Rue 21 2011 Annual Report Download - page 29

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion together with “Selected Consolidated Financial Data,” and the
historical consolidated financial statements and related notes included elsewhere in this Annual Report on
Form 10-K. The statements in this discussion regarding industry outlook, our expectations regarding our future
performance, liquidity and capital resources and other non-historical statements in this discussion are forward-
looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-
looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and
uncertainties described in Part I — Item 1A “Risk Factors”. Our actual results may differ materially from those
contained in or implied by any forward-looking statements.
We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting
of a 52- or 53-week period ending on the Saturday closest to January 31 of the following year. For example,
references to “fiscal year 2011” refer to the fiscal year ended January 28, 2012.
Overview
rue21 is a fast growing specialty apparel retailer offering the newest fashion trends for girls and guys at every
day great value. We were originally founded in 1976 as a value-focused specialty apparel retailer. In 1998, we were
acquired by certain funds now advised by Apax Partners, through SKM Equity Fund II, L.P. and SKM Investment
Fund II. In 2001, our current President and Chief Executive Officer, Bob Fisch, joined us. Upon his hiring, Bob
Fisch began repositioning our company by aligning our stores under one brand name, strengthening our
management team, honing our fashion value merchandise approach and refocusing our store growth strategy. In late
2006, we introduced our larger rue21 etc! store layout, which averages approximately 5,000 square feet and features
a separate store-in-store for our rue21 etc! girls jewelry and accessories category. As of January 28, 2012, we
operated 755 stores in 46 states, 602 of which featured the larger rue21 etc! store layout.
Our strong growth and operating results reflect the initiatives taken by our management team, as well as the
increasing acceptance of our brand and merchandise. Our net sales increased from $296.9 million in fiscal year 2007
to $760.3 million in fiscal year 2011, a compound annual growth rate of 26.5%. Over the same period, we grew
income from operations from $17.5 million to $62.8 million, a compound annual growth rate of 37.7%. Since the
beginning of fiscal year 2007, we have increased our store base from 278 stores to 755 stores as of January 28,
2012. Our total square footage growth has outpaced our total store growth over this same period, reflecting the
increasing size of our average store.
We expect to continue our strong growth in the future. We believe there is a significant opportunity to grow our
store base to 1,500 stores. We plan to open 120 stores in fiscal year 2012. We also plan to continue to convert our
existing stores into the larger rue21 etc! layout, which allows us to offer an increased proportion of higher margin
categories, such as accessories, intimate apparel, footwear and fragrances. We converted 38 stores to the rue21 etc!
layout in fiscal year 2011 and plan to convert 30 stores in fiscal year 2012. We expect to continue to drive our
comparable store sales by increasing the penetration of our newer product categories, increasing our brand
awareness, continuing to provide our distinctive in-store experience and converting stores to the rue21 etc! layout.
Our growth in total square footage is supported by our store economics, which we believe to be very attractive.
As a result of our low store build-out costs, favorable lease terms and low-cost operating model, our stores generate
strong returns on investment. We focus our real estate strategy on strip centers, regional malls and outlet centers,
primarily in small and middle market communities, which we believe are underserved by traditional junior and
young men’s specialty apparel retailers. Our typical new store investment is approximately $170,000, which
includes build-out costs, net of landlord tenant allowances and initial inventory, net of payables. New stores
generate on average between $900,000 and $1.1 million in net sales per store in the first twelve months.
We continue to invest the capital necessary to build our infrastructure and support our future growth. In 2011
we completed expansion plans at our corporate headquarters in Warrendale, Pennsylvania, and expanded the
footprint of our distribution facility in Weirton, West Virginia. We also continue to invest in our systems
infrastructure, including implementation of the latest store merchandising, supply chain, financial and real estate
applications.
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