was $3.5 million, $2.2 million and $3.8 million for the fiscal years 2012, 2011, and 2010, respectively. All outstanding
vested options are currently exercisable as of February 2, 2013. The fair value of stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following range of weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 2,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Risk-free interest rate(1)
|
|
|
1.1% - 1.8
|
%
|
|
|
1.24% - 3.10
|
%
|
|
|
1.52% - 2.46
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility factors for the expected market price of the
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys common stock(2)
|
|
|
53.0
|
%
|
|
|
55.0% - 56.0
|
%
|
|
|
55.0
|
%
|
Weighted average expected term(3)
|
|
|
6.0 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 rue21s industry.
|
51
rue21, inc.
Notes to Consolidated Financial Statements Continued
(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.
|
The following table summarizes information regarding non-vested outstanding stock options as of February 2, 2013:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Averaged Fair Value
at Grant Date
|
|
|
|
(in thousands)
|
|
|
(per share)
|
|
Non-vested as of January 29, 2012
|
|
|
810
|
|
|
$
|
14.20
|
|
Granted
|
|
|
125
|
|
|
|
13.67
|
|
Vested
|
|
|
(325
|
)
|
|
|
12.76
|
|
Cancelled
|
|
|
(10
|
)
|
|
|
11.78
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of February 2, 2013
|
|
|
600
|
|
|
$
|
14.91
|
|
|
|
|
|
|
|
|
|
|
As of February 2, 2013, there was $8.9 million of unrecognized compensation expense related to non-vested stock
option awards that is expected to be recognized over a weighted-average period of 0.80 years. The total fair value of shares vested during the fiscal years 2012, 2011, and 2010, was $4.1 million, $2.7 million and $0.8 million, respectively.
Restricted Stock Unit Activity
Time-based restricted stock units vest over three years.
Performance-based
restricted stock unit awards vest over three years if the performance is achieved in the first year period. The level of goal achievement, if any, will determine the number of shares that can be received.
Below is a summary of restricted stock unit activity for the year ended February 2, 2013:
Restricted Stock Unit Grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-Based Restricted Stock Units
For the Year Ended February 2,
2013
|
|
|
Performance Share Units For the
Year Ended February 2, 2013
|
|
|
|
Shares
|
|
|
Weighted Averaged
Fair Value at Grant
Date
|
|
|
Shares
|
|
|
Weighted Averaged
Fair Value at Grant
Date
|
|
|
|
(in thousands)
|
|
|
(per share)
|
|
|
(in thousands)
|
|
|
(per share)
|
|
Non-vested as of January 28, 2012
|
|
|
162
|
|
|
$
|
29.85
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
182
|
|
|
$
|
27.20
|
|
|
|
155
|
|
|
$
|
27.24
|
|
Vested
|
|
|
(63
|
)
|
|
$
|
29.84
|
|
|
|
|
|
|
$
|
|
|
Expired or forfeited
|
|
|
(1
|
)
|
|
$
|
30.12
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of February 2, 2013
|
|
|
280
|
|
|
$
|
28.12
|
|
|
|
155
|
|
|
$
|
27.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total fair value of time-based restricted stock units granted during fiscal year 2012 was $5.0 million. As of
February 2, 2013, there was $7.9 million of total unrecognized compensation cost related to non-vested restricted stock units. The unrecognized cost is expected to be recognized over a weighted-average period of 1.0 years.
The total fair value of performance share units during fiscal year 2012 was $4.2 million. As of February 2, 2013, there was $1.6
million of total unrecognized compensation cost related to non-vested performance share units. The unrecognized cost is expected to be recognized over a weighted average period of 1.29 years.
52
rue21, inc.
Notes to Consolidated Financial Statements Continued
Note 6 Lease Commitments
All of the Companys operations are conducted from leased premises. Store leases provide for base rentals, some of
which increase over time, and the payment of a percentage of sales as additional rent when sales exceed specified levels; the latter, providing the basis upon which material contingent rental payments are determined. Minimum rentals relating to
these leases are recorded on a straight-line basis. Generally, lease terms are five to ten years in length excluding renewal options. In addition, the Company is typically responsible under its leases for maintenance, common area charges, real
estate taxes, and certain other expenses. Point of sale equipment is also leased by the Company for a term of four years. All leases are classified as operating leases.
