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rue21, Inc. (NASDAQ:RUE)

Q4 2012 Earnings Call

March 21, 2013 4:30 p.m. ET

Executives

Jean Fontana – IR, ICR, Inc.

Bob Fisch – President, CEO

Kim Reynolds – SVP and General Merchandise Manager

Keith McDonough – SVP and CFO

Analysts

Lorraine Hutchinson – BofA Merrill Lynch

Randal Konik - Jefferies & Co.

Brian McGill - Janney Capital Markets

Brian Tunick - JPMorgan

Stephanie Wissink - Piper Jaffray

Jeff Black – Avondale Partners

Operator

Good day and welcome to the rue21 Fourth 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 Jean Fontana of ICR. Please go ahead, sir.

Jean Fontana

Thank you. Welcome to our call. I would like to open this call by reminding you of the company’s safe harbor provision. Any statements contained in this conference call as of those containing historical facts may be deemed to constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in these forward looking statements due to a number of risks and uncertainties all of which are described in the company’s filings with the SEC which includes today’s press release.

During this call, we will refer to two non-GAAP measures, adjusted net income and adjusted earnings per diluted share. Reconciliations of those non-GAAP measures to net income and earnings per diluted share are in our press release.

With me today are Bob Fisch, Chairman and CEO, Kim Reynolds, Senior Vice President and GMM and Keith McDonough, Senior Vice President and Chief Financial Officer.

Now I’d like to turn the call over to Bob.

Bob Fisch

Thank you, Jean. Thank you and good afternoon everyone. I will start by discussing today briefly looking back at the fourth quarter and the fiscal year of 2012, and then focus the majority of our time on the initiatives we have put in place for 2013 that will enable us to continue to achieve consistent and predictable growth.

This past fourth quarter was our 44th straight quarter in which we achieved our profit goals as both a private and a public company. That is a record of consistency that both our management team and our board are proud of achieving. Some fourth quarter highlights that we announced today include a total net sales increase of 22.4%, positive comparable store sales growth of almost 1%, gross margin expansion of 110 basis points and adjusted earnings per share of $0.65 that exceeded our guidance and increased 25% from the fourth quarter of 2011.

Looking at fiscal 2012 overall, we opened 125 stores with excellent results. As we have said throughout the year, our 2012 stores performed even better than the stores we opened in 2011 and in prior years. This is a testament to our powerful small market real estate strategy. We also achieved positive comparable store sales growth and record gross margin despite a tough environment resulting in sales growth of 18.6% and an adjusted net income growth of over 19%.

We generated strong cash flow for the year enabling us to begin repurchasing our stock as Keith will detail to you later in this call. We ended the year with a healthy balance sheet and no debt, and as announced today, we will be continuing to buy back our stock in 2013.

It was a good year for rue in what was unquestionably a tough retail environment. But I have a passionate and experienced management team and we will not settle for good. We want to be great. While 2012 was certainly good, we intend to make 2013 great and beyond. This year we will achieve major milestones. We will exceed the $1 billion mark in sales. We are on target to open our 1000th store in the fourth quarter of this year, and in fact, today we just opened our 900th store in West Plains, Missouri and in keeping with our small accounts (flagsihp) [ph] store strategy that I always talk about, the shopping center happens to be owned by a local man who also coaches basketball at a local high school.

New store opening has and always will be a growth driver for rue21, and we believe we have the potential as discussed previously to be a 1700 plus store chain. We have plans to open 125 new stores in the United States this year and we will keep opening over 100 stores a year for the foreseeable future.

But what makes 2013 really exciting goes beyond new store growth and the milestones we intend to accomplish this year. What will make 2013 great are the opportunities we’re creating to take the company to the next level, and I am going to touch on some of the plans we intend to execute that will be instrumental in our comp and total success in 2013 and in future years.

First, I’d like to talk about initiatives that I discussed with many of you at the ICR conference in January. And that we believe will begin to contribute to comp store sales increases in the back half of the year, our etc! store refreshes. In 2006 when we launched etc! we changed the look and feel of our stores. We are going to refresh and remodel our stores again in 2013 in their existing locations. Our customer wants newness when they shop at rue21 and we are going to give it to them not only through our merchandise but through a completely remodeled store. We will enhance the store design, the fixtures, the colors and the lighting et cetera.

This remodel initiative will be implemented in 20 plus existing stores in the third and fourth quarter and will be accelerated going forward into future years. When we convert a rue21 store to a rue21 etc! we see a sales lift of 20% to 25% per store. We believe we will pick up at least 15% by remodeling and giving a brand-new look to rue21 etc! stores. And I want to note that the refresh strategy is an addition to our ongoing plans to convert our remaining 100 or so rue21 stores to the rue21 etc! format.

