rue21 Inc. Q1 2010 Earnings Call Transcript

May.26.10 | About: Rue21 Inc (RUE)

rue21, Inc. (NASDAQ:RUE)

Q1 2010 Earnings Conference Call

May 26, 2010 4:30 PM ET

Executives

Joe Teklits – Senior Managing Director, ICR, Inc.

Bob Fisch – President, CEO and Chairman

Kim Reynolds – SVP and General Merchandise Manager

Keith McDonough – SVP and CFO

Analysts

Brian Tunick – JP Morgan

Paul Lejuez – Credit Suisse

Paul Alexander [ph] – Bank of America

Jeff Black – Barclays

Stephanie Wissink – Piper Jaffray

Michelle Tan – Goldman Sachs

Janet Kloppenburg – JJK Research

Operator

Thanks so much for holding everybody. Welcome to the rue21 first quarter earnings conference call. Just a quick note, today’s call is being recorded.

Now at this time, I’ll turn you over to our host, Mr. Joe Teklits. Please go ahead, sir.

Joe Teklits

Thanks. Good afternoon, everybody. Thanks for joining us for rue21’s first quarter 2010 conference call. Hosting today’s call will be Bob Fisch, President and Chief Executive Officer, and after management has made its formal remarks, we will open the call to questions.

As you know, some of the statements made on the 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 company’s 2009 10-K. Investors should not assume that the statements made during the conference call will remain operative at a later time and rue21 undertakes no obligation to update any information discussed on the call.

And now, I’ll turn the call over to company’s CEO Bob Fisch.

Bob Fisch

Thank you, Joe, and thank you everyone for joining us for our first quarter conference call. Joining me today on the call is our CFO Keith McDonough, who will review our first quarter results in detail, and our Senior Vice President and General Merchandise Manager Kim Reynolds, who will review some merchandising trends and will also be available, myself and Keith for questions-and-answers.

We are happy to say that we are off to a very good start in 2010 and we are feeling confident about our prospects for the year and our ability to meet the annual growth targets we have set out for our company. We exceeded our sales expectation for the first quarter, and posted a same-store sales increase of 7.7%, on top of last year’s first quarter increase of 8.3%. We also achieved record first quarter sales per square foot, gross margin, and operating margin for our company and grew our operating income by 95%, including non-recurring and incremental costs that we did not have last year as a private company. But what I focus on more than record quarters is continuing to deliver consistent results, which for us equates to achieving 20% plus annual earnings growth.

Our goal is to continue to grow our top line and bottom line using a combination of store growth, comp growth, merchandise margin expansion, and leveraging of our comparable costs, each contributing to consistent bottom line growth. We have shown that this disciplined growth is sustainable and this quarter builds on the strong momentum we had coming out of last year.

We believe our ability to offer fashion and value, continues to attract new customers and drive our sales growth. The fact that we deliver new merchandise to our stores everyday keeps our loyal customers returning to our stores often and to keep up with the trends that we have.

In terms of growing our store base, we opened 31 stores in the first quarter, and now plan on opening 60 for the first half of the year. We remain on target for 100 new stores this year. We also converted 13 additional stores to the larger etc! format during the first quarter versus nine in the first quarter of last year.

I just got back from the real estate convention in Las Vegas last night where we met with our major developers and I thought I would share with you some of my observations. It’s still tough for the real estate industry overall out there, but there was a glimmer of hope at the convention this year and things seem to be getting better out there in deal-making and relationships between the real estate developers and the retail community. We are pleased at RUE with the real estate possibilities available to us and we now have 90% of our new store locations secured for 2010.

While I don’t see many new projects coming out of the ground in the next year or two, there are plenty of great real estate opportunities due to backfilling for RUE for 2011 and for our future. And most important, we were locking in great deals now that will continue to benefit us for the next 10 to 15 years. So when the economy and the real estate markets recover, we’ll have already secured advantageous (inaudible).