A summary of fixed minimum and contingent rent expense for all operating leases follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
(in thousands)
|
|
February 2,
2013
|
|
|
January 28,
2012
|
|
|
January 29,
2011
|
|
Store Rent :
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed minimum
|
|
$
|
66,631
|
|
|
$
|
56,421
|
|
|
$
|
44,276
|
|
Contingent
|
|
|
3,868
|
|
|
|
3,388
|
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total store rent, excluding common maintenance charges, real estate taxes and certain other expenses
|
|
|
70,499
|
|
|
|
59,809
|
|
|
|
46,976
|
|
Offices, distribution facilities and equipment
|
|
|
5,308
|
|
|
|
4,371
|
|
|
|
3,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Rent Expense
|
|
$
|
75,807
|
|
|
$
|
64,180
|
|
|
$
|
50,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes future annual minimum lease obligations under all operating leases as required by the lease
agreements:
|
|
|
|
|
(in thousands)
Fiscal Year
|
|
|
|
2013
|
|
$
|
75,921
|
|
2014
|
|
|
69,924
|
|
2015
|
|
|
63,994
|
|
2016
|
|
|
57,328
|
|
2017
|
|
|
49,855
|
|
Thereafter
|
|
|
144,151
|
|
|
|
|
|
|
Total future lease obligations
|
|
$
|
461,173
|
|
|
|
|
|
|
Note 7 401(k) Profit Sharing Plan
The Company sponsors a qualified 401(k) plan with a contributory profit-sharing feature (the Plan) for eligible
employees. Under the provisions of the plan, employees must have completed one year of service and be at least 21 years of age to be eligible. The plan permits participants of the plan to contribute up to 50% of pretax annual compensation as defined
in the plan, subject to certain limitations. The Company matches 100% of participant contributions up to 4% of pretax annual compensation as defined in the plan. Profit-sharing contributions to the plan, as determined by the Board of Directors, are
discretionary, but generally may not exceed 15% of defined
annual compensation paid to all participating employees. 401(k) matching
contributions and profit-sharing contributions to the plan were $0.9 million, $0.7 million and $0.6 million for the fiscal years 2012, 2011, and 2010, respectively, and are included in selling, general, and administrative expense in the Consolidated
Statements of Income.
53
rue21, inc.
Notes to Consolidated Financial Statements Continued
Note 8 Income Taxes
The provision for income taxes at the fiscal years 2012, 2011, and 2010 consists of the current and deferred elements
in the table below:
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
(in thousands)
|
|
February 2,
2013
|
|
|
January 28,
2012
|
|
|
January 29,
2011
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
23,918
|
|
|
$
|
15,051
|
|
|
$
|
15,834
|
|
State
|
|
|
3,418
|
|
|
|
3,017
|
|
|
|
3,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
27,336
|
|
|
|
18,068
|
|
|
|
18,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,254
|
)
|
|
|
5,819
|
|
|
|
939
|
|
State
|
|
|
(495
|
)
|
|
|
18
|
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(2,749
|
)
|
|
|
5,837
|
|
|
|
664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
24,587
|
|
|
$
|
23,905
|
|
|
$
|
19,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys income taxes determined at the statutory rate for the fiscal years 2012, 2011 and 2010 differ from
the actual rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 2,
2013
|
|
|
January 28,
2012
|
|
|
January 29,
2011
|
|
Effective Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes
|
|
|
2.6
|
%
|
|
|
3.3
|
%
|
|
|
3.8
|
%
|
Permanent differences
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
|
|
0.7
|
%
|
Other
|
|
|
(1.8
|
%)
|
|
|
(0.5
|
%)
|
|
|
(0.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
35.9
|
%
|
|
|
38.0
|
%
|
|
|
39.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of temporary differences, the Company has the following net deferred tax amounts at February 2, 2013,
January 28, 2012 and January 29, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
(in thousands)
|
|
February 2,
2013
|
|
|
January 28,
2012
|
|
|
January 29,
2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Rent
|
|
$
|
25,057
|
|
|
$
|
20,317
|
|
|
$
|
15,925
|
|
Accrued Compensation
|
|
|
5,789
|
|
|
|
2,639
|
|
|
|
1,675
|
|
Inventory
|
|
|
1,607
|
|
|
|
1,308
|
|
|
|
1,127
|
|
Accrued Reserve
|
|
|
47
|
|
|
|
174
|
|
|
|
192
|
|
Other
|
|
|
11
|
|
|
|
9
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
32,511
|
|
|
|
24,447
|
|
|
|
18,961
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
(36,226
|
)
|
|
|
(30,911
|
)
|
|
|
(19,588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax (liability) asset
|
|
$
|
(3,715
|
)
|
|
$
|
(6,464
|
)
|
|
$
|
(627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
rue21, inc.