Next, our second growth vehicle for 2013 is an enhancement of our guys business which we will be calling rue Men. This year we will turn our focus to growing and building strengths in our guys division. The division represents a huge opportunity for us especially in the smaller markets where there is almost no competition in guys’ fashions. We are going after this business by changing up our store build-out and footprint to give our guys a defined home in the store.

We are going to put the rue Men format in 10 new stores and 10 remodeled stores this year, in the third and fourth quarter. In some of the larger locations rue Men will even have its own entrance. Our guys don't want to be feminine or surrounded by girls fashion, they want to shop in the space where they feel comfortable. In stores with larger square footage, the men’s business represents a higher percentage of total sales than in the average store. And that was significant in us reviewing this new opportunity.

This gives us confidence that by giving a separate identity to guys we have an opportunity to drive incremental sales growth in both our new stores and stores that are already drawing a loyal male customer and we see rue Men as having a similar impact as etc! has done for the rue21 stores.

Our third strategy is to incorporate rue Men and the design elements we create for our remodels and bring them into our larger format stores. We've been testing a larger format for the past few years, and we believe we now have perfected the correct square footage to achieve success. As we think about our square footage growth we have the opportunity to leverage a larger 6000 square foot store format in between 20 and 25 new and existing locations in 2013 in select markets. We will be disciplined about where we build the larger stores so that they keep the same sales per square foot and four-wall profitability that we expect from our store base.

To be clear, we will continue to open in the majority of our stores in the 5000 square foot successful format and open a smaller percentage of stores in the larger format so that we optimize sales per square foot in each market. In 2012, we spoke about investments we made in technology, including new planning and allocation systems. In 2013 and going forward, we expect to reap the benefits from these investments. Our improved merchandise planning systems will go live this quarter, allowing us the opportunity to expand our gross margin and improve inventory productivity to drive comp store sales. We’re also launching mobile scanners to our stores this month, which will optimize payroll hours by making our field teams more efficient and convert hours previously spent on tasks into time focusing on customers and again driving sales.

And finally, as most of you on this call may know in 2012 we began investing in our ecommerce platform. Our e-mail events and social media initiatives during 2012 played a key role in driving sales by allowing us to communicate brand stories and offers to existing customers while attracting new customers to the brand. We will build on the progress we made in 2012 and translate our growing database which has gone from 300,000 e-mail addresses in August to 2.5 million in just seven months.

Our ecommerce investments in 2013 will benefit both our company and our shareholders over the long term, great opportunity. We currently plan to launch the ecommerce business in early 2014 and it’s an important growth vehicle for rue as we look into our bright future.

Keith will discuss our outlook but I want to let you know that we are planning our first quarter prudently like many of our peers in the retail sector. And the favorable weather comparison in February to March has affected us in many regions throughout the country. Last year at this time we had record ones as many of you. This year we’re wondering how that little groundhog Punxsutawney Phil messed up so badly. We expect to get the spring business back at the end of the quarter when it stops feeling like winter.

We have the right merchandise to capture the business when the customer comes out to shop and it is important to note that our merchandise is selling well in the climates where the weather is less severe across the country. So even with the tough start to the year from a traffic perspective, we are anticipating an exciting finish to the quarter and a great year in which we will again deliver consistent top line and bottom line growth. A lot of good initiatives, a great story for now and into the future.

And now I will turn the call over to Kim to provide you with some details on some of our merchandise initiatives.

Kim Reynolds

Thanks Bob. Bob spoke with you earlier about the excitement of our guys business and the upcoming tests of rue Men. There is little competition in the retail landscape for great fashion for the guy customer at unbelievable value. We have identified the opportunity to capitalize on that business and on small market store locations. What’s been great about the quarter continuing through the spring season is the commonality of trends across both girls and guys. rue21 captures the trends on both sides of our stores and windows representing a cohesive fashion and trend message to our captive customers. Everyone wants great fashion at great prices.

The color trend continues to drive the sales in bottoms and tops. Our guys business has continued performance in bottoms driven by color 12 (ph), fashion denim and the growth of our carbon black premium 39.99 denim. Our guy recognizes the comparable value of our carbon black denim as it feels and looks very similar to branded styles available elsewhere at retailers closer to $100 or more. We continue to raise the bar in fashion in the guys area as we build our guys accessories business to complete the look.