Turning back to the first quarter results, each class of real estate, strip centers, malls and outlet centers, performed well in the quarter, as did each category of merchandise, guys, girls and etc!. We’ve been very consistent and we are particularly proud of the way our guys merchandise continues to build market share momentum in the smaller underserved markets where RUE has built a presence. We have become a destination for guys who wants to wear the latest trends and we continue to separate ourselves from the competition in these smaller communities. The dominant girls’ category also achieved strong sales this quarter. We continue to push for merchandise that the customer loves and not just likes. It’s very important.

Before I turn the call over to Kim Reynolds to give you some details on our merchandise results for the quarter, I want to thank many of you for making the trip to Pittsburgh in April for our Analyst Day to meet more of our team. Merchandising, real estate, IT, finance, marketing and planning and allocation are all integral to our future performance and I hope that you walked away satisfied that we have built teams in each of these areas that are best in class. Everyone you met knows what our goals are as a company and each person is accountable for their performance being an integral member of the team and making sure that as a group we’re disciplined in how we operate and how we grow.

During the first quarter we began work on many of our key strategic initiatives for the year that we introduced to you on that Analyst Day. These include building on supply chain efficiencies to increase revenue, developing our brand through consistencies of marketing and viral advertising, strengthening some of our core categories of merchandise and building our store management teams through a focus on promoting internally and enhancing our associate development programs. Developing and refining the RUE culture is very important and paramount to our success.

We have begun initiatives to become more focused and how we flow products to our stores and reduce inventory and have also been able to renew our commitment to leverage costs as we grow our store base. And we’re excited about the new ideas our teams are generating and look forward to continuing to make gains in our initiatives through fiscal 2010.

So, again, we had a great first quarter, and we’re very confident that we’ll continue to gain market share, build our brand, and expand our presence into new markets that are starved for fashion and value.

So with that, it’s my pleasure to turn this call over to Kim Reynolds, our head merchant to briefly talk to you about merchandising, and then Keith McDonough will go through the financials. Kim?

Kim Reynolds

Thank you. As Bob said, our first quarter results can be described as consistent in total sales growth, comp store growth, and gross margin improvement in all three categories of business, including girls, guys and etc!. The opportunity areas we identified prior to the quarter, girls fashion knits and sweaters, girls and guys better screens, jewelry and footwear, all delivered increases to plans and to last year.

Our good, better and best merchandising strategy remains a key focus in all three divisions as we raise the bar in offering more fashion and value at slightly higher retails. We’ve had very positive feedback in girls and guys denim, girls fashion tops, and jewelry. There is little resistance to pricepoint when the fashion trend is timely and a good value, and we’ll look forward to continuing to raise our AURs in fashion throughout the year.

As we’ve outlined in the past, through our use of domestic importers and the domestic market, we’re able to react quickly to capitalize on trends based on our customers’ response, oftentimes delivering new product in fashion to the selling floor in two to six weeks.

Our inventory strategy allows us flexibility in chasing trends while fine-tuning assortments. Our merchants are diligent and constantly delivering newness and fashion to our stores. As we enter into the second quarter, we see opportunities in girls fashion tops with the strength of flyways and shrugs, girls curvy fit bottoms, girls sandals as well as girls and guys better screens. Our ability to ship new products to the stores daily allows us the flexibility of identifying emerging fashion trends and reacting to customers’ change in taste. Actually just finished placing a lot of our jean fashion for back-to-school.

We’re looking to maximize potential sales for the remainder of the short spring and summer selling season without taking too many undue risks, and are working hard on deliveries for back-to-school with the new opportunities and styles that we’ll be delivering to our customers. We won’t speak to those trends now, but will be able to discuss some of them on future calls.

Now I am going to turn the call over to our Chief Financial Officer Keith McDonough.