Notes to Consolidated Financial Statements Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
(in thousands)
|
|
February 2,
2013
|
|
|
January 28,
2012
|
|
|
January 29,
2011
|
|
Current-deferred tax assets
|
|
$
|
5,910
|
|
|
$
|
5,121
|
|
|
$
|
5,024
|
|
Noncurrent-deferred tax liabilities
|
|
|
(9,625
|
)
|
|
|
(11,585
|
)
|
|
|
(5,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(3,715
|
)
|
|
$
|
(6,464
|
)
|
|
$
|
(627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the activity related to our unrecognized tax benefits:
|
|
|
|
|
Gross balance as of January 30, 2010
|
|
$
|
35
|
|
Prior period tax positions (decrease)
|
|
|
(1
|
)
|
|
|
|
|
|
Gross balance as of January 29, 2011
|
|
|
34
|
|
Prior period tax positions (decrease)
|
|
|
(34
|
)
|
|
|
|
|
|
Gross balance as of January 28, 2012
|
|
|
0
|
|
Prior period tax positions (decrease)
|
|
|
0
|
|
|
|
|
|
|
Gross balance as of February 2, 2013
|
|
$
|
0
|
|
The gross amount of unrecognized tax benefits at fiscal years ended 2012, 2011, and 2010 was $0, $0 and $34,000,
respectively. Over the next 12 months the company believes that there will be no material change in unrecognized tax benefits.
The Company classifies interest and penalties as an element of tax expense. The amount of tax related interest and penalties for fiscal years ended 2012, 2011 and 2010, respectively, was not material.
The Company files a consolidated U.S. Federal Tax returns as well as various state tax returns. The Companys
U.S. Federal tax returns are open for further audit by taxing authorities for the periods of 2008 through 2012. The principal state jurisdictions that remain open to examination for the periods 2008 and forward are: Pennsylvania, Texas, North
Carolina, Illinois, and West Virginia.
Note 9 Commitments and Contingencies
We are subject to various proceedings, lawsuits, disputes, and claims arising in the ordinary course of our business.
Many of these actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against us from time to time include commercial, intellectual property, customer, and employment actions, including class action lawsuits.
The plaintiffs in some actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages, and some are covered in part by insurance. Given the uncertain nature of litigation generally, we are not able in all
cases to estimate the amount or range of loss that could result from an unfavorable outcome of the litigation to which we are a party. In accordance with U.S. generally accepted accounting principles, we establish accruals to the extent probable
future losses are estimable. Nevertheless, we could incur charges in excess of any currently established accruals and any available insurance. Any such future charges, individually or in the aggregate, could have a material adverse effect on our
consolidated results of operations and consolidated cash flows.
On June 11, 2010, Elva Perez, a former employee, on
behalf of herself and a purported class of all of our other similarly situated California employees, filed a complaint in the Superior Court of California, County of Santa Cruz. The complaint alleges, among other things, that we have forced our
in-store employees to work off-the-clock without compensation; failed to pay overtime wages; failed to provide in-store employees bona fide meal and rest periods; failed to reimburse in-store employees for business expenses they incur; and failed to
provide accurate, timely itemized wage statements, in violation of the California Labor Code, the California Industrial Welfare
55
rue21, inc.