Our girls business represents approximately 57% of our total sales and our initiatives in this area can really move the needle on the total company in both sales and profits. We’re pleased with our performance of our colored bottoms, jeans in all price points, including our 39.99 premium denim and our woven top category. There is so much newness with the Italian design (ph) with a huge breadth of assortment including embellishments, prints, dyes and solids that we are convinced this category will lead the division as we enter into the third test of 2013. The woven trend is still driving the growth of top categories.

With these two quickly approaching we’re also excited about the beginning of the back season. Next week, the gun goes off for dress season and we think we’ve done a pretty amazing job at capturing the category in all the right trends at compelling price points, so we can’t wait to see that happen.

We expect great performance from our carrier brand this year. I am pleased to share with you that we’ve added a senior director to the area that comes to rue21 with many years of extensive experience in the lingerie business, including retailers such as Lufthansa and Victoria's Secret. And it’s always been our goal to be category killer in intimate at great value and under her direction we feel we have strengthened the team with an incredibly talented and experienced leader. Look for great things to come especially the brands and umbrella business for spring that appears to be the most wanted lingerie item of the season.

I am pleased to talk about the strengthening of our etc! business led by footwear. Our strategy is continuing to offer fashion goods at regular price during the first quarter appears to be paying off. Our girls are not ready for sandal and flip flop season yet so the fashion good category offers them a seasonally appropriate option to buy fashion in a silhouette they don't already own. The casual shoe and wedge trend has been our strength and we will continue to lead this footwear category into the first half of the year.

Many higher end fashion designer looks are evident in our footwear assortments at a fraction of their retail prices at rue21. Great fashion and great value are always our strengths and you will see all this in the etc! areas. The rue top categories we discussed before the holidays were extremely successful and we are finding almost any lifestyle accessory, cell phone cover, cell phone chargers, speakers, is the wanted accessory piece for our customers. Look for a lot of growth and opportunity in this category as we enter to 2013.

Finally, we are excited that the planning and allocation tools are now in place. We are anticipating the payoff of those investments will enable us to plan more accurately and allocate merchandise more precisely, maximizing our sales potential and raising the bar in gross margin.

With that, I will turn the call over to Keith.

Keith McDonough

Thanks Kim. As Bob pointed out, overall results for the quarter were excellent and we are especially satisfied we delivered diluted earnings per share growth of 25% as adjusted. rue21 results as adjusted for the quarter were $0.02 above the top of our guidance, operating income of 18% and net income growth of 24.4%.

Net sales were $269.1 million for the quarter, up 22.4% and sales growth of 13 weeks was up 17.2% and comp stores were up 0.7%. The 14-week of the fourth quarter of fiscal 2012 has little incremental impact to our top or bottom line. We opened 17 stores in the quarter as we did last year. We closed two stores in the quarter as we did last year. We had 877 stores in our operation at the end of the year consisting of 724 comparable and 153 or 17% non-comparable stores and that’s versus last year count of 755 stores which included 611 comparables and 144 or 19% non-comparables.

The highlight of the quarter, once again another expansion of gross margin in an extremely promotional environment. Gross profit for the quarter increased by 25.9% to $101.2 million and gross margin expanded by 110 basis points to 37.6%. The gross margin expansion was driven by a 75 basis point pick-up in merchandise margin and a 35 basis point leveraging of fixed cost in cost of sales.

2012 marks the fourth successive year of material gross margin expansion for rue21. In all our calls since becoming a public company, Bob and Kim have committed to and rue21 has delivered a steady and consistent expansion of our gross margins, and later in my remarks we will be committing to once again the future margin expansion.

Selling, general and administrative expenses increased 31.9% to $68.8 million, an increase as a percentage of sales by 190 basis points. But non-recurring professional fees of $1.2 million contributed 40 basis points of that increase and another 50 basis points of the increase related to incremental stock based compensation expense. The growth of our non-cash stock comp expense line will normalize growing close to sales growth after Q1 of 2013 as we have guided in the past. The remainder of the deleveraging of expenses in Q4 related to our store compensation expense which is another area of leverage opportunity in the future that I will touch on later in my commentary.

Operating income for the fourth quarter was $24.7 million after adjusting for non-recurring expenses which is an increase of 18% for the quarter. Tax expense is once again a bright spot for rue coming in at an effective rate of 36.0% compared to 38.3% last year. The lower effective tax rate was primarily attributable to discreet tax events in the quarter and also to the progress on our long term planning – tax planning initiatives.

