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rue21, inc. (NASDAQ:RUE)

Q3 2010 Earnings Call Transcript

December 1, 2010 4:30 pm ET

Executives

Joe Teklits - IR

Bob Fisch - President and CEO

Keith McDonough - CFO

Kim Reynolds - SVP and General Merchandise Manager

Analysts

Paul Alexander - Bank of America

Janet Kloppenburg - JJK Research

Paul Lejuez - Nomura Securities

Sean Naughton - Piper Jaffray

Michelle Tan - Goldman Sachs

Operator

Good day ladies and gentlemen and welcome to the rue21 third quarter 2010 earnings conference. (Operator Instructions) At this time, I would like to turn the call over to Mr. Joe Teklits.

Joe Teklits

Thanks very much. Good afternoon, everybody. Thanks for joining us again for rue21's third 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 are aware, 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 and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to both known and unknown risks and uncertainties and could cause actual results to differ materially from such statements.

Those risks and uncertainties are described in the company's annual report on Form 10-K filed on March 31 of 2010. 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 this call.

And with that, I will turn the call over to Bob Fisch.

Bob Fisch

Thank you, Joe. And thank you, everyone, for joining us for our third quarter conference call. Joining me today on the call is our CFO, Keith McDonough, and our Senior Vice President and General Merchandise Manager, Kim Reynolds.

We are very pleased with the results for both the third quarter and fiscal 2010 year-to-date. We have been public for just a short period of time, a little over a year now. We have achieved over eight-and-a-half years of consistent earnings increases. We do despite staying true to our core strategies. One, delivering fashion at a great value to our customers; two, sales growth that is driven primarily by our very productive new store openings and square footage growth; and three, a flexible sourcing model and strong merchandise mix of girls, guys and accessories that allows us to drive margin growth.

I'm very happy to say that our third quarter sales increased approximately 20%. We achieved a comp store sales increase of 1.8% on top of the 13.5% increase in comp store sales for the same period last year. Also significant gross margin increased from the third quarter of fiscal 2009 with a 60 basis point improvement in merchandise margins over the same period last year.

During the third quarter, we were able to execute our normal value strategy in what was a very promotional environment, because we did not overly promote at the start of the back-to-school season in July. We were able to set the tone in the beginning of the third quarter, with regular value prices and promote accordingly to plan to make the most impact and drive sales.

We always want to focus on profit and not hurt our business in the long term just for the purpose of putting up short-term comp gains. And as you have seen from our sales trends this year our same-store sales, while very important are not the primary driver of our earnings growth and also not tied to just how well we performed a year ago. We write our business with short lead times and a focus on speed to market, so our same-store sales are mostly driven by available trends and how well our merchandising team takes advantages of those trends.

I think it is important now that I address the subject of products that caused pressures that could affect all retailers next year, including rue. In addition to our flexible sourcing model, we have many advantages that we believe will help us offset any cost pressures and allow us to continue to deliver margin growth.

First, our etc! accessories business accounts now for almost 25% of our sales year-to-date. This is a high-margin business and we do not believe it will be affected by increases in cotton cost to the same degree as apparel. We are continuing to aggressively go after this growth accessory business, in addition to a successful line of guys accessories offered under our cotton brand.

As we convert more stores to the etc! format, we not only drive square footage growth, but are able to take advantage of a higher margin accessory categories. Second, our focus on fashion at competitive, opening price points allows Rue to drive sales without relying on huge promotions. While we certainly can, and we do promote on key items, in fashion, our good, better, best merchandise strategy is working well and we found no price resistance when we offer fashion items that our customer loves.

As Kim will tell you, one of our best-selling items this fall has been a guy studded screen tee for $24.99.

Third, to improve margins, we are focused on improving our business processes and have added management talent to our planning and allocation team to accomplish our initiatives. We have several programs underway right now that will allow us to keep improving our ability to flow the right product and categories to the right stores and better allocate inventory to each store by classification and increase our gross margin.

We have tested some of these process changes and have gotten great results. So we see these improvements adding to our margins in 2011.

And finally, within the next 12 to 18 months we will strengthen our planning and allocation technology systems, and we believe this will further add to our profitability. Enhancements to our allocation systems are being developed right now with the expectation that we can go live within 12 months. This will be followed by the planning system implementation within 18 months.