Notes to Consolidated Financial Statements Continued
Commission Wage Orders and the California Business and Professions Code. The complaint seeks, among other things, an order awarding compensatory and liquidated damages, including unpaid wages; an
award of restitution; an order imposing civil penalties; an order enjoining us from committing future violations of the laws allegedly violated; and interest, attorneys fees and costs. The Company denied the allegations made by the Plaintiff
and asserted various defenses. On June 6, 2012, the Court certified a class of all individuals employed in our California locations as hourly store managers, assistant store managers and sales clerks from June 11, 2006 to pursue claims
related to meal breaks, meal premium pay, work-related travel claims, travel expense claims, bag check claims, and pay record claims. On October 4, 2012, the parties to the litigation agreed to a settlement under which we agreed to pay
$2,750,000 as a gross settlement amount, which will, among other things, be used to provide payments to employees participating in the certified class and to pay for fees and expenses of class counsel. The plaintiff, on behalf of herself and the
employees participating in the certified class, will provide a general release, releasing us from all claims, from June 11, 2006 until the date the Court preliminarily approves the settlement agreement, that were pled or could have been pled
based on the factual allegations set forth in the complaint. The Court granted final approval of the settlement on March 22, 2013 and the Company has paid the full settlement amount.
Note 10 Related Party Transactions
At February 2, 2013, funds advised by Apax owned approximately 30% of the Companys outstanding common stock.
We reimburse Apax for reasonable expenses incurred to attend Board of Director meetings. Amounts paid to Apax totaled
$11,000, $9,000 and $35,000 for fiscal years 2012, 2011, and 2010, respectively.
Note 11 Subsequent Events
On March 19, 2013, the board of directors authorized an additional $25 million under its stock repurchase program.
Under the stock repurchase program, the Company may repurchase shares in the open market at current market prices at the time of purchase or in privately negotiated transactions. The timing and actual number of shares repurchased under the program
will depend on a variety of factors including price, corporate and regulatory requirements, and other market and business conditions. The Company may suspend or discontinue the program at any time, and may thereafter reinstitute purchases, all
without prior announcement.
Note 12 Selected Quarterly Financial Data (Unaudited)
The following table sets forth certain unaudited quarterly financial information (in thousands, except share and per
share amounts):
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Thirteen Weeks Ended
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April 28,
2012
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July 28,
2012
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October 27,
2012
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February 2,
2013
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Fiscal Year 2012
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Net Sales
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$
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205,615
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$
|
202,059
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|
|
$
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225,158
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|
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$
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269,054
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Gross profit
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|
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79,681
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|
|
|
79,531
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|
|
|
85,106
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|
|
|
101,200
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Net income
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|
|
11,602
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|
|
|
9,090
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|
|
|
8,165
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|
|
|
15,044
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Basic income per common share
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|
|
0.47
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|
|
0.37
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|
|
0.34
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|
|
|
0.63
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Diluted income per common share
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0.46
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|
|
0.36
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|
|
0.33
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|
|
|
0.62
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Weighted average basic common shares outstanding
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24,480
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|
|
|
24,420
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23,939
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|
|
|
23,783
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Weighted average diluted common shares outstanding
|
|
|
25,119
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|
|
|
25,022
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|
|
|
24,555
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|
|
|
24,393
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|
56
rue21, inc.
Notes to Consolidated Financial Statements Continued
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Thirteen Weeks Ended
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April 30,
2011
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July 30,
2011
|
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October 29,
2011
|
|
|
January 28,
2012
|
|
Fiscal Year 2011
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|
|
|
|
|
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Net Sales
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$
|
172,875
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|
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$
|
172,770
|
|
|
$
|
194,761
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|
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$
|
219,896
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Gross profit
|
|
|
67,246
|
|
|
|
67,629
|
|
|
|
71,400
|
|
|
|
80,365
|
|
Net income
|
|
|
9,619
|
|
|
|
7,669
|
|
|
|
8,741
|
|
|
|
12,921
|
|
Basic income per common share
|
|
|
0.39
|
|
|
|
0.31
|
|
|
|
0.36
|
|
|
|
0.53
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|
Diluted income per common share
|
|
|
0.38
|
|
|
|
0.31
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|
|
|
0.35
|
|
|
|
0.52
|
|
Weighted average basic common shares outstanding
|
|
|
24,383
|
|
|
|
24,415
|
|
|
|
24,461
|
|
|
|
24,467
|
|
Weighted average diluted common shares outstanding
|
|
|
25,063
|
|
|
|
25,080
|
|
|
|
25,066
|
|
|
|
25,054
|
|