Finally, net income increased 22.4% to $15.8 million as adjusted for the quarter, up from $12.9 million a year ago. Fully diluted earnings-per-share were $0.65 adjusted versus $0.52 a year ago on a diluted share count of 24.4 million this year versus 25.1 million last year.

To quickly review our performance for the full year, sales grew above last year by 18.6% to $901.9 million reflecting a 52-week measured comp increase of 0.7% and a 17% square footage increased. Gross margin for the year expanded by 60 basis points which was delivered on top of the 70 basis point expansion in fiscal 2011. The expansion is attributable to both improved merchandise margin of 50 basis points and leveraging a fixed cost of 10 basis points.

Expenses and profits for the year were impacted by both the Q3 Perez class action settlement and the Q4 nonrecurring professional fees. Adjusting for both of these impacts totaling 4.1 million, operating income was 15.5% growth and net income growth was 19.4%. Net income margin increased by 10 basis points for the year to 5.2 adjusted on top of a 30 basis point expansion in 2011.

Highlights for the year and balance sheet include following: cash and short term investments were $63.5 million, down $8.5 million from last year but reflective of $25 million expended for rue21 share repurchases. Inventory was up 20% over last year and up 2.3 per square foot primarily due to slowing spring merchandise of distribution center and in part to one-week calendar shift. We have no long term debt on the balance sheet and our revolver facility capacity of $85 million soon to be $100 million when we renew the facility next year. We have no plans to borrow and we have not done so since our IPO.

Now turning to outlook, the following commentary excludes any and all impact from our eComm initiative which I would discuss last. We plan to open 125 stores in 2013 with approximately 44 opening in the first quarter compared to 40 stores last year. We may close a handful of stores later in the year all of which that would have leases that are expiring.

Comp sales results for Q1 are expected to be down negative 2%, a positive 2% by quarter end, due in part to all our 2013 initiatives that Bob discussed, we feel very comfortable planning for and guiding to low single-digit comp sales for the year along with our overall sales growth in the mid-teens. We expect gross margins for the fifth consecutive year to expand in 2013 due to our continually growing economies of scale and our investments in advanced planning and allocation systems over the past two years.

In regard to expenses, as we have guided in the past, stock compensation expense in 2013 will grow more in line with sales growth after the first quarter. Additionally we began this month with the implementation of our mobile store technology which is key component of project simplifications discussed in past calls. We believe this project, including our new in-store technology, will allow us to leverage store compensation costs going forward in terms of both improved customer conversion and more efficient payroll hours utilization. For these reasons and our continuing disciplined focus on costs and ROI, we anticipate SG&A expense leveraging for the full year 2013, including stock compensation.

Now moving to depreciation and amortization, due to all the infrastructure and systems investments made in our company over the past years, including the planning and allocation systems, depreciation will be a leveraged headwind in 2013 by approximately 10 to 20 basis points or $0.04 per share. However we do anticipate that in 2014, depreciation will normalize growing more in line with sales.

For our EPS results for the quarter – for the first quarter of 2013 we expect to be within a range of $0.47 to $0.50 on a diluted weighted average share outstanding of approximately 24.4 million, and we expect full year earnings per share in the range of $2.10 to $2.15 on a diluted share count of 24.2 million.

Finally, to our exciting eComm initiative that Bob had discussed, we’re very pleased with our progress to date in the construction of our eComm platform. Most major platform architecture decisions have been made, vendor selected and our eComm platform architecture a devoted internal team is building and getting stronger every day. Although we are not ready to announce particular vendor agreements we are certain that we have selected partners at the forefront of the industry that will provide proven best-of-breed functionality and services to our eComm customers.

I am particularly pleased to announce that we plan to take eComm order fulfilment in-house right from kick-off. This decision aligns perfectly with our business model that prioritizes ROI and low cost of ownership. Our ability to take on our own fulfillment was only made possible by earlier critical decisions we made. Number one, to double the size of our DC in 2011 giving us more than enough space for eComm operations, and number two, to recruit and hire a highly regarded supply-chain veteran in Steve Lyman. Steve came aboard as VP of supply chain in 2010 with a wealth of eComm experience gained at American Eagle where he was a critical member for that team to filter ecomm facility in Kansas and managed that successfully after developed (ph).

From a cost standpoint we see an investment in 2013 of approximately $0.10 in EPS for eComm, including $0.02 in the first quarter. As stated in previous calls and presentations, we will not have any sales impact to our eComm channel in 2013 but we do believe based on our projections as they currently stand that we can achieve near breakeven eComm results in 2014. Therefore in 2014 we should be past the incremental stock comp, depreciation and e-commerce investment headwinds back to experiencing good leverage in the business.

