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rue21, inc. (NASDAQ:RUE)

Q3 2012 Earnings Call

November 28, 2012 4:30 pm ET

Executives

Joseph Teklits – IR, ICR, Inc

Robert N. Fisch – President, Chief Executive Officer

Kim A. Reynolds – Senior Vice President and General Merchandise Manager

Keith A. McDonough – Senior Vice President and Chief Financial Officer

Analysts

Brian J. Tunick – J.P. Morgan

Stephanie Wissink – Piper Jaffray

Lorraine Hutchinson – BofA Merrill Lynch

Paul Lejuez – Nomura

Jeff Black – Avondale Partners, LLC

Operator

Good day and welcome to the rue21, inc. Third Quarter Fiscal 2012 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Joseph Teklits of ICR. Please go ahead, sir.

Joseph Teklits

Thanks very much. Good afternoon everyone and welcome to rue21's third quarter 2012 conference call. The speakers today are Bob Fisch, Kim Reynolds, and Keith McDonough. As a reminder, statements made during today's call will contain forward-looking information about our financial performance and prospects. Results could differ materially from those contained in our forward-looking statements made today.

The risks that could cause our business and financial results to differ materially from those we currently expect are included in our fiscal 2011 Form 10-K and in subsequent filings we made with the SEC, as well as in any earnings press release we issued today. All these documents can be found on the Investor Relations website at rue21.com. The information discussed on this call is as of today, November 28, 2012 and the Company undertakes no duty to update this information to reflect future events or circumstances.

And with that, I'll turn the call over to Bob.

Robert N. Fisch

Thanks, Joe, and good afternoon everyone. Joining me today to discuss the third quarter results are Keith McDonough, our CFO, and Kim Reynolds, our GMM. As I had remarked during our last earnings call, our third quarter sales through early September started strong and we did extremely well in our big profit and volume period for back-to-school.

While sales was soft in the middle of the quarter, we still enjoyed good overall profit gains which is always our priority. We had margin improvement this quarter, thanks to a 120 basis point increase in merchandise margin and we finished with another strong quarter of overall financial results and another quarter to add to our record of consistency.

Our comp store sales was slightly positive for the third quarter, but as is typical for rue, most of our top line growth continues to be generated by new store openings. We had another 29 store locations opened this past quarter, again, in smaller markets that are star for the fashion and shopping environment we provide them. Stores like Ottumwa, Iowa, North Platte, Nebraska and Bismarck, North Dakota I’m sure you’ve all been to those territories. And our store in the Maple Valley Shopping Center in Farmington, Missouri which sits in a strip center next to a JC Penney and across the street from a Walmart. That store was our highest volume store in sales for the first two weeks it opened and in November it was our Number 2 store in the entire chain.

The only other clothing store in the center is Maurices and there are less than 50,000 people living within 10 mile radius of the store. The smaller the market, the better we do. We get lower rents, higher sales volume, and higher profits. It is our secret sauce formula, and we are securing these types of locations now for 2013.

And in addition, we get these results from the slightly smaller square footage of our new stores. As we have discussed in many of our meetings this past year and our conference calls, our new stores in 2012 opened on an average 500 square feet smaller in the past years. And we are increasing sales per square foot and it’s important increasing total sales even with the smaller space.

Our multi-category merchandise assortment of girls, guys and etc! accessories also help drive our results this past quarter. Our margin of both the girls and guys division was exceptional. As Kim will discuss, we achieved strong positive comps in sportswear, which continued into November while comps weakened in the quarter centered on the etc! business, particularly jewelry and some departments in accessories.

Our success this past quarter in the junior business was another perfect example of how the talents of Kim and her buying teams combined with our fast sourcing strategy enabled us to be on trend and achieve profits, again, on a consistent basis even when one category of merchandise is tougher. It’s a three-three pronged strategy.

Our business is pretty simple. Our overall sales growth comes from new stores, which are performing great and from comps and girls, guys and etc!. Both the girls and guys businesses were very good in the third quarter and we are confident these trends will carry throughout the fourth quarter. Our etc! business was down in the third quarter and we are focused on improving this trend in the fourth quarter. In fact we have the initiatives in place and as Kim will discuss, and frankly the current sales trend that we have right now gives us confidence that we are on track for the fourth quarter.

