Rue 21 2010 Annual Report Download - page 37

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 conditions and the level of disposable consumer income, consumer debt,
interest rates and consumer confidence.
Our business is seasonal and as a result, our net sales fluctuate from quarter to quarter. Net sales are usually
higher in the second through fourth fiscal quarters, and particularly in the months of August and December, as
customers make back-to-school and holiday purchases.
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, stock-based compensation and store
expenses but excludes store occupancy costs and freight to stores. These expenses do not generally vary
proportionally 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 has
increased significantly in fiscal 2010 due to additional legal, accounting, insurance and other expenses we incurred
as a result of being a public company and compliance with the Sarbanes-Oxley Act and related rules and
regulations.
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