Joseph Teklits - Senior Managing Director, ICR, Inc.
Robert N. Fisch - President, Chief Executive Officer and Chairman
Keith A. McDonough - Senior Vice President and Chief Financial Officer
rue21 Inc (RUE) Q3 2009 Earnings Call Transcript December 8, 2008 4:30 PM ET
Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the rue21 Third Quarter Fiscal 2009 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session,instructions will be provided at that time for you to queue up for questions. As a reminder, today’s conference is being recorded.
I’d now like to turn the conference over to Mr. Joe Teklits of ICR. Please go ahead.
Thanks. Good afternoon, everybody. Thanks for joining us for rue21’s third quarter 2009 results conference call. On today’s call will be Bob Fisch, President and Chief Executive Officer; and Keith McDonough, Chief Financial Officer. After management has made their formal remarks, we will open the call to questions.
Before we begin, a reminder, some of the statements made on the conference call during the prepared remarks and in response to your questions may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.
Those risks and uncertainties are described in the press release and rue21’s prospectus filed with the SEC and in the third quarter 10-Q, which will be filed by December 18. Investors should not assume that the statements made during the conference call will remain operative at a later time. And rue21 undertakes no obligations to update any information discussed on the call.
Now, I’ll turn the call over to the company’s CEO, Bob Fisch.
Robert N. Fisch
Thank you, Joe. Hello everyone, and thank you for joining us for our first conference call as a public company. Joining me today on the call is Keith McDonough, our CFO; and Kim Reynolds, our Senior Vice President and General Merchandise Manager.
The past eight years have been a great rise for rue21, we’ve been able to produce very consistent sales growth and profitability increases during all economic environments, while also building rue21 into a strong 500 plus store chain. And we will more than double our size again over the next five years. I am confident of that.
This performance provided us the chance to have our successful IPO about a month ago. And I want to thank everyone involved in that process, and especially, thank the entire rue21 team for making this happen.
Note that we have consistently achieved sales and profit to a high growth forecast over the past eight years, consistency. Part of producing consistent results is having the right plan and having the maniacal focus to execute the plan. But a big part of it is never underestimating the value of experience. It is having an experienced management team that is consistent in what they do, that has worked together for years to build the business.
With Kim Reynolds as our head merchant, who has worked with me for over 25 years and is the best in the business. Keith McDonough, who has been our CFO for over six years leading the financial charge. And others in key management roles for many years at rue21, we know how to open stores, work with our vendors and grow our profits. However, our IPO is not the finish line for rue21, it is really just the beginning of our new phase of growth, what I call, total sales and profit growth. We are a pure growth company. And today, we see more opportunity than ever for rue21 across the country. We stand for fashion at a great value while building a brand.
We opened our 88th store for 2009 in November. This is another area where we have been consistent over the years, opening every store on or ahead of plan. We are quick and we are efficient. Speed to market is our secret source. We can sign a lease and have the store opened six weeks later and we do it with a builder, of course, that allows us to return our investment in less than a year. We are a self-funding business.
Bob Thomson, our Senior Vice President of Real Estate and his team are now getting us in position to achieve our plan of 100 new stores next year. They are ahead of schedule and I am very confident that we will be opening 100 very profitable stores in 2010 that will again pay for themselves in less than a year.
We expanded into the states of Washington and Oregon this year, well ahead of our projections. And we will be filling in these markets in 2010, along with other key markets across the country. We also have converted 26 stores in 2009, bringing the number of stores in our etc! format to 314. And we are targeting approximately the same number growth for 2010.
etc! is our expanded accessory content, which includes footwear, jewelry, handbags, and our exclusive line of fragrances in a store-within-store format. We tested six stores three years ago and in a short three-year period, we now have 314 etc! locations.
Looking at our third quarter results quickly, we were very pleased with our same-store sales comparison of 13.5%, and total sales growth of 41%. And based on our plan for the fourth quarter, we should finish the year with an annual comp increase of approximately 6%, ahead of our longterm goal of low single-digits; and total sales growth for the year of at least 30%, which is ahead of our 20% long-term goal.
We also were able to achieve a strong gross margin in the third quarter, a new high for any quarter for rue21, at 36.2%. And we more than doubled our net income from a year ago. Year-to-date, our net income is up 78% and we are ready for the important holiday season. And so far we are on plan for the period.
I believe this year has been a very good illustration of what rue21 is all about and what continues to be all about. First, total growth. We ended the quarter with 534 stores, and we see the potential to have over 1,000 stores in the next five years. This will enable us to grow our square footage in the high teens on a percentage basis annually. Also, as evidenced in 2009, we have the ability to expand our margins both at the merchandise margin level and also by leveraging the infrastructure that we have put into place to be a much larger company.
Second, we can react very quickly to trends and changes in the marketplace. We jump on trends fast and get out of them just as fast. We could not have been as successful as we have been this decade without consistently having the right product. We can do this because we use domestic importers that have great sourcing capabilities around the world that allows Kim and her team to work on very short lead times because we are such an important partner to our suppliers. And finally, we have a great rue culture that wants to do well, work together and win. And I think the strong back-to-school and fall seasons we just finished on top of a strong performance last year is great proof of that.
Everything we do at rue, the consistent product, the value we offer to our customers and the service and culture that you will find in our stores, all of which we are bringing to smaller underserved market that are starved for what we offer, build our rue brand. So with that, I would like to turn the call over to Keith McDonough to discuss the details of the third quarter and our outlook for the fourth quarter.
