Rue 21 2010 Annual Report Download - page 42

Gross Profit
Gross profit increased 31.1%, or $31.7 million, in fiscal year 2008 to $133.6 million from $101.9 million in
fiscal year 2007. Gross margin decreased 20 basis points to 34.1% for fiscal year 2008 from 34.3% for fiscal year
2007. This decrease was primarily attributable to a 30 basis point decrease in merchandise margin, due primarily to
increased markdowns. Gross margin was positively impacted by a 10 basis point increase in store occupancy,
distribution and buying costs, as these costs increased at a rate lower than net sales.
Selling, General and Administrative Expense
Selling, general and administrative expense increased 31.4%, or $23.8 million, to $99.9 million in fiscal year
2008 from $76.0 million in fiscal year 2007. As a percentage of net sales, selling, general and administrative
expense remained relatively constant at 25.5% and 25.6% in fiscal year 2008 and fiscal year 2007, respectively.
Store operating expenses increased by $18.6 million primarily resulting from the operation of 449 stores as of
January 31, 2009 compared to the operation of 352 stores as of February 2, 2008. As a percentage of net sales, store
operating expenses increased to 18.6% in fiscal year 2008 from 18.3% in fiscal year 2007, due primarily to
increased store salaries as a percentage of net sales.
Administrative and general expenses decreased as a percentage of net sales to 6.9% in fiscal year 2008 from
7.4% in fiscal year 2007 as these costs increased at a lower rate than net sales. Offsetting the decrease in
administrative expense margin was a $434,000 asset write-off related to store conversions.
Depreciation and Amortization Expense
Depreciation and amortization expense increased as a percentage of net sales to 2.9% in fiscal year 2008 from
2.8% in fiscal year 2007, or $3.3 million. The increase was due to growth in capital expenditures of $6.2 million and
$3.7 in fiscal year 2008 and fiscal year 2007, respectively.
Interest Expense, Net
Interest expense, net decreased by $1.0 million to $1.5 million in fiscal year 2008 due to both reduced weighted
average borrowings and a reduced average interest rate under our senior secured credit facility.
Provision for Income Taxes
The increase in provision for income taxes of $2.1 million in fiscal year 2008 from fiscal year 2007 was due
primarily to a $5.6 million increase in pre-tax income. The effective tax rate declined to 38.8% in fiscal year 2008
from 39.3% in fiscal year 2007.
Net Income
Net income increased 38.4%, or $3.5 million, to $12.6 million in fiscal year 2008 from $9.1 million in fiscal
year 2007. This increase was due primarily to a $31.7 million increase in gross profit and lower interest expense,
partially offset by increases in selling, general and administrative expense of $23.8 million, higher depreciation and
amortization expense of $3.3 million and a higher provision for income taxes of $2.1 million.
Liquidity and Capital Resources
Our primary source of liquidity is cash flows from operations. Our primary cash needs are generally for capital
expenditures incurred in connection with the opening of new stores, the conversion of existing stores, and for the
related increase in merchandise inventories. Cash is also required for investment in information technology and
distribution facility enhancements and funding normal working capital requirements. The most significant
components of our working capital are cash and cash equivalents, merchandise inventories, accounts payable
and other current liabilities. Our working capital position benefits from the fact that we generally collect cash from
sales to customers the same day or, in the case of credit or debit card transactions, within several days of the related
sale, and we typically have up to 75 to 90 days to pay our vendors.
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