Our new stores have again been a major driver of our 2010 performance. Our stores come out of the gate at almost 95% maturity and we achieve a 100% plus return on our initial investments within the first year of opening. This is predictable and consistent sales growth for us.

We opened 33 stores in the third quarter, and 95 year-to-date. We have also converted 31 stores to a larger etc! format. We have invested in a strong real estate team and portfolio management systems and see great opportunities in site selection for the immediate future.

Our flexible real estate strategy allows us to target underserved markets where our customer appreciates fashion ahead of value and wants a unique shopping experience that they can't find at a big box retailer. Of the 95 stores we opened through the third quarter of 2010, we opened 48 stores in strip centers, 46 stores in B and C Malls, and one outlet center location.

The key is that most of our stores are in centers where we are very unique and face less competition than we would in A Malls in major metropolitan areas. We give our customers an A Mall experience, and we will be able to leverage our favorable occupancy rates in these centers for at least the next 10 years. And we opened an additional 10 stores in November, which now gets us to a total of 105 openings for the year.

I know most of you are curious about our sales for the fourth quarter to date and this past Black Friday weekend. And while we don't normally comment on current quarter business, I will say that we were pleased with the traffic we saw in our stores during the Black Friday weekend.

The results we achieved were in line with our expectations and consistent with our guidance. We were happy with our results for November before Black Friday, during Black Friday, and we are very happy with our result after Black Friday. And I am pleased to say, we did not need to overly be promotional to achieve these results.

Looking ahead to the remainder of this season, we are in a position to deliver what a customer wants from us this holiday season, fashion and quality at a great value. That's the Rue business. We will give you more details on our 2011 earnings expectations on our next call, but at this point we are comfortable saying that we plan to continue to produce top-line percentage growth in the high teens and net income growth of at least 20% on an annual basis.

Next year we are planning to open more than 105 stores, and once again next year, we are confident that these new stores will drive much of our earnings growth.

Now I would like to turn this call over to our head merchant, Kim Reynolds.

Kim Reynolds

In the third quarter we continue to gain brand recognition and capture market share by delivering fashion and quality to our customers at a tremendous value. Strong categories for the quarter included boots, sweaters and fashion knit tops. Layering was a key look for back-to-school, and we had a great mix of shrugs, cardigans and sweaters. There is little resistance to price if we have the right fashion, and that's what we are going after.

If we can sell fashion denim at $19.99, which is a pretty amazing starting point compared to our competitors, then we don't need to promote it to drive the sales.

I want to take a minute to give you our point of view on how we plan to deal with changing costs of raw materials and labor in 2011.

We are not obligated to any one vendor or any overseas factories in sourcing our merchandise. Our vendor matrix has anticipated the effects of the increase in cotton, and cotton based yarns through a series of strategies that include creative sourcing, new fabric development, and closer timing of commitments. Our vendors understand and embrace our strategy of great value, and in turns, we expect to see minimal impact through the first half of 2011.

Also, we're focused on offering the right mix of merchandise in our stores, whether it be fashion or key items, or between girls, guys and accessories. We are proud to be a leader in the teen fragrance market. In the third quarter we had a successful launch of our 12th exclusive fragrance, Carbon Elements for guys, which builds on the company's growing carbon and CJ Black Guys merchandise assortments.

There are not many retailers maximizing the accessories business right now, and this is a real advantage for us. As Bob mentioned, we think the etc! accessory category is an important part of our business, And we are looking to increase our market share in this arena.

And now I am going to turn it over to Keith to give some details on our financial performance.

Keith McDonough

Thanks, Kim. I will review the details for the quarter and then provide our outlook for the fourth quarter and I will also make some additional commentary regarding the first quarter of 2011. Net sales were $163.9 million, up 19.5% from $137.1 million for the third quarter. The increase included a comparable store sales increase of 1.8% for the quarter, built upon a 13.5% increase of a year ago.

Total transactions were up 21% in the quarter, and AUR was down 2.9% from last year, partly related to the increase in the etc! accessories business and partly related to comparatively low sales in outerwear in October versus the same period last year. By the way, we are seeing a nice rebound in outerwear in November and AUR.