That completes my prepared remarks. And I’ll turn the call back over to Bob.

Bob Fisch

Thanks Keith. We’ve started what will be a pivotal year for this company and we remain relentless in our mission to drive strong top and bottom-line growth. In 2013, our sales growth will again come primarily from new stores but we also have many initiatives in place to drive productivity this year and moving forward beyond this year. Some of the strategies that we expect will deliver results beginning in 2013 were highlighted on this call today and include etc! store remodels, rue Men and building a more defined home to the guys division in our stores, a larger store format in carefully selected markets, the hiring of new talents to strengthen our aerie lingerie brand and the implementation of planning and allocation technology.

We also are getting closer to our ecommerce launch and are excited about the potential new business it will provide in the future years. When we put all these plans together we’re optimistic about the future. We believe that we could be a $2 billion, 1700 plus store company in 5 to 6 years with many new initiatives ahead of us. The sky is the limit.

And I now would like to turn this call over to your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from Lorraine Hutchinson of Bank of America.

Lorraine Hutchinson – BofA Merrill Lynch

Wanted to ask about the fourth quarter, you had initially guided total sales growth to 26% to 28% and it came in a bit below that. Was that the new store performance or was that just a smaller 53rd week?

Bob Fisch

I think it was a smaller 53rd week, it was not the new store performance. It was the last week and whether that’s an effect of the tax rebates, whatever it was, it was tougher than what we’d expected.

Keith McDonough

Yeah, I think we guided in the past to around $16 million in revenue for that week, Lorraine, it came in around $11 million.

Lorraine Hutchinson – BofA Merrill Lynch

And then do you think it’s just weather that’s causing a softer start to the first quarter or is there any other way to diagnose some of these macro factors you’ve been discussing?

Bob Fisch

Well, I think that at the end of January beginning of February, I think there was an effect of tax rebates because it was something that, it’s probably stated and everybody knows is, it was a significant decrease of them at that timing versus last year. And we do a lot of business in that beginning period and we do get a lot of people into those rebates. I believe that we came back from a beginning tougher February and ended the month of February much stronger where we probably got some of those tax rebates back. But I think Lorraine, what’s happening out there and I think that's why that we wanted to guide conservatively and I think prudently doing it is that it was record weather last year, right now starting the ides of March, March 15th for the next 13 days the whole country was 8 degrees more warmer than normal as the whole month of March, and for example, like yesterday in Minnesota, it was 18 degrees during the day, last year was 17.

So it’s – the reason I feel that it’s more just that factor, I don’t want to belabor that because we will get back to business is because in states like Louisiana and Texas and the West Coast and even the Northwest, we’ve seen a good increases in business and it’s the areas that are up against these major tough weather conditions that we have an effect, as that changes I see our business is changing and I feel very good about our merchandise now and going forward and feel we’ll get that business back.

Keith McDonough

I think actually just the opposite with regard to new stores Lorraine, we finished the year with our new store performances exceptionally strong and we’re seeing so far very good indications from new stores we opened in the first quarter thus far.

Operator

Our next question will come from Randy Konik from Jefferies.

Randal Konik - Jefferies & Co.

Can you guys – when you talk about all this productivity enhancing items with regard to remodels, rue Men, etc!, can you talk to which of the strategies you expect to be most impactful to improving productivity, and is there still sort of return on investment target you have for the capital spend here? And lastly, what kind of -- should we expect to see on an average sales productivity per foot on these initiatives?

Bob Fisch

Well, I think that as far as the business of refreshes, we normally do stores and we tried to explain, will not take a lot of time, we normally will see and work with a developer to relocate or convert a store when they can help us out contribution wise and occupancy savings whatever and we move stores. We see the opportunity working with developers that Bob Thomson, real estate head and his team are doing that we’re going to be able to work in the same environment of store right now that instead of just relocating stores able to enhance with better – as I mentioned to earlier in the call, to give us a good lift. And what we said is that I did say that we've looked to probably have around the 15% increase to what we normally do in the store comp sales versus the 20 to 25 when we move them. I have not sat down and looked the exact dollar per square-foot but it is – but it would be that type of an increase.