Keith McDonough

Thanks, Kim. I will review the first quarter financial details and then provide an update to our outlook for the second quarter and for fiscal 2010. Net sales for the quarter were $137.7 million, up 28% from $108 million for the first quarter of 2009. The increase was driven by comparable store sales increase of 7.7% combined with square footage growth of 21% from a year ago. The comp increase was on top of an 8.3% increase in the first quarter of 2009. Total sales growth was driven by 32% increase in transactions, slightly offset by a decline in average UPT.

As Bob mentioned, each of our major merchandise categories performed well. We opened 31 stores in the quarter and closed one. We were operating 565 stores at the end of the quarter, up 18% from last year, consisting of 445 comp stores and 120 non-comp stores or about 21% of the total. Last year’s total count at Q1 end was 480, consisting of 349 comparable stores and 131 non-comparable stores or about 27% of the total. One of our stores in Tennessee had to temporarily close on the last day of the quarter due to flooding. We’re assessing that situation to re-open as soon as practical.

Gross profit for the quarter increased by 38% or $252.2 million, and our gross margin expanded by 280 basis points to 37.9%. The gross margin expansion was driven primarily by a 210 basis point increase in merchandise margin plus 70 points of leverage of store occupancy, distribution and buying associated with our strong overall and same-store sales performance.

Our merchandise margin improvement was consistent with what you’ve seen for the past four quarters, resulting from the IMU improvement initiatives that Kim Reynolds and her team began in the early part of 2009. Importantly, this initiative anniversaries in the second quarter. So the rate of increase over last year will level off going forward.

Selling, general and administrative expenses increased by 28% to $37.3 million. This increase included $611,000 in non-tax deductible expenses associated with our secondary offering that took place in the first quarter. We also had normal public company costs amounting to $600,000 in this year’s first quarter that were not in our SG&A expenses a year-ago. Additionally we had incremental stock option expense in the quarter of $323,000. Despite all of these incremental expenses, our strong sales in the quarter allowed us to only deleverage by 10 basis points from a year-ago.

Total SG&A margin was 27.1% versus 27% last year. Subtract the outlook non-recurring and incremental costs, SG&A would have leveraged by approximately 110 basis points.

Depreciation and amortization totaled $4.9 million and increased by 35% over a year-ago. We continue to plan 2010 CapEx to be roughly $32 million net which includes the opening of 100 stores, 30 conversions, store maintenance and fixture CapEx and our continuing IT investment.

Operating income for the first quarter doubled to $10 million from $5.1 million a year-ago even with our incremental SG&A expenses. Our operating margin expanded by 250 basis points differs to a first quarter all-time high of 7.2%, driven primarily by our sales growth and gross margin expansion.

The quarter’s effective tax rate was 41.4% versus 39.6% for the same period a year-ago. The higher effective tax rate is entirely a result of the non-deductibility of the $611,000 in our secondary offering expenses. Going forward, we anticipate returning to a tax rate of 39.3% or below. Although we do expect general, long-term improvements due to; number one, that we have changed our stock option grant practices; and number two, our ongoing tax rate reduction focus.

Finally, net income increased by 95% to $5.8 million for the quarter, up from $3 million a year ago. Fully diluted earnings per share were $0.23 versus $0.13 a year ago on a fully diluted share count of 25 million versus 23 million last year.

Turning to the balance sheet. Cash and cash equivalents at the end of the first quarter were $27.8 million compared to $5.7 million at the end of the first quarter of 2009, and we have no long-term debt on the balance sheet. Inventories totaled $87 million, which was 7.1% higher than last year, but on a square-footage basis was down 12% from last year. We’re projected to be in a cash positive position and not borrowing under the revolver through the rest of year, which is due in part to our new and converted store ROIs that continue to be in excess of 100% and 30% respectively.

Now turning to our outlook. We continue to plan for 100 new stores in 2010 and now believe that split will be 60 in the first half and 40 in the second half. Last quarter we told you the split for 2010 would be roughly 50-50.