We opened 33 stores in the quarter versus 29 stores in the third quarter of 2009. We converted nine stores in the quarter versus seven last year. Square footage at the end of the quarter was up 23%. We operated 628 stores at the end of the quarter consisting of 493 comparable stores, and a 135 or 21.5% non-comparable stores, versus last year's total store count of 534 which included 386 comparable stores and 148 or 27.7% non-comparable stores.

Gross profit for the quarter increased by 21.1% to $60.1 million and gross margin expanded by 40 basis points to 36.6%. The gross margin expansion was driven by a 60 basis point increase in merchandise margin, and was offset a little by 20 basis points of deleverage of the other fixed costs in our cost of sales.

Selling, general and administrative expenses increased 21.4% to $42.6 million, and as a percent of sales, expenses increased by 40 basis points to 26% versus 25.6% last year. The deleveraging was fully attributable to public, company and share-based compensation expense. Without these line items SG&A expense was leveraged by 30 basis points in the quarter. And again, that is on a 1.8% comp sales quarter.

Operating income for the third quarter was $11.8 million versus $10.0 million a year ago, up 17.3%, including the burden of the new public, company costs and share based compensation expenses that we did not incur a year ago. Without these costs, operating income would have grown 27%, and operating margin would have expanded by 40 basis points in the quarter.

The quarter's effective tax rate was 38.9% versus 39.5% for the same period a year ago. The lower effective rate was primarily a result of an increase in the state tax credits and additional deductions related to ISO stock options.

Finally, net income increased 19.5% to $7.1 million for the quarter, up from $6.0 million a year ago. Fully diluted earnings per share were $0.29 versus $0.26 a year ago on a share count of $25.0 million this year versus $23.1 million last year.

To review quickly our performance for the three quarters year-to-date, sales now stand above last year by 20.1% at $444.6 million, reflecting a comp increase year-to-date of 2.4% and the 23% square footage increase.

Gross margins expanded by 170 basis points, all of which is attributable to improved merchandise margin. Operating margin expanded by 70 basis points, and operating income is up 34% including public, company and share-based compensation expenses is up over 49% excluding those non-comparable expenses. Net income from the three quarters is up 35%, and margin has increased by 50 basis points.

The third quarter balance sheet will be the last one we present with a private, company prior year comparative due to our IPO last November.

Highlights of the third quarter balance sheet include the following: Cash and cash equivalents were $18.7 million, compared to $5.3 million last year. Inventory was up 29.9% over last year and up 5.5% per square foot, partially as a result of new store openings in the fourth quarter and partially in order to maximize deliveries to our stores over the holiday season. We have no long-term debt outstanding compared to $21.2 million a year ago, and our revolver facility capacity remains at $85 million.

Turning to our outlook, we are raising our year-end EPS guidance range to $1.17 to $1.20. For the fourth quarter we expect diluted earnings per share in the range of $0.40 to $0.43, using a net income range between $10.0 million and $10.8 million, and diluted shares outstanding of approximately $25.0 million.

This earnings range is based on estimated total sales growth in the range of 19% to 21%, including low-single digit comp stores sales on top of a comp sales rate of 8.6% last year in the fourth quarter. One would note in 2010 we were reducing our forecast for CapEx for this year, as discussed in past conference calls, from $32 million down to $29 million.

I have a few additional comments regarding the first quarter of fiscal 2011 for those of you that will be building your 2011 models prior to our coming back on a call again. We will be forecasting the first quarter 2011 by applying the same long-term sales assumptions of low-single digit comps and total sales growth in the high teens range.

It is noteworthy that similar to the fourth quarter of 2010, we achieved a fairly robust comp sales increase of 7.7% in the first quarter of 2010, while we do not expect gross margin expansions while we do expect gross margin expansion for the full year, our first quarter gross margin expectations are that we will maintain those of the first quarter of 2010, noting, that we are up against the strong gross margin increase for the first quarter of last year.

We also expect operating margin to be similar to last year for the quarter and finally we expect the same effective tax rate after excluding the discrete event of our secondary offering last year, the cost of which was not deductible and grow that rate up last year.

As a reminder our long-term forecast metric include the following. Square footage growth in mid-to-high teens, low single digit comp growth, gross margin expansion of at least a 150 basis points over the next five years. And we will continue to leverage SG&A expenses by not growing them as fast we grow sales. Finally, those metrics will generate net income growth in access of 20% over the long term.