Now, turning towards November, like many other retailers, we opened earlier than ever this year in Thanksgiving night. We achieved record sales for the combined Thursday, Friday period which included comp store sales growth above plan. Just like the key back-to-school month of August when the traffic is there, we get the business. That makes us bullish about the month of December going into the holiday where we certainly will have a good traffic flow.

We have many holiday 2012 compelling opportunities and strategic initiatives to drive the sale and make this a great fourth quarter that I’m very proud of. First, gift giving items. We felt that many of our customers coming into the store this Thanksgiving were focused on buying for themselves in addition to buying gifts and our junior sportswear business momentum has continued throughout the holiday weekend and into fiscal December. We know the focus of our customer will turn to gift items as we move towards the holiday and we are certainly ready for it. There are four key holiday gift buying weekends this December and we have plans in place to capture business we left on the table last year.

We are compelling gifting items in apparel and accessories; like sweaters, scarves, robes and fragrance sets. We introduced two new limited-edition fragrances this past week, Midnight Sparkle and Midnight Magic. Just for this purpose and we had strong results. We also offering a terrific assortment of technology related gifts that has had strong sell-throughs over the Thanksgiving weekend. This gift business should be a pure plus business on top of our resurgent junior business and key volume drivers for the holiday.

Another pure plus business this holiday comes from a third-party gift card program. Last year, we piled a sale of our gift card to a local grocery store chain and was very successful without cannibalizing our own in-store gift cards. Our gift cards were sold in just 400 of their locations. This year, we launched a program that allows us to sell third-party gift card in over 8,000 locations nationwide.

And this leads me to another initiative we are excited about continuing to build our digital retailing infrastructure in preparation for our next great growth driver e-commerce. We have launched a very successful initiative to capture e-mail on our best customers both on our website and our stores. At back-to-school time, we had approximately 300,000 e-mail addresses for the total company. And just a few short months, we now have almost 2 million e-mail addresses of engaged rue21 customers which puts us into a great position for ecommerce development. And more important for holiday, we are converting visitors into customers by offering website and email exclusive coupon and web based promotions.

Just as we did in November, we will not offer more promotions over the holiday but we will be better at communicating our promotions to our target customers than we have ever had in the past which drives traffic to rue. And finally, we believe we have even more opportunity for gross margin expansion this quarter and going into next year. Unlike many in the retail universe, we did not over promote in the fourth quarter last year so we are not up against heavy promotions going into holiday.

We believe this will be a competitive advantage for us at rue in addition to the positive effect we already seeing from a new allocation system. And as you know, our planning system is on target to be launched in the first quarter of 2013. We are enthusiastic about the opportunity we have for this holiday season and we are also already looking forward to 2013 and beyond.

I’d like to add that November 13 was our third anniversary of becoming a public company and despite rising product costs, the ups and downs of the economy and unpredictable weather we have hit every one of our quarterly profit goals since we have gone public. We didn’t miss any in the seven plus years prior that we were a private company either and I’m very proud of that record and of my experienced management team that has helped make that record a reality. Experience and consistency is key to rue’s success.

Now I would turn the call over to Kim Reynolds to talk about the merchandise results for the third quarter and our strategy and highlights that we're looking for our holiday. Kim?

Kim A. Reynolds

Thank you, Bob. As Bob mentioned, we are pleased with our girls and guys sportswear performance for the third quarter. Both categories had comp store sales increases as well as gross margin gains and they represented almost 80% of the company's total sales.

Our extra business had a toughest third quarter than apparel especially in jewelry and some categories and accessories. Our strongest ever categories include handbags, scarf’s and shoes. As we discussed on the last call, we were super excited about the return to classic trends like shirting, (inaudible) and the importance of color across both genders. Our ability to react quickly to emerging trends and deliver terrific fashion at great value every day enables us to move the assortment direction from what was clubby last year into this year's most wanted fashion within only a few weeks.