I don't – I see rue Men as something that’s evolving now that will pay off to some degree in the third and fourth quarter but to significantly pay off in going forward years both in the 5000 square foot format and 6000 square-foot format. So that's what I see strong there. And so in lift to dollar per square-foot, we’re never going to be the highest dollars per square-foot but what I do see that’s important is that in the guys business, Randy, that the rue guys business, its contribution is significantly stronger when we go to a bigger format and define the store, set a little separately from making sure we have a guys viewpoint and a bigger square-footage. And what happens is we have a better sales and dollars per square-foot in that spacing. So I don’t have the exact numbers but I feel very confident about this because I think that we’re going to be able to segment the guys business a little more which I think will carry us strong into the future.

Randal Konik - Jefferies & Co.

So I guess then for Keith, how should we be thinking about, as Bob said over the next two years you're going to do some of these initiatives, how should we be thinking about your CapEx, capital requirements over the next couple years, free cash flow, and then relating that to the buyback, because obviously it looks like you're stepping up your buyback of your stock, which is very good to see. I just want to kind of, let's tie that all together. What are your thoughts on that?

Keith McDonough

So including eComm our guidance, that actually will be in our K that we file, will be CapEx net of TAs, is $47 million to $53 million for 2013, that includes the work that Bob has described, includes over 6.5 million in eComm investments and includes our normal store opening cadence and those IT investments that we made. I don’t anticipate that the number growing significantly, I know that a couple years out, we’ve got probably another distribution center but that’s a few years out. So I expect that, that number will normalize somewhat, that’s what gives me confidence that depreciation expense will normalize as well, especially if we take a look at in 2014, and based on all those numbers including the 2013 CapEx that I just described, that line will grow more in line with sales. So free cash flow has been $25 million to $40 million per year, I don’t anticipate that changing and that’s what gives us the confidence just to ask for authorization of an additional $25 million in share repurchases from the board which puts us back up to $50 million of dry powder.

Operator

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

Brian McGill - Janney Capital Markets

This is Brian filling in for Adrienne today. First, I want to say congratulations on a great 2012. So let me also say I love the sound of rue Men. It sounds like a great initiative, looking forward to seeing that. I was just wondering if you could talk a little bit more about the indicators that you guys are seeing to allow you to identify that opportunity, just if it's -- that there's some left on the table or where that demand that you're seeing that opportunity is really coming from.

Bob Fisch

Well, it's interesting I have been here 12 years and something I look at that I probably should have seen even earlier, being very straight about it as I usually am on these calls, is that when we look at our rue store we’re not like American Eagle, Abercrombie and Aeropostale where the girls and guys merchandise is exactly similar on girls and guys dual-gender side. It’s a lot more fashionable, as Kim points out, on the girls side, and it’s nothing we don’t have fashion guys but it’s not exactly the same. I see too many times when I make frequent store visits that we look a little too much like a girls store and not really developing a guy store. So in our bigger stores that we've tested, and we now have a few of these stores where we have stores that are bigger stores and we also segment guys a little more, we’re having a strong increase in guys contribution of business compared to what it would have been in a smaller store. So even with the bigger store they are doing a better contribution while girls and guy etc! is doing well, the guys is doing stronger.

So I see that is important and then just in talking and doing some studies with some of our people, more intercept studies and whatever is that the guy really wants – it’s home a little more. Now it's not going to be where it's not going to be open -- openings where they can't intermingle girls and guys in there but it gives a definition on that Brian and I feel really strong about it. And so it’s something that guys business is 18% of our business and I believe it’s a low penetration and even though that we are picking up in guys I believe we owe the public a lot more and I think having guys where it's not in these underserved markets that much as far as competition, I think it’s going to help us, Brian.

Brian McGill - Janney Capital Markets

And then if I could just ask one more, I was wondering on the weather topic, obviously we've been hearing from everybody that it's difficult out there and certain regions have really been struggling more than others. I was wondering if you could provide some sort of feeling for magnitude differences between some of those differences. Obviously your guidance for comp here is a negative 2% to positive 2%. Is it fair to say that the harder affected regions are on the lower end of that range and some that are in some better weather areas are on the top of that guided range?

Bob Fisch

Yeah, absolutely Brian, when I talk about that to me is – as the weather changes it, weather gets to where I like it even better, then we go to the upper end of the range, and I think it’s right to do it. Of course, it’s going to be different by area, and some areas significant because example, last year on Patty’s day was 78 degrees, this year was snowing at 38. So you can draw your own conclusion on that. But you know what, we don’t sit here and say we’re not going to get the business back, it’s just that right now I think it’s prudent to be careful about it and plan your inventories quarterly and be ready to take action when the business – we also are not going to just to let you know over promote now when the weather is tough. I want to everybody to know that, that is not the time to over promote, it’s just, that’s not when you’re going to get the business. So Easter is happening in another week and a half, week, whatever week and a half, and – but we have six and half weeks of offer left there we can really get our business. So weather will change, but I just think it’s right to call that out now.