And that completes my prepared remarks. And so, I will turn this call back over to Bob.

Bob Fisch

Thanks, Keith. Again, we are very pleased with the results we achieved this quarter. And my management team is excited about the opportunities we see to drive total sales and earnings growth through the holiday season and into 2011. And now, I'd like to turn it over for any questions that you would like to ask.

Question-and-Answer Session

Operator

(Operator Instructions) First, we'll hear from Brian Tunick, JPMorgan.

Unidentified Analyst

This is (Iak) in for Brian. I wanted to focus on the accessories biz that you alluded to as a big margin opportunity for you in 2011. My questions are, how fast is that business currently growing from that 25% penetration that you mentioned? Where could that potentially go to? And then, can you give any color about the margin differential between the accessories biz and the apparel businesses?

Bob Fisch

We are very pleased with the etc! business as I discussed in and we don't really give out the numbers, but we had a very strong growth in the third quarter of etc! and the margins are very strong as accessory margins usually are including shoes and jewelry and things like that. So we are very pleased with that. We don't give out the actual numbers on that, but we believe that by continuing to improve the etc! business and keep developing it, it will also help our total margin growth for the company.

Unidentified Analyst

And then just a quick follow-up, I know you guys the new stores opened at 90%, 95% maturity. The question is in year one when new stores enter the comp base, should we assume that off of those tough volumes that the first year comps are flat to slightly down?

Keith McDonough

We have a 15 month comp rule first of all, so that the robust sales that we opened to especially in those first three months, we keep them out of the comp base to offset that three months factor. So the 15 month they come into our comp base, but by that time, usually they sell right in and are comping nicely with the rest of the chain, so are very consistent.

Bob Fisch

I will also add that when we look back over stores we've opened up since 2004, 2005, 2006, 2007, 2008 and 2009 into 2010 that we've had consistent growth in each of those year openings, each year after. So it has been very consistent. So we are pleased to see that and that's why we have entertained growing the stores the way we have.

Operator

Our next question today comes from Randy Konik, Jefferies.

Unidentified Analyst

This is (Amanda Severn), on for Randy. I guess, first, could you give any color on the comp in the quarter between Girls, Guys and the Accessories businesses?

Bob Fisch

We don't usually break that out. I will say that the comps were very good for all three, and probably I will say that was a little stronger in the accessories and the etc! area. And I think that what's very positive is because we have such a competitive advantage also where there's very little competition as we continue to grow rapidly in this area.

But we were happy with our businesses overall.

Unidentified Analyst

Okay. And then, is there any color you could give just on how the comp progressed throughout the quarter? Any further detail there?

Keith McDonough

I will say, in all three quarters we saw a consistent growth in positive comps. What I think I'm most pleased about is not just the performance of back-to-school, which was August into early September, but the factor that we had a positive growth in October where we were most nervous. Some of you might remember even, when we went on our road trip in some of our other calls, we had such a positive October, partly because it was one of the coldest Octobers in history, and outer vests, sweaters and other areas were extremely strong.

And I'm pleased to say that we were able to have a very good growth, and because of our variable concepts of having etc! in addition to Girls and Guys. And so we were very happy with the results of all three months in the quarter.

Operator

Next up, we hear from Lorraine Hutchinson, Bank of America.

Paul Alexander - Bank of America

This is Paul Alexander for Lorraine. Can you give us any more information on the stores planned for next year? I know you'll give us more next quarter, but for now, could you tell us anything directionally about if they'll be skewed towards any regions or formats or how many sites you've secured so far?

Bob Fisch

To your point, we will give a lot more color next autumn. But what I will say is that there'll probably still be maybe a little more strip center opportunity versus the malls opportunity. Where in the past it had been 65% strip centers to 35% malls, it's now close to 50/50, maybe a little higher in strips. And that's because of the incredible opportunity of locking in great rent prices in really good centers over the next 10 to 15 years for the centers that we go into a mall.

So you would be crazy not to take advantage of it. So we feel very good about that. And we are not ready to announce that breakout total yet for the year by quarter, but it will be consistent. And we have approved a significant amount. The thing which you got to remember also is, we have speed to market in real estate. We opened a store within six weeks after taking possession of a center.