We also continue to plan to close a handful of stores later in the year, all of which is at leases that are expiring. Consistent with all previous 2010 guidance, we’re planning for low-single digit same-store sales increases for both the second quarter and for the back half of the year.

For the second quarter we expect our operating margin to approximate last year, including and offsetting our incremental public company and share-based compensation expense as well as higher depreciation expenses as a percent of sales.

We expect public company expenses to be approximately $675,000 and share-based compensation expense of $625,000 in the second quarter. For the full fiscal year 2010, public company expenses including the first quarter secondary offering will approximate $3.3 million. Share-based compensation will be approximately $2.3 million.

For the second quarter of 2010 we expect diluted earnings per share in the range of $0.23 to $0.25. Again, this guidance assumes the low-single digit same-store sales increase and total sales growth of about 20%.

Excluding incremental public company and share-based compensation expense, our guidance reflects net income growth of approximately 27% for the quarter.

For the year, we continue to expect gross margin improvement and our operating margin for the year is expected to expand by 50 basis points, which is the higher end of our original plan. This anticipated margin expansion includes and offsets the incremental impact of the public company and share-based comp expense I just described.

So for the full year 2010, we continue to expect sales to increase by over 20% and now expect net income to grow by more than 30% with earnings per share in the range of a $1.14 to $1.19 on a fully diluted share count expected to be 25.1 million versus 23 million for 2009. Excluding both non-recurring secondary offering cost and incremental public company cost and share-based comp expense, our guidance reflects net income growth of approximately 38%. As a reminder, our long-term forecast includes square footage growth total in the high teens, low-single digit comp growth and annual net income growth of between 20% and 25%.

That concludes my prepared remarks, and so I’ll turn the call back over to Bob.

Bob Fisch

Thank you, Keith. We’re clearly pleased with our results for the first quarter and are looking forward to continuing our focus on strong and consistent total growth to be provided by a multi-pronged approach. We are consistent in our three-pronged strategy of merchandise, real estate, and sales. We believe we are positioned to deliver the results for our shareholders that we have outlined for you today and then we expect that from ourselves too.

And with that, we can now open up this call for some questions. Thank you for your interest.

Question-and-Answer Session

Operator

(Operator instructions) Well, first good afternoon to Mr. Brian Tunick with JP Morgan.

Brian Tunick – JP Morgan

Thanks. Good afternoon. Congrats, everyone.

Bob Fisch

Thanks, Brian.

Brian Tunick – JP Morgan

I guess a couple of questions. I guess, Bob, you talked about the ICSE conference and we’re hearing, lot of folks who are out there now, can you maybe talk about, first off, what are you seeing as far as rents per foot, as either the trend for leases in the back half of this year or for 2011? Have you changed your view on the biggest opportunities by state? Are you seeing anything there? And then maybe for Keith, it sounds like you think that the sourcing in the IMU side of the equation will start to slow. So, how should we be thinking about planning and allocation and sort of what kind of gross margin target is reasonable in the next few years?

Bob Fisch

Okay. Brian, a couple of things. One, besides the factor that going out there, you think that it’s going to be 90 degrees in Vegas. The first data convention as high as 63 and a lower 49 is slowing now. So besides that, it was – it's purely business. I think that as far as our strategy, I don’t see anything changing that we discussed over the last year or two that we’ve been able to deliver lower costs in our rents. And I think that we are continuing that strategy into this year and into next year. I think that what’s happened out there that I see positive for Rue is just a continuation with our best developers where they now see that we have such a strengthened business that they really can afford not to do business with this and they are coming down to the rents that we need. So it is consistent to what we had before.

And number two, on opening, no, our strategy, we will open our 44th state later next month in Idaho, in Boise. And so now 44 states strong, and I see a continuation of really going after to strengthen the South, Southwest, now moving into the West Coast. And so I still see that being strong, and I don’t see the strategy changing. I am very positive about the convention, because yes, as I said, there is a glimmer of hope that I see. More things happening between the retailers and developers. I do not see a lot of things coming out of the ground yet, but really we had great consistency with major developers on backfilling spaces, Brian, and that we are encouraged than ever that we will be able to deliver what we say, if not more if needed.