Keith A. McDonough
Thanks, Bob. I will review the details for the quarter and then provide our outlook for the fourth quarter, and also make some additional commentary regarding the first quarter of 2010. Net sales for the quarter were $137.1 million, up 41% from $97.5 million for the third quarter of 2008. Increase was driven by the comparable-store sales increase of 13.5% for the quarter, combined with square footage growth of 27% from a year ago. Each of our major merchandise categories performed well, especially guys. And the overall comp increase was driven primarily by an increase in transactions.
We opened 29 stores in the quarter versus opening 31 stores in the third quarter of 2008. We operated 534 stores at the end of the quarter, consisting of 386 comparable stores and 148 noncompar able stores versus last year’s total store count of 434, which had included 304 comparable stores and 129 non-comparable stores. Note that the non-comp store count represented 28% of the total at Q3 end this year. That’s an important metric. Another important metric I would mention here is, that I would remind each investor that our 15 – of our 15 month comp rule that is explained more fully in our IPO prospectus.
Gross profit for the quarter increased by 41% to $49.6 million, and gross margin expanded by 10 basis points to 36.2. The gross margin expansion was driven primarily by 180 basis points of leverage of store occupancy, distribution and buying, offset by 170 basis point decrease in merchandise margin. Our merchandise margin returned to normal level this year in the third quarter after an unusually high level a year ago.
Selling, general and administrative expenses increased 29.8% to $35.1 million, and as a percent of sales, expenses declined by 220 basis points to 25.6% versus 27.8% last year. This is a result of leveraging from our strong comp and total sales increase for the quarter, of course.
Depreciation and amortization expense rose at a slightly higher pace than sales growth, and as a percent of net sales, expanded to 3.2% from 3.0% a year ago. This margin expense increase was driven by our increasing rate of capital expenditures for new stores and conversion stores, additionally IT and DC infrastructure and systems. Net of tenant allowances, capital expenditures year-to-date are 19.1 million versus 10.2 million a year ago. And we’re planning 28 million net capital expenditures for 2009 versus 17.6 million net in 2008.
Operating income for the quarter was $10 million versus $5.1 million a year ago. That’s a 96% increase. This income growth was driven by our comp performance and total sales growth of 41% and leverage fixed cost component of sales and SG&A expenses. Due to these drivers, our operating margin expanded by 210 basis points to 7.3 for the quarter.
Net interest expense for the quarter decreased $200,000 to just $100,000, due primarily to a decrease in average borrowings under our senior facility. Going forward, interest expense will be even less of a factor given our use of IPO proceeds and paying down our revolver facility borrowings.
The quarter’s effective tax rate was 39.5% versus 39.2 for the same period a year ago. The higher effective tax rate was primarily a result of an increase in the amount of non-deductible expenses. Finally, net income increased by 107% to $6 million for the quarter, up from $2.9 million a year ago. Fully diluted earnings per share was $0.26, versus $0.13 a year ago on a share count of 23.1 million versus 22.8 million last year.
Looking quickly at the first three quarters year-to-date, sales increased by 36% to $370.2 million reflecting a comp increase year-to-date of 7.4%. Total square footage growth of 21%. Gross margin expanded by 90 basis points, operating margin expanded by 120 basis points, and net income increased by 90 basis points or 78% year-over-year.
Turning quickly to the balance sheet, cash and cash equivalents were 5.3 million at the end of the third quarter compared to $3.9 million last year. Total long-term debt at quarter-end was $21.2 million versus $40 million a year ago. These amounts do not include the proceeds of $29.2 million, which will be about $24.5 million net of IPO cost of our offering – generated by offering 1.65 million shares of common stock on November 13.
Inventories, importantly, at the end of the third quarter were $87.2 million, up 14% from $76.5 million a year ago. But on a per square foot basis, inventory was down 9.9% versus last year.
Turning to our outlook. For the fourth quarter, we expect diluted earnings per share in the range of 17 to $0.20 using a range of net income between 4.2 million and $4.8 million, and diluted shares outstanding of approximately 24.3 million. Excluding public company expenses, estimated in the quarter of $1.6 million, our diluted earnings per share range would be $0.24 to $0.27 versus $0.20 last year on 22.7 million shares outstanding last year. This earnings range is based on estimates of total sales growth in the low 20% range, including low single-digit comp store sales, three new store openings and two closings in the quarter as compared to a comp sales rate of 11.2% last year in the quarter, 17 new store openings and one closing.
A few additional comments regarding the first quarter of fiscal 2010 for those of you that will be building your 2010 models prior to our coming back on a call again. We will be forecasting the first quarter of 2010 by applying the same sales assumptions of low-single digit comps and total sales growth in the 20% range. It is noteworthy as we did in the fourth quarter of 2008 that we achieved a fairly robust comp sales rate of 8.3% in the first quarter of 2009. We’re also planning public company expenses of $750,000 in the quarter additionally, stock-compensation expense of approximately $440,000 for a total of 1.2 million in non-comparable expenses in the quarter that were not in the first quarter of 2009.
As a reminder, our long-term forecast metrics include the following. Square footage growth total in the high teens, low-single digit comp growth, gross margin expansion were 150 basis points at least over the next five years. We will continue to leverage SG&A expenses by not growing them as fast as our sales growth. And finally, those metrics will generate net income growth of between 20 and 25% long term.
That completes my prepared remarks. And so, I’ll turn this call back to over to, Bob.
Robert N. Fisch, President
Thank you very much, Keith. We are now ready for questions so I open it up to questions now.
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