In girls, we executed shift from our traditional mid-based fashion tops into golden fashion tops and succeeded and articulating a clear fashion statement to our girls. We introduced a color multiplier shirt item into our assortments and I’m extremely pleased with the customer response our ability to resource the item opportunistically and to continue to be relevant in this trend of timely trends change.

I dress business delivered positive comp sales in the quarter with loafers, flip-flop dresses and short dressing styles driving the sales. Our girls and guys pattern businesses both delivered strong comp store sales increases. We launched our 3999 premium denim into all stores for back-to-school successfully showing that when you have the right fashion there is no price point resistance.

Again, with the strong color trends, we offer colored skinny in both colors and patterns, and continue to build the assortment through a new colors and greater impact as we enter into the fourth quarter in both girls and guys. We see the trend continuing and have incorporated it into the first half of 2013. We delivered positive sales in shoes for the quarter with the casual shoe trend is our strongest category in both girls and guys.

As we enter into the fourth quarter, we are focused on both offering fashion and great value, but also on gift giving. As Bob mentioned earlier, we felt we had an opportunity last year in the gift giving categories as they working hard to capitalize on those sales. From holiday sweaters with a bit of shine to pass dark colors to signal the slight change in the season to new floral prints all intended for yourself, or for a gift historical cycle ready for the holiday season.

Our et cetera division is also focused on the gift giving trend through the addition of rue media. Electronic accessories are great gifts at compelling price points. We introduced a strong assortment of earbuds, headsets, cellphone charms, text glove, cellphone cases and whist list all designed for gift giving and many are marketed as great gifts under $5 and great gifts under $10. We are very pleased with the impact we are making in store and confident of its success as we enter into the holidays.

Our jewelry category is starting to show traction in the arm candy trend of multiple bracelets as well as many cleaned up and look of real trends. Much cleaner sales, multi medals and the return of gold medals distinguish our assortments from the previous season. Just as the trends changed in apparel, the trends are shifting in the jewelry and accessory areas as well.

Our scarf category was especially strong in the third quarter and continues successfully into the fourth quarter and our beauty business is continuing to grow and expand beyond traditional nail, eye and lip categories. Along with our new Midnight Sparkle and Midnight Magic exclusive popup fragrances, we feel we are ready to drive sales for the holiday timeframe. We extremely excited about all the new initiatives we have to offer in every category of business as well as our ability to change trends quickly based on customer response and we feel strongly that this will be a very successful holiday season. We have strengthened our juniors’ category, consistency in our guys’ category and a turn around and et cetera that gives us confidence for going forward.

Now I’ll turn the call over to Keith.

Keith A. McDonough

Thanks, Kim. I will review the financial highlights of our third quarter and year-to-date results and then provide our outlook for the fourth quarter. Solid top line growth coupled with more year-over-year gross margin expansion with the financial highlights for the quarter.

Operating income margins expanded by 30 basis points after adjusting for the pros, wage and hour class action settlement and the incremental stock compensation expense. EPS, after adjusting for pros, was $0.41, $0.01 above our guidance range for the quarter. Inventory at quarter end was up 7% per square-foot, but almost all the increase is attributable to early holiday seasonal seats.

We generate $4.1 million more in cash than last year in Q3 excluding share repurchases and invested over twice that amount or $9.2 million in the rue share repurchase program. Updating you as of this week, cash used for stock repurchases has grown to $24 million since the program began in June.

Sales growth in the quarter was 15.6% or $30.4 million and was driven by non-comp sales including continuing excellent new 2012 store sales results plus comparable store sales increase of 0.2%. As usual with rue21 our total sales growth was driven primarily by non-comp store sales which contributed over 98% of our overall growth.

In Q3, we saw another strong AUR increase of 3.4% and average ticket growth of 8.4% driven by excellent comp and non-comp growth in our junior’s and guys apparel categories at specialty. These two categories delivered comp growth above our expectations for the quarter overcoming an extra category performance that did not meet our expectations due to a particular softness in our jewelry and merchandise offerings in the quarter.

29 new stores were opened in the quarter and one closed in Oakland, Tennessee as compared to 30 stores opened in the third quarter of last year. Our quarter end store count is up 17% to 862 as compared to 740 last year. Store mix this year consisted of 698 comp stores and 164 non-comp stores or 19% of the total. Last year's non-comparable store count was 160 or 21.6% of the total.