Keith McDonough

And to your gross profit question, Brian, I think just finishing off – or starting off where Bob left off is the fixed component of gross profit, which includes occupancy. So the optimism that Bob brings back from Vegas will certainly reflect going forward in that gross profit line item. Also, as you know, we have invested tremendously in the DC. I expect that that’s going to continue to provide leverage for us in that line item. And then finally, the merchandise margin, which is critical, that we were seeing just great benefits of. It’s been a great four quarters that we’ve had. We do expect – we have optimism to expect continued progress in that area. All I wanted to caution the market is that it shifts slow relative to last year, but I think we’ll continue to progress as we move forward.

Brian Tunick – JP Morgan

Okay. And Keith, can I just ask – did you guide previously for up 100 basis points gross margin and did you change that today?

Keith McDonough

No, we haven’t changed it today. And that’s a good question. The long-term guidance is actually 150 basis points. And as I’ve said, we’ll decide when we want to – when we feel it’s prudent to pull that long-term guidance. When we are going to achieve that guidance, we’ve never given that.

Bob Fisch

Brian, it’s Bob again. Nothing has really changed in that before. So we believe we are consistent in our growth of gross margin, and we have every confidence at that 150 basis points over that next three to five years that we will achieve and surpass.

Brian Tunick – JP Morgan

All right. Good luck.

Bob Fisch

Thank you, Brian.

Operator

We’ll take the next question now from Paul Lejuez with Credit Suisse.

Paul Lejuez – Credit Suisse

Hey, thanks, guys.

Bob Fisch

Hey, Paul.

Paul Lejuez – Credit Suisse

Bob, what’s your view? We’ve heard a lot of retailers talk about a slow start to May. What’s your view of what’s going on out there? You’ve got stores off-mall, in-mall and outlet centers. Are you seeing any differences amongst those channels and just what your big picture view of what’s happening out there?

Bob Fisch

Well, first of all, we are not going to report on just the May results. I can tell you for the quarter, May, June and July, that I’m confident that we will achieve our low-single digit, as we said. And as we always do, we look to be consistent and look to be able to over-deliver. If you are asking me what I see out there, I think I can shed some light on what I say and I do hear that some businesses have been soft.

One thing I think that the people have to realize is that the Memorial Day shift would probably affect many retailers where Memorial Day weekend was last year the previous weekend and now it’s upcoming weekend and moves into June for Sunday and Monday. So I think that that’s an effect to a lot of retailers. But what I think is I’d like to refer back to what I said about looking at merchandise, it’s not just like, but looking at merchandise that you love. I think the part of things that have happened out there is that I think the people played some things to safe and are going after fashion, the things that customers loving lot lately. And I think that they can’t rest on their loyal and I think that it’s also the right balanced pool of sale and regular price strategy. And I see – it's very easy, and I’ve seen it fall to the trap of that in the past, but it’s – to us, we are not looking to sell more.

We are looking to have more regular price, as Kim said, to trade up into good, better, best strategy. And I think that what’s out there in some retailers, I think that the people felt that maybe selling more is going to get them more business. I think merchandise you love more is what’s key. And I think that’s – but maybe if there is softness out there, it’s not unbelievably a lot of great new trends out there. You really have to push hard to make it happen. And that’s what my team and I are working to do. So we hope to continue that.

Paul Lejuez – Credit Suisse

And then maybe Keith, on the merchandise margin comments you just made, how much is the improvement going forward would you say is coming more from the sourcing side versus the AUR side? What are your vendors seeing – telling you on the sourcing side?

Keith McDonough

Well, Kim is probably better equipped to answer that. I mean, what we’ve seen is IMU.