So I'm in no rush to make a deal. I'll make a deal when the deal is right to be made. So we are in very good position for 2011.

Paul Alexander - Bank of America

And then just changing gears a little bit to talk about the sourcing environment again, can you just tell us a little bit more about the dynamics of those importer relationships and the structure of that? Was expecting gross margin expansion next year, but expecting gross margins to be flat early, but at the same time not having the visibility towards pricing in the back half, what can you tell us more about those relationships to put us at ease about whether or not costs are going to get passed on to you really strongly from those under us?

Keith McDonough

I think that it's right and prudent right now for us to be conservative in our first quarter projections. And that, because we are up against a very significantly high gross margin of last year based on also with a robust 7.7% sales, I think its right for this company to be conservative. But at the same time, we also mentioned that we felt very strongly that we will have a nice increase for the total year in gross margin.

With that I'll turn it over to Kim to answer the rest of the question on sourcing.

Kim Reynolds

As you know, rue21 doesn't own or operate any individual manufacturing facilities, and we rely upon our marketplace for sourcing all of our product.

As I mentioned in my prepared comments, our vendors understand and embrace us as being a value business. I know there has been pressure to increase certain costs. So far we have very minimally been affected by that.

As I mentioned, there are some strategies that I feel comfortable sharing and some others that I don't really feel comfortable sharing that we are still working with our manufacturing sources to maintain the value (crossing) that rue21 gets day in, day out.

Bob Fisch

I would also add Kim, that we are anticipating in the future, including 2011, advanced efficiencies due to planning allocation, business process change and improvement, as well as system implementation in the planning and allocation areas.

So we think those areas are going to key. Especially as the year rolls on, we are probably within the next couple of weeks doing final negotiations for to begin the system implementations.

Operator

Our next question today comes from Janet Kloppenburg, JJK Research.

Janet Kloppenburg - JJK Research

I just wanted to ask just a little bit about your comments on the first quarter. I know you had a very good one last year. But there were some things you were saying in trend or in pricing. And I heard your comments about sourcing. That makes you step back a little bit when you think about that quarter?

Bob Fisch

No, we are not concerned at all about that. We think we are going have the profit increase that we will give to our guidance. And we are not concerned at all Janet. I just said that we just want to be a little conservative about it, but I think it's just prudent.

Janet Kloppenburg - JJK Research

Okay, alright, I just wondered about that. I also didn't hear what your inventory for this quarter, was up right now. Did you guys say that?

Bob Fisch

We did. 5.5% at the end of the third quarter.

Janet Kloppenburg - JJK Research

5.5%. Okay. And should we expect it to end the year at that level?

Bob Fisch

No. It will probably be down from that Janet. There is a couple of reasons that I've said that we are well positioned for that 5.5%; one position is that you might recall, we stopped opening stores at the end of the third quarter last year. That's not the case. We had 10 more stores in waiting at the end of the quarter this year.

And also, we want to ensure deliveries for our stores this holiday season.

Janet Kloppenburg - JJK Research

I wonder what it was per square foot, like on a comparable basis, Keith.

Keith McDonough

You're talking about projecting the year end through, right? It's 5.5%.

Janet Kloppenburg - JJK Research

On a comparable store basis?

Keith McDonough

Yes.

Bob Fisch

What Keith's saying Janet, the biggest thing and the last thing I would like to see this company do for holiday is not to have its delivery and merchandise take care of our customers. So it's not our future product that we are going to have to jeopardy, it's like moving things in a week early to 10 days early, and that's the reason why.

And I think that it's the right decision to make. And when we end the year, we feel comfortable where our stop position will be.

Keith McDonough

And I would say, Janet, to answer your question it's probably something less than 5.5% on a comp basis.

Operator

Next up, we'll take a question from Paul Lejuez, Nomura Securities.

Paul Lejuez - Nomura Securities

You mentioned not seeing price resistance a couple of times during your prepared remarks. I'm just wondering, does that mean you guys think you have an AUR opportunity next year, and if so, where do you see it?