Gross profit increased by 19.2% or $13.7 million to $85.1 million and gross margin expanded by 110 basis points to 37.8%. In the 12 quarters rue has been a public company, total gross and merchandise margin has expanded 11 of the 12 quarters and on a Q3 trailing 12 month comparison, gross margin has expanded on average 100 basis points per year and over 300 basis points in the three year period since going public. And yes, as we have said each quarter since going public, we still believe that we have at least 150 basis points of merchandise margin expansion ahead of us over the long term.

Quarter three SG&A expense were adjusted for the pros settlement and incremental stock comp expense delevered by 50 basis points all of which was attributable to store expenses. The pros settlement created expense in the quarter of $2.75 million, plus another $150,000 in related costs, the total of which represented 1.3% of sales in the quarter.

Incremental stock comp has been an expense margin headwind during all of 2012 and Q3 was no exception totaling $2.5 million or 1.1% of sales and 40 basis points above last year third quarter. We have discussed and anticipated expense deleveraging related this non-cash item for 2012 and also that it will normalize in relation to sales growth after Q1 of 2013.

Our other raw material non-cash expense depreciation and amortization totaled $8.5 million increasing 25% over a year ago. The expense represented 3.8% of sales within our expectations deleveraging by 30 basis points from last year. We are planning 2012 CapEx to approximately $39 million net, which includes 125 store openings and are continuing IT and supply chain infrastructure investments.

Operating income for the third quarter was $12.8 million or 5.7% of sales but adding backup the pros settlement, adjusted operating income to $15.7 million or 7.0% of sales and 14.5% over last year. The quarter’s effective tax rate was 36.5% versus 36.4% last year and net income was $8.2 million including pros.

Fully diluted earnings per share were $0.33 and $0.41 adjusted for pros versus $0.35 a year ago on a fully diluted outstanding share count of 24.6 million shares. The share repurchase program previously discussed had an impact on EPS calculation of $0.01 in the quarter.

For the three quarters to date sales growth now stands at 17.1% and comp sales growth is at 0.8% compared to 1.5% through the first three quarters of last year. Gross margins expanded by 40 basis points and SG&A expense margin is equal to last year including the 50 basis points of incremental stock comp expense and the pros class action lawsuit settlement. Net income year to date is $28.9 million or $30.7 million adjusted for pros which is $4.7 million or 17.9% above last year.

Highlights for the quarter and balance sheet include cash and short term investments of $44.3 million or $8.3 million or 23% over last year after having spent $22.2 million on share repurchases year-to-date since June. Inventory was up 26.4% and 7% per square foot, but as discussed almost all of this increase was timing related to earlier new inventory received in preparation for holiday.

CapEx in the quarter was $14.8 million and was equal to last year. We have no long term debt in the balance sheet and our revolver facility limit to $85 million plus another $15 million accordian feature. We do not borrow at all during the quarter or year-to-date and have no plans to borrow throughout the remainder of 2012. The strong predictable cash flow is the primary reason our board approved the repurchase of rue shares up to $50 million.

We look forward to continuing to create shareholder value through our buyback program throughout the remainder of 2012 and beyond. We will open 125 new stores in 2012 and have opened 108 through the first three quarters. We have closed one so far and plan to close 2 more in the fourth quarter, all of which have leases that are expiring. On average, rue21 has closed less than 2 stores per year over the last five years.

In full year 2012, we are increasing the upper end of our EPS guidance range adjusted for pros to $1.83 to $1.86 which puts our fourth quarter EPS guidance range from $0.60 to $0.63.

Diluted outstanding share count is expected to be 24.5 million shares for the quarter and 25.0 million shares for the full year. We anticipate fourth quarter comp sales growth in the low single digits and overall sales growth between 26% and 28% of which the 53rd week will contribute 6% to 8% of that growth rate. Our guidance does not assume any further share repurchases other than what I’ve discussed in this call.

That completes my prepared remarks. I'll turn the call back over to Bob?