Kim Reynolds

In answer to your question, we are hearing about cost increases, particularly on cotton fibers in almost every country we source in. Right now, the company has not felt an effect on that. And I’m pretty confident going to the fourth quarter there will be a minimum effect to that. And with regards to gross margin improvement, there are also initiatives in planning and allocation that were also geared towards helping the merchandise gross margin as well that wasn’t just IMU.

Paul Lejuez – Credit Suisse

Great. Thanks. Good luck, guys.

Bob Fisch

Thanks, Paul.

Operator

Next now to Paul Alexander [ph] with Bank of America.

Paul Alexander – Bank of America

Hi, guys. This is Paul for Lorraine Hutchinson. Inventory was down so much on a per square foot basis this quarter. Can you guys give us an update on what the strategy is there? And you still drill such a great comp with the inventory down. What should we expect going forward and how it may impact comps?

Bob Fisch

I think it’s actually – we’ve been down the last two quarters. And what happens, I think, is part of our beat the market strategy, what’s changed in retailing for us is not only just relying on direct imports, is I think that we wanted to be a little cautious on it right now that where the opportunity is that if something can happen strong out there, Kim and her team really can chase and get the right merchandise because of our speed to market. So I think we felt to be a little cautious. I would say going forward it’s not going to always be down to that level. Our plans are to be flat to a couple of percent up and with the cumulative stores we are opening and because we think we can deliver the business. But we do have a model pool where – we didn’t get hurt because I think that we have the flexibility when something is happening hot, we can chase the goods.

Paul Alexander – Bank of America

Okay, thank you.

Operator

We’ll hear next now from Jeff Black with Barclays.

Jeff Black – Barclays

Yes. Hey, congrats on a good quarter.

Bob Fisch

Thank you, Jeff.

Jeff Black – Barclays

Can you talk a little bit about the etc remodels, what we are seeing with these at this point in time, and really what we are seeing within the categories, particularly like sandals et cetera that you’ve added? Thanks.

Keith McDonough

I can answer financially. I mean, financially, Jeff, they are immediately accretive. It’s a matter of history that we see increased comps, generally increased sales per square foot, and delivery of additional profit out of that box that is paying off the additional investment required for the conversions in three years or approximately three years. So financially, they have been accretive and that’s why we continue to look out and do them strategically as they come up with lease expirations and when approached by developers. That’s the key because we hold the leverage at that point.

Bob Fisch

I think from merchandising position, do you want to answer that?

Kim Reynolds

Yes. To your question about etc, we are seeing a very explosive category in our sandal business right now. I alluded to it earlier. And we are very, very aggressively going after that at the same time. I would caution that there were certain – let’s say, in Rue Kicks or sneaker businesses that were very strong after – and sometimes these things are offset to last year’s business and not the pure plus all of the time, but we are very aggressively going after the category. It has performed extremely well.

Bob Fisch

I think also that Kim was alluding to categories of business that we’ve gone after a better jewelry business and we could do that even strong in our etc format because it has more space positioning, and so we are seeing good results there. So we now look to over 350 etc stores in 3.5 years. So we could consider that as something that that’s going to continue to grow profitability for us.

Jeff Black – Barclays

Great. Continued good luck.

Bob Fisch

Thank you very much.

Operator

Next now to Stephanie Wissink with Piper Jaffray.

Stephanie Wissink – Piper Jaffray

Good afternoon. Thanks for taking our question. This is Steph for Jeff. Kim, a two-part question for you. I was intrigued by what you were saying about your movement up in price. Do you think that you are graduating your existing customers or do you think you are capturing new customers? And if you are capturing new, where are they coming from do you think? And then secondly, Bob, a question for you. Just any differences in your strip center location performance by co-tenant, whether it’s target or Wal-Mart or others. Thank you.