Operator

Our next question will come from Brian Tunick from JPMorgan.

Brian Tunick – JPMorgan

So three quick questions. I guess first for Keith, so sounds like 2013 earnings growth not going to be to your algorithm, given the eComm and the D&A spend. So just looking beyond this year, can you maybe talk about your EBIT margin targets as we get into 2014 and '15? Second question for Bob, 900 stores, you are talking about 1,700, no specialty retailer obviously there. So maybe on a comfort level between strip centers and factory and outlet stores or Canada, just maybe help us get comfortable that 1,700 is the right number from here. And then finally, maybe Kim wants to talk about AURs being such a big driver last year I think of the comp, so just wondering how you're thinking of AURs in 2013 or could there be any other drivers as those start to flatten out? So one for everyone. Thanks very much.

Keith McDonough

I said before and I will say it again that we have every confidence that rue21 is double digit operating margin company. We have had some headwinds, the stock comp, becoming a public company in 2009, has been a headwind since we went public. I am happy that actually the next quarter I won’t have to be talking about that line item any longer. Depreciation is just reflective of the investments we made as a company. rue21 has always been a infrastructure invested company and I have said in the past that we are invested to deliver the growth we have committed to our shareholders for next year and the year beyond today. And that’s an important element of who we are.

We see eComm as an amazing opportunity. Today it’s a headwind from an expense standpoint, 2014 and beyond we see it as accretive, we see it as supporting expanding gross margins – and operating margins and that’s part of my commentary in regard to how we are doing this. I am pleased that we are doing this, a lot of our retailers go out and outsource their fulfilment and that’s a very expensive proposition to do and to make money especially long-term. Ultimately most retailers are taking it back in house. We’re starting with our own fulfilment and I think that's important asset that we will have in the years to come and I think that eComm is going to be a big driver of operating margins for us going forward. So long term again I have more than confidence to say that we are double digit operating margin company.

Bob Fisch

And to answer your second thought, Brian, because with all these initiatives which could be powerful for now in future years of ‘14, ‘15 and ’16 because my job and this company’s job is to devote, is to get the business now, but my job is also to sit there and put a platform together for the next three years out of how we’re going to keep this growth and keep building this company to a high growth company. And the last part of that is the stores. So we’re now today very happy at 900 stores. As we mentioned as -- I spoke to you in the group at ICR we did say that we think it's gone from 1500 to 7000 stores because the stores that we are opening now we are becoming more on top of understanding the markets and going after the small markets, Brian, that it is becoming even more, the smaller the market 20 to 30 to 50,000 people the more business that we're doing. So for example, we opened in (inaudible) New Mexico last week and in four days we did $75,000 of business, okay. It’s 20,000 people living in that town and so as you know we obviously don’t pay a lot of rent but the customer is stout – yeah, they must be really stout because there is a lot of business at this time of the year and it did more than double, triple than most stores can do so.

So the point is I see that and to your question of strip outlets and malls, the outlet is going to be minimal growth, we will go after that, when there is a great outlet, they will open a few years but strip I see this year probably, Brian, being about 60% of the total because I am just seeing more and more opportunities that Bob and his team are bringing in of these underserved markets, and that makes me feel really good, to whether there is a lot of building coming out of the ground or not in the next couple years where I was nervous earlier, I am not nervous now. And I do see us opening 100 to 120 for the foreseeable future. The other point is that I'm not sure right now and to discuss this on the call is right to do that we are going to go after Canada right now. I think it’s right to bring that up because these 20 to 30 stores that we’d open over the next two years and what that pays off versus really working on the refreshingly models to get that comp and total sales growth to work on rue Men and to what Keith said with the fantastic opportunity of eComm, that's where we should be spending our manpower, that's where we should be spending our money right now and we can always look at it. But I believe we could be 1700 stores in the United States alone.

Kim Reynolds

Brian, to your question about AURs, one of the things we always talk about really is introducing and expanding on our good, better and best strategy. When we offer a fashion, work fashionably to offer our customers the more we can command that retail on that, my best selling girls jacket is $33 today. Our best selling handbag is $25 to $30, my best selling shoe right now roughly $40. 33.39 denim is one of our fastest returning and best selling category in both girls and guys. So I think the point is when we offer merchandise that customers love we will have a better rate of sales at regular price and that’s – my challenge is to my merchant zone, what we accept and challenge and we also mentioned, I talked about the implementation of the planning and allocation, just to make sure that great fashion is in the right store at the right time.