Robert N. Fisch

Thanks, Keith. Like many of us who did grow up in New York City area and not just Pittsburgh, I was incredibly moved by the storage of courage and heartbreak that the company the hurricane Sandy. My heart does go out to all of those who suffered such a terrible losses and continue to be affected today almost one month after the storm. We have grew what to express support for all of our associates, vendors and colleagues who have been impacted and our thoughts for totally with all of you.

And now I'd like to turn this call over to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we'll go right to our first question from Brian Tunick from J.P. Morgan.

Brian J. Tunick – J.P. Morgan

Thanks, good afternoon guys and congrats.

Robert N. Fisch

Thanks Brian.

Brian J. Tunick – J.P. Morgan

I guess the view I guess generally was that you were trending with a strong start to back-to-school and just curious if you could talk about maybe what happened as we moved into like the second half of September and further into October, I guess we're wondering, is your shopper really spiking around key events and less excited about either the newness or fashion or the accessory side that they’re seeing out there obviously some other faster fashion players also seem to be struggling?

And then on the second question may be Keith can just give us an update on the real estate pipeline what we should be expecting either from a new store number next year, CapEx number next year, what be should be thinking about from a growth perspective?

Robert N. Fisch

Brian, let me first go over the quarter. And as I said on the call and as we’ve said in meetings and conferences, yes, back-to-school started very strong. We just saw a tougher traffic pattern in later September, which I don't think was unique just to rue, and did come back more into October. So I don't think this has something to do with fast pace fashion, because what I can tell you is that the struggling was a little more in the etc! business and not in the junior sportswear business.

In the junior sportswear business, which really has a lot to do with the fast pace fashion retailers, what I think is important to note that Kim mentioned and I'm really proud of her and her team is that as you know we converted for more of that [“dress you, club you”] [ph] of all that fashion to more of the hard hitting key items fashion in wovens and knits and tops and bottoms in color and that really started to make the business stronger, which is also propelling the business as we move into fourth quarter.

So I really if I didn't feel good about what I'm starting to see now in the fourth quarter, I would be concerned, so I feel pretty good that would seem to be a traffic issue and wasn't happy with it, and but, yes, we did really well in the big profit time period of back-to-school and then we rebounded more into the end of October and as I discussed on the call into November. So that I think is what happened there. Keith?

Keith A. McDonough

The real estate outlook is strong as usual. We are well prepared for 2013 and that 2012 family of stores we couldn’t be more proud of, Brian. It is – they are outperforming almost every metric of the family of stores back through 2007. So it’s a great story and we expect it to continue from what we are seeing in 2013.

Robert N. Fisch

And we see similar store growth of what’s going to happen there in the 120 store range or something like that. A positive thing to our business which by the way we get as closer to that 1,000 store level and as we said we see 1,500 plus store opportunity, I again do not see a change in the retail environment where I see a concern even though there is not a lot of centers coming out of the ground, I feel so good about the smaller market development.

And I mentioned only four or five names on there of small towns but I didn’t even mention (inaudible) Texas, which opened up, and in the 19 days it opened in November, did $165,000 of business against $60,000 plan in less than 5,000 square foot store with 23,000 people living in that area of Texas, it’s 60 miles from Waco. So there are a lot of opportunities there that rue is capturing and will capture for the future.

Brian J. Tunick – J.P. Morgan

Right. That’s super help. Good luck for holidays guys.

Robert N. Fisch

Thanks, Brian. Speak to you soon. Bye bye.

Keith A. McDonough

Bye bye, Brian.

Operator

Our next question comes from Stephanie Wissink with Piper Jaffray.

Stephanie Wissink – Piper Jaffray

Hi, good afternoon. Thanks for taking my question. I just have couple. The first Bob, if you could just share a little bit more in terms of the traffic declines that you are seeing, is that persistent declines or you seeing [more list] [ph] again around some of those key volume points. Looking specifically at the comps in the quarter and then how you’re thinking about the importance around holiday as we go through the fourth quarter?

Robert N. Fisch

Well, I'm not seeing huge traffic declines. I'm seeing that in the third quarter that in some of the transaction changes has a lot to do with the etc! business that was a little tougher, because some of these things are in the jewelry or in the undies categories of the lower price points, but with the junior’s strength and the guys’ consistency I'm not seeing that and I'm certainly not seeing that as we move into fourth quarter. And I certainly haven't seen it for the last couple of weeks in November.