Kim Reynolds

With regard to your first question, in movement up in retail, I believe we’re doing a combination of two things. I believe we’re trading up our current customer and I also believe we are gaining market share from other retailers. I think rue21 offers fast fashion. We ship to our source every day. That’s not the format for a lot of other retailers, and our target customers are very smart consumer. They shop in other retailers, but they buy at rue21. So I think it’s a combination of both.

Bob Fisch

And as far as strip center performance, a couple things. One, in just alluding percentage, strips outlets and malls have all been consistent. And so, to what we have mentioned in our comp store growth, it’s consistency strips versus the outlets and malls. I’ve seen continued strengthening in the strip centers. I don’t know exactly how Target and Wal-Mart are doing, but I think that the customer obviously loves to come to us because we are more of a specialty value boutique. So I see good things for us continuing.

Stephanie Wissink – Piper Jaffray

Hey guys, if I could just jump in with one more follow-up. Any thoughts around accelerating the plans for your ecommerce strategy, just given the success you've had in your store business? Thank you.

Bob Fisch

Right now, we’re reviewing ecommerce. We know that that’s an important segment to look at for the future. And as I’ve mentioned before on past calls or talking to some individual, I think that we have so many initiatives in place between opening up approximately 100 stores, making sure that DC is right, and hiring the right people as we also build on our business and allocation planning systems. That is something that we do see for the future. And I just still wanted to say something about it right now, but I don’t want anybody to think that we don’t think it’s important.

But right now we are strengthening ourselves also in viral marketing and social marketing, which is very important with our root community blogging. I think that’s important. We are looking at mobile marketing right now to develop that strategy stronger. And we are going after Facebook stronger to get more customers everyday in addition to looking at Foursquare, which is another new player out there in the industry. So I think that we are extremely interactive and will become even more. And when it’s the right timing, we will go that after ecommerce business. Thank you.

Operator

(Operator instructions) We’ll go next now to Michelle Tan at Goldman Sachs.

Michelle Tan – Goldman Sachs

I was wondering if you could talk about some of the drivers for the comp in the quarter, AUR traffic, et cetera. And then also, help us understand a little bit the seasonality of the business. A lot of retailers are in that transitional period between bringing back-to-school deliveries, and there is really not a lot that they are getting to drive sales. How should we think about the big months and the cadence for our business relative to the apparel guys that we are used to?

Bob Fisch

I’ll jump into the second and fourth, and then Keith will talk about the average retailers and driving the transitions. It’s interesting that you got that up because we were looking at our own businesses right now. The second quarter, especially going into late May, into June, early July, is a quick transition quarter. We are probably more competitive at that time and more – it's not a long-selling period cycle. And we really are getting very focused to get set for back-to-school, which is really a big part of our business. End of July, beginning of August through the whole month, it’s a very, very strong month comparatively to almost any month of the year, probably except for December. And so I think that right now it’s the highly competitive quarter and we will do well with our margins and everything in sales, but we’re really focusing – Kim and her team are focusing going into the third quarter.

Keith McDonough

Then from a sales standpoint, Michelle, the detail there is the transactions were up – the largest driver by far. UPT was down slightly. AUR are up. So overall it’s a great picture. We always look at transitions being the primary driver to sales.

Kim Reynolds

Michelle, I wanted to say one other thing about that. I think we all think about the second quarter as being very promotional and certainly we have a lot of competition out there this quarter. As we do every year at this time, I don’t want to underplay how important fashion is in every retail company, particularly at Rue. I have great selling wedges, I have great selling sandals, I have great selling fashion and tops that are not on promotion. And that’s a 12-month business. And I think the point Bob was trying to make is that we as merchants are maybe not offering as much merchandise that the customers love. And maybe that’s part of the malaise that’s happening at retail right now. It’s not just how much you promote.

Michelle Tan – Goldman Sachs

Thanks. And Keith, one quick follow-up. Sorry if I missed this in the prepared comments. But the SG&A for the second quarter, how should we think about the growth rate there?

Keith McDonough

In terms of what? I mean, is it – what exactly do you mean?