Operator

Stephanie Wissink from Piper Jaffray has our next question.

Stephanie Wissink - Piper Jaffray

Bob, I appreciate the reference to Minneapolis. You are right, it is indeed 18 degrees and we're all getting antsy here, so appreciate that. Really quickly, Keith, just a couple of housekeeping questions. If you can give us the number of conversions in the quarter and then the total ending square footage, that would be helpful. In addition, if you have the Q4 comp metrics, the transactions and the average transaction value, that would be helpful.

And then a question for you, Bob. Just on the gross margin outlook, I sense your enthusiasm around the opportunity there. And if you could give us a sense of the balance between merchandise margin versus leverage, is there a mix-driven merchandise margin opportunity, or Kim, to your point on pricing, is there more room to kind of stretch the fashion opportunity and take pricing higher?

Keith McDonough

So transaction growth for the quarter was around 13%, Stephanie, and the quarter ending or year end square footage was 4.35 million square feet.

Bob Fisch

And in the question of the merchandise margin, total margin overall we continue to see opportunities in merchandise margin and as we showed in the fourth quarter where we had a significant increase in margin over last year’s significant increase in margin, I believe that Kim and her team are able to with their power to keep pushing the prices down. We are not looking to raise retail on the same like merchandise. We are looking to go after better retail of merchandise that's compelling that we love. So that I do not see any change in that Stephanie and I think the opportunity is still there to continue that merchandise margin growth. But it’s also there because of what Mark Chrystal and his team are going to be working on with the new planning systems and what we already – initiated with our allocation system this past year, and those are very important tools too. It’s not just all about merchandise, it’s also how we deliver the merchandise and plan the merchandise in addition to how we sell it in the stores.

Operator

And next we will go to Jeff Black from Avondale Partners.

Jeff Black – Avondale Partners

Bob, maybe some color on just the etc! updates. I understand the first wave that drove the productivity, but you're saying productivity on the remodels is up another 15%. What accounts for that? Are there new things coming into the etc! area? Is it a different focus in the area? Just anything there would be helpful.

Bob Fisch

Jeff, yeah, I said that in the stores that we’re looking to refresh that we looked to see a 15% comp increase in there versus the ones that we relocate and convert it that are 20% and 25% increases. As far as etc! business I didn’t say that but if you want to talk about etc! business we mentioned that we were having a tougher jewelry business in the third and fourth quarter, and I thought to see that getting stronger now. So we see that I think Kim mentioned about how footwear has been strong and I think where we make some good decisions and maybe will even think about it next year, even more in the sportswear area too, that even is going to be more of a balance of what – not to have outerwear and sweaters but to have long sleeves or whatever, with even more long sleeve knits or active, because the last couple of years have been incredibly warn and that’s not going to happen all the time.

So I think we’d love that but the boot business by Kim and her team and her etc! leader in there are going after regular price business with a strong move. It really helped us. So I see us being – when I say etc! stores, that etc! store helps etc! business and guys and girls. So it’s not just only etc! but etc! business is going to be continued to be strong and I believe also that it’s going to be strengthening even more by as Kim mentioned developing it with putting somebody, we are putting somebody just to let you know into an area and splitting some of the business out to really define the tarea lingerie business to go after it. So I think these are good categories that’s going to help the total etc! business in addition to the total stores, Jeff.

Jeff Black – Avondale Partners

And just to put the fine print on it, the accessories comp versus the overall comp, are we still lagging in the accessories business, or did that catch up with the fixes to jewelry and footwear you're talking about?

Bob Fisch

I believe that it’s starting to catch up and I think that the we expect that to be pretty close to being right in line with everything else. So where it was significantly different, we really worked on it and my accessory leader in addition to Kim really worked very hard and I believe that she is going to really come through as Kim and the team will. So yes, I think that it's getting very close and I think as we go forward we will be there or exceeded.

Operator

And at this time we have no further questions in the queue. I would like to turn the conference back over to Bob Fisch for any additional or closing remarks.

Bob Fisch

Well, as we entered the first day of March madness I’d like to get rid of the March madness weather. So we all will wish on that but it will happen. But I want to thank everybody to be on this call and I look forward to speaking you in later in May when we have our first-quarter accomplishments. Thank you very much.

Operator

That does conclude our conference for today. Thank you for your participation. You may now disconnect.

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