I see very strong about that and I’m feeling very good about as we now are marching into December Stephanie, so I feel good that – look, it’s always - we are very consistent and believe it or not this is my 40th Christmas in retailing, I started when I was six years old. So and I can’t believe it’s 40 years. I've had many years, we've had strong increases and many years where it’s been flat or little above and we are very consistent and I do feel really good go about because of the junior trend is that in my opinion is if we see accessories, the etc! division being even flattish.

And I see them already in the business so far in the quarter going from a stronger decrease to getting closer to the flattish if we’re anywhere near that with what we’re doing in the juniors and guys, then we are going to make our guidance and do well. So I see that happening. So I feel that this is a time period and as what Brian said before about traffic that we do really well when the store is really busy and as other people have traffic in the store, I believe our convergence are going to be extremely strong, because of the businesses that Kim and I discussed on the call.

Stephanie Wissink – Piper Jaffray

And you are continuing to see AUR, I think Keith you mentioned AUR of three and tickets (inaudible) so really any improvement in traffic would be pretty significantly accretive to the overall comp?

Keith A. McDonough

Absolutely.

Stephanie Wissink – Piper Jaffray

Okay. And last question for you Bob, as you talked about e-commerce like in terms of your enthusiasm, the timing you are currently slated for when you think that might be ready to go live and maybe what has surprised you about some of the feedback that you're getting through your customer data basing?

Robert N. Fisch

Well, as far as e-com as of right now what we have (inaudible) is the spring of 2014 so we are almost a year from that, believe it or not, it’s unbelievable that 2014 is within a year. So we've very excited about that because what we are finding out is that and this is what happening which is interesting, some people are thinking that we might be promoting more, we're not promoting more, what we are doing is doing more e-mail events tied around what we have in store to get more exposure to our customers, so we are not promoting more as you can see by our margin gains which was mostly merchandised, it was not, we are very proud that we did not promote more for even Thanksgiving time period or for the third quarter.

So what I'm happy about seeing is the customers are really reacting positively to the prelude to e-commerce of our e-mail captures are exceptional and I see that what the strength is that the e-mail blasts are doing extremely well, not going to get into numbers, but they are doing very well, and it leads me to believe that when we do go live on e-com that we have great opportunities to explode the business and not only with our own customers, but gain dramatic market share from the rest of the market because rue gives great prices with great fashion.

Stephanie Wissink – Piper Jaffray

And is your thinking at this point Bob to be (inaudible) that e-commerce order from the store level or is all that still in motion in terms of your strategy and thinking.

Keith A. McDonough

It’s certainly still in motion. We have interim leadership in. It’s been here for last three months and we are making a lot of progress on the project plan, but some of those decisions we have yet to make. I will be entertaining vendors and solutions in the spring of this coming…

Robert N. Fisch

We are not sure whether it’s totally going to be in-house or its going to be outside of the house. Okay?

Keith A. McDonough

We do understand the importance of tight integration and approach to our customers both ecom and brick-and-mortar.

Robert N. Fisch

But what will be most important Stephanie is whether – which way we do it we will be really going after the business profitably to drive the sale. So we feel really good about that, but what I feel good about is that our social and viral marketing is becoming stronger with our new ecom leader that’s come in to help us. We are able to capture more emails and also as I said, these email blasts are going to give us some good business also into December, not just November. So I do feel good about that opportunity.

Stephanie Wissink – Piper Jaffray

Okay. Thank you. Best of luck.

Robert N. Fisch

Thanks. Have a good holiday.

Operator

And next we will go to Adrienne Tennant with Janney Capital Markets.

Unidentified Analyst

Hi. This is (inaudible) for Adrienne. Congratulations on the quarter guys.

Robert N. Fisch

Thanks, Brian.

Unidentified Analyst

So I just have a question actually, clarifying question about the black Friday time period. I believe the Thursday, Friday time period combined was the comp was above planned. So I was just wondering if that means it was above the low single-digit and it's month-to-date you guys are currently still running low single or above that and also if the comps and the margins both were able to be positive for that Black Friday time period? Thank you.