Michelle Tan – Goldman Sachs

In terms of SG&A, kind of growth trends as we move through the rest of the year. I know you talked about merchandise margin leveling off a bit. Any guidance on the SG&A on that front?

Keith McDonough

We’ve certainly beat up the non-comparables and the non-recurring. So you should have that. The SG&A growth rates year-over-year, I think you should remove those and maintain the kind of the same margin as a percent of sales that we have shown traditionally and historically. We feel pretty comfortable and that’s the way I’m looking at it from a fairly conservative standpoint.

Michelle Tan – Goldman Sachs

Okay. Great, thanks.

Operator

Next now to Janet Kloppenburg at JJK Research.

Janet Kloppenburg – JJK Research

Hi, Keith. Just a follow-up on – congratulations on a good quarter, guys. Really beautiful. Keith, on SG&A, I think you are saying we should keep it flat as a percentage of sales versus last year’s second quarter. Is that what your guidance is or –?

Keith McDonough

Yes, that’s my expectation. And that includes – what I’ve done is I’ve used that with regard to fixed costs inside the cost of sales as well. And the reason for that of course is that we are going out with low-single digit comp forecast.

Janet Kloppenburg – JJK Research

Right. Great. Yes. That’s – and then just in forecast, given – low-single digit comp forecast given – I think you are up against your easiest comparison for the year from last year, and on a two-year basis, very easy. So I was just wondering if you guys could talk a little bit why your top guidance is so low, or is it just that this is a competitive time and you want to maintain margin?

Keith McDonough

Well, we’ve said repeatedly, Janet, that our forecast for both short-term and long-term is low-single digit for this business. We’ve got so much white space out there. There is really no reason to forecast. I think the business model that Bob talked about, about chasing inventory, one of the reasons we are down from an inventory standpoint is because we over – exceeded the low-single digit comp for sales performance. We like when that happens. But forecasting this business is right to be out there at low-single digits, and that’s what we’ve done. When we see a change, a material change in that guidance, we’ve come to the market before and we will do that again.

Janet Kloppenburg – JJK Research

Okay. And for Kim, do we look for a continuation of increased AUR? I mean, couldn't that be a comp driver?

Kim Reynolds

Yes, it could be, Janet. We are looking to – it's a continuous program that I was hoping that we could have success with previously and we are continuing on that program, but yes, it could have a positive effect on our current performance.

Janet Kloppenburg – JJK Research

And then just lastly, on the inventory per square foot, I think you are down 12% per foot. Is that a constraint to comps? And I think you said you expect it to be flat to up. Is that what we should expect at the end of the second quarter?

Keith McDonough

Sorry. The inventory level?

Janet Kloppenburg – JJK Research

Yes.

Keith McDonough

Inventory level, I would say, would be up a couple percent. That is correct. And then we would be getting our folks really in position for the critical back-to-school season that really kicks off the last week of July, beginning of August. And our business obviously because of the team, business that you certainly know so well, that’s become the critical time period. So I think that being nimble right now is really good out there because there is a malaise out there of finding the right merchandising and that – to me, I don’t want to just – just like our real estate strategy, I don’t want to sit there and also buy in advance so much because I’ve got to buy it because I’m going to open 100 stores. We take our time. I think that we are able to do that in merchandise, Janet, especially when you look at the screen that you can get in one to two weeks, and that’s a big part of our business. And the same thing with fashion that Kim has been alluding to.

Operator

Ladies and gentlemen, it appears we have no further question this afternoon. Mr. Fisch, I’ll turn the conference back to you, sir.

Bob Fisch

Well, thank you very much. I appreciate everybody on this call and we look forward to continue to complete what we are doing and to increase our profits, as we’ve saying we are doing. And I look forward to speaking to everybody again individually and on this call. Thank you very much.

Operator

Ladies and gentlemen, that does conclude today’s conference. I would like to thank you all for joining in. Wish you all a great afternoon. Good bye.

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