Rue 21 2010 Annual Report Download - page 24

their sale of merchandise on more stringent payment terms. If this were to occur it could impair our ability to obtain
desired merchandise in sufficient quantities.
There can be no assurance that we will be able to acquire desired merchandise in sufficient quantities on
acceptable terms or at all in the future, especially if we need significantly greater amounts of inventory in
connection with the growth of our business. Any inability to acquire suitable merchandise in sufficient quantities
and at acceptable prices, in particular exclusive merchandise, due to the loss of or deterioration or change in our
relationship with one or more key vendors, or events harmful to our vendors, may materially adversely affect us.
We are subject to risks associated with leasing substantial amounts of space, including future increases in
occupancy costs.
We do not own any real estate. Instead, we lease all of our store locations, our corporate headquarters in
Warrendale, Pennsylvania and our distribution facility in Weirton, West Virginia. We lease our distribution facility
from the State of West Virginia under a lease that expires in 2012, with one five-year renewal option. We are
currently negotiating with the State of West Virginia to develop adjacent land and expand our distribution facility in
2011, and we plan to enter into a new lease that incorporates the expanded square footage. Although we feel we have
appropriate expansion plans, if we do not successfully negotiate and execute a new lease, our distribution facility
may not be able to support our business demands in the future, and we could incur higher costs and longer lead times
if we are forced to locate a new distribution facility.
We typically occupy our stores under operating leases with terms of five to ten years, generally with additional
five-year renewal options. We have been able to negotiate favorable rental rates over the last year due in part to the
state of the economy and high vacancy rates within some shopping centers; however, there is no guarantee that we
will be able to continue to negotiate such favorable terms, and this could cause our occupancy rates to be higher in
future years or may force us to close stores in desirable locations. Some of our leases have early cancellation
clauses, which permit the lease to be terminated by us or the landlord if certain sales levels are not met in specific
periods or if the strip center does not meet specified occupancy standards. In addition to future minimum lease
payments, most of our store leases provide for additional rental payments based on a percentage of net sales, or
“percentage rent,” if sales at the respective stores exceed specified levels, as well as the payment of common area
maintenance charges, real property insurance and real estate taxes. Most of our lease agreements have defined
escalating rent provisions over the initial term and any extensions. As we expand our store base, our lease expense
and our cash outlays for rent under the lease agreements will increase. Our substantial operating lease obligations
could have significant negative consequences, including:
• requiring that a substantial portion of our available cash be applied to pay our rental obligations, thus
reducing cash available for other purposes;
• increasing our vulnerability to general adverse economic and industry conditions;
• limiting our flexibility in planning for or reacting to changes in our business or in the industry in which we
compete; and
• limiting our ability to obtain additional financing.
Any of these consequences could place us at a disadvantage with respect to our competitors. We depend on
cash flow from operations to pay our lease expenses and to fulfill our other cash needs. If our business does not
generate sufficient cash flow from operating activities to fund these expenses and needs, we may not be able to
service our lease expenses, grow our business, respond to competitive challenges or fund our other liquidity and
capital needs, which would harm our business.
Additional sites that we lease may be subject to long-term non-cancelable leases if we are unable to negotiate
our current standard lease terms. If an existing or future store is not profitable, and we decide to close it, we may
nonetheless be committed to perform our obligations under the applicable lease including, among other things,
paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we
may not satisfy the contractual requirements for early cancellation under that lease. Our inability to enter into new
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