Robert N. Fisch

I’m not going to get into numbers with you, but we are feeling really good about the results. And that it wasn't just only the Thursday to Saturday that did well we were consistent for the whole timeframe, so we consistent with the business that we had in Black Friday. Also as far as the margins I’m not going to get into what they were, but I did say that we did not promote more and we promoted within a normal promotional cadence.

And that to me is the most pleasing thing. As you probably will know with our company and me, as we look for that consistency of gross margin development and not just the hype up of week or month or something like that. And we think that as we go into fourth quarter and now December and having November behind us, okay that going into December again not having to be as promotions being ridiculously promotional that will be able to run a business properly with the great merchandise that Kim has and how we have the good marketing and store support around it.

Unidentified Analyst

Okay, definitely. Thank you. And then just the house keeping question, I was wondering Keith if you could give us the earnings square footage for the third quarter here?

Keith A. McDonough

Yes, sure. [$4,264] million.

Unidentified Analyst

Okay, great. Thank you.

Robert N. Fisch

At a small market.

Operator

(Operator Instructions) Next we'll go to Lorraine Hutchinson from BofA Merrill Lynch.

Lorraine Hutchinson – BofA Merrill Lynch

Thanks, good afternoon.

Robert N. Fisch

Hi, Lorraine.

Lorraine Hutchinson – BofA Merrill Lynch

Could you help provide a little bit of diagnosed issues that you are seeing with extra? Last quarter there were some talk about anniversary the feather trend that work is it just jewelry as other categories and then any I guess percentage of business is coming from extra now and any opportunities to fix that in time for the key December shopping period?

Kim A. Reynolds

We did talk about weakening in jewelry during the second quarter call and the third quarter call, and we were up against very developed feather business from last year, but the trend is really cleaning up a lot and I think I referenced it little bit a earlier if the trends and sportswear and have changed and written to classic, we are seeing the same change in our jewelry business. I would say that out of all the accessory categories that would have been the most challenging. And also I referenced in some fresh categories where we see additional opportunities for fourth quarter and the gift categories. That includes jewelry sets and earring sets, but most with the electronic piece which we think are going to be a huge opportunity for us for the quarter.

Lorraine Hutchinson – BofA Merrill Lynch

And then what percentage of your sales comes from extra at this point?

Keith A. McDonough

The quarter was 22%. Just like to know what we discussed and I think that's important, yes as Kim said, in the fourth quarter with the traffic and all these gift giving items that we're going after. We feel good that we are not – maybe seen explosive extra business, but we see that getting closer to comp. And so as we said as we do that I think with the business being strong in the sportswear category, and that's what our business is all about.

It's a multi-category channel business and so we don't see an over a long time of extra business being tough. We have five et cetera prongs in there, so between fragrance and beauty, which is strong; our footwear business, which is strong; we have our carry laundry business, which is good and then we've had some ups and downs in jewelry and even if jewelry isn’t strong, we have many other categories that will help and as Kim mentioned the scarf business is explosive so that offset some of the little trinket business, so we do feel good about that and so we see the mix overall will give us a good fourth quarter.

Lorraine Hutchinson – BofA Merrill Lynch

Great, thank you.

Robert N. Fisch

Thank you, Lorraine.

Operator

And our next question comes from Paul Lejuez with Nomura.

Robert N. Fisch

Hello Paul.

Paul Lejuez – Nomura

Very good, very good.

Robert N. Fisch

Paul what is Juez stands for?

Paul Lejuez – Nomura

What that?

Robert N. Fisch

What is Juez stands for?

Paul Lejuez – Nomura

Great, is my friend.

Robert N. Fisch

Okay.

Paul Lejuez – Nomura

So on the ticket, Keith did you say the ticket was up 8%?

Keith A. McDonough

I did.

Paul Lejuez – Nomura

So that would imply some around just on the comp basis the transactions were down somewhere in that ballpark, and I guess I'm just trying to kind of try together that kind of number if that is the right way to look at it would you guys being okay with what you’re seeing from a traffic perspective. And maybe it's not traffic, maybe it's convergence or maybe you could just talk about that a little bit and then could you just remind us about the merch margin difference in a apparel versus accessories and then kind of related to that as you focus on gifts little bit more when you talk about things like electronics I’m just wondering and what's your impact what's the margin impact of that kind of focus? Thanks.

Keith A. McDonough

Yeah, it's not that deep of the decrease that you mentioned Paul, but it's close to that. And what we saw in the third quarter especially and that was deeper than we have seen for the last couple of quarters right, but what we believe is happening is that the lower ticket accessory purchaser just coming in for some of those accessories and accessories only as what was missing from the third quarter. Because we have seen a rebound in the category in the fourth quarter and that delta between you kind of net sales and transaction growth has come down to what we have seen over the last couple of quarters.

So we think it is extra or accessory related, we don't talk about gross margin by category. But as you can imagine, generally our accessories categories does push gross margin expansion particularly proud that we delivered that the kind of expansion that we did in the third quarter in the phase of a decrease in terms of what our expectation were for the extra category. So it is a – there is always a story embedded in the mix from a gross margin and the AUR standpoint with our business, but its part of Bob’s three pronged strategy to have that that category separation and offering changes the game from quarter-to-quarter, but it gives us lot of levers to pull.

Paul Lejuez – Nomura

Gotcha. Thanks and good luck guys.

Robert N. Fisch

Thanks Pauls. Take care.

Operator

We will go next to Jeff Black with Avondale Partners, LLC.

Jeff Black – Avondale Partners, LLC

Hey congrats guys.

Keith A. McDonough

Jeff, how are you?

Jeff Black – Avondale Partners, LLC

Good, thanks. Can you give us some color on just how much et cetera laid on the comp, I mean was the business down five in the rest of the business flat any help there would be useful? And then Keith on the SG&A, I didn't catch it, but did you say you were able to leverage SG&A at your compensation expense and what's the story on that line this time around? Thanks.

Robert N. Fisch

Jeff, I think we mentioned a few times on the call, but what I am happy about is I’m not going to get into the comps drops or whatever, however what I said to you, what I said there is that yes we had a drop with a negative comp, I compared to sportswear girls and guys. But what I'm really proud of is that’s turning around in November so that I'm going forward into fourth quarter feeling good about where our et cetera business is, and while it might not have the increases that girls and guys has, if it does make flat then we certainly we feel very good about our fourth quarter to our guidance and profitabilities.

So we especially we had a lot of business last year, and I’ve mentioned this and Kim has on a couple of different calls in the past that we left on the table some gift giving business in our plush and soft categories that we did not capitalize on last year. That's part of the accessory business too, so we will capitalize on that this year for fourth quarter in addition to some of the gifting games and electronic handles.

And I still think the jewelry will be up and down, I don't think that is just I think it's something is going on into the industry, but I certainly have many other category that will in accessories well offset any drops in that area whether it's scarf, fragrance, beauty or electronic games or other gifts. So we have a multitude of business in that prong, so I feel good about it, Jeff and so to me I think we stubbed our toe that wasn't just an industry which is a good thing, because that I think we can do something about it, and we are a fast based business to do it, and I think you'll see that in the fourth quarter.

Keith A. McDonough

And then you expect just deleverage by we excluding those items deleverage by 50 basis points Jeff for all in store operating expenses we got a couple of pretty bad experiences from a shop claim and are benefits and our casualty losses that they took this one way or another than we delevered little bit in stores hours. Year-to-date we are at a 0.8% comp growth we are exactly equal in margin excluding those two items?

Jeff Black – Avondale Partners, LLC

Got it. All right thanks, good luck.

Robert N. Fisch

Thank you very much.

Operator

And we have no further questions in queue. I would like to turn the call back over to our speakers for any further or closing remarks.

Robert N. Fisch

Well thank you all, and I appreciate everybody being on this call, and I really do wish everybody a great holiday season both in business and personally with your families and really look forward to speaking with you in 2013 to give you the color on the fourth quarter. Thank you. Have a great holiday. Good bye.

Operator

And that does conclude our conference for today. We thank you again for your participation.

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