Kim Reynolds

Paul, I think what we alluded to earlier, well I'll say outright is that we've had a lot of success in our good, better and best strategy that we started almost a year ago. And that meant not rating the retail and basic commodities, but pushing the envelope on fashion. And Bob alluded to a best-selling screen that we're currently performing well during the third quarter at $24.99.

We've never even pushed the envelope to $19.99 in our screen business but if the merchandise is something that a customer loves, we are not finding price resistance there.

Paul Lejuez - Nomura Securities

But is that the plan at this point? I mean are you planning to push it further relative to what you've done?

Kim Reynolds

We're in the fashion business, and when we see the fashion is appropriate to the customer and we've tested it for the last year or so in specific categories and I see it growing as a percentage of our total business. I am not going to say everything going to be higher, but if it's something the customer loves, we can command a higher retail.

Bob Fisch

I can help little on that too I think is that everything should be done in moderation. And nothing at Rue is going to be done in extremes. And while we are going after key items and doing that, as you know, we have a balance of a key item and fashion business. And I think that's what helps makes us a little more unique.

And so we'll tweak the pedal a little to keep raising the bar based on sale. So for example, in our boot business we have incredibly great fashionable fur boots at $39.99 that will be competitively at $60 to $80. So even though that's a high price point, it certainly isn't for that item. And in these underserved markets, it's an incredible value to people.

So I think that we are in the fashion business, and to me right now that's the key to success, is to give the merchandiser the customer that they love.

Paul Lejuez - Nomura Securities

And Keith, you lowered the CapEx guidance for this year. Was there something that transfers over to next year or are the stores costing less to get built? And I don't know if you can maybe help us with a CapEx range for what to expect next year.

Keith McDonough

I think it's more on the IT side, Paul that's not materialized late in the fourth quarter. And I think that will roll over to the first quarter of 2011.

Paul Lejuez - Nomura Securities

So 2011, we should expect a slightly higher CapEx relative to 2010.

Keith McDonough

Yes.

Operator

Next up, we'll take a question from Sean Naughton, Piper Jaffray.

Sean Naughton - Piper Jaffray

So on the accessories front, just to keep hammering away on this issue, I believe you guys tested some higher price points, fashion accessories and some doors for back-to-school last year. Can you talk about how successful this was in the most recent campaign that you guys did for back-to-school this year?

And is there an ultimate kind of percentage that you guys are thinking about for this business to be as a percentage of the total overall?

Kim Reynolds

We did increase both retail as well as case level of product in certain of our larger format etc! stores with success. And a lot of those successes were also expanded to the rest of the chain, so it becomes a learning ground for the total rue company. And we see that progression continuing in more categories than just jewelry and we do continue that strategy of introducing higher price point and better fashion in our accessory categories in each of the etc! store that we open.

Bob Fisch

I don't have an exact percentage to give you right now in etc! business. I do see the percentage growing from the 25%, but I don't know how dramatic it will be, because I don't see the girls or the guys business dropping in their sales. So I think it's just going to be a great plus business to us on that Sean.

Sean Naughton - Piper Jaffray

Then on the merchandise margin, obviously it came back a little bit in the third quarter this year versus the down 170 you had in Q3 last year. How should we think about gross margin over the next couple of years? I think you talked about it growing 150 basis points over the next few years. Could that be more of a combination of leverage or could it be potentially on the merchandise margin?

Keith McDonough

We think it's the merchandise margin. We also have created a large window, three to five years, to accomplish that. And every quarter, Sean, we've been delivering some pretty massive merchandise margin gains. So we always look around the room and decide whether we want to continue to give that guidance, and yes we are comfortable giving that level of guidance over the long term. So we expect and anticipate expanded merchandise margin.

And I would remind you again that Kim Reynolds and Bob Fisch have just been through like a five-quarter IMU initiative that has produced tremendous results for the company. The gains that we've seen in merchandise margin have been spectacular over the last five quarters.

Bob Fisch

The other thing to add to what Keith is saying is this is the business where the merchandise makes the difference, and we're going to keep working stronger than ever on that that we feel that there is lot of leverage and opportunities as Keith said.

I've very strong people like Mark Chrystal, the Head of our Planning and Allocation area, and he has been with us now for two-and-a-half years. He and his team along with Kim are going to make a very strong gain where the total margin will increase not only because of mark-up but because of being able to control the inventory by store.

When you open up so many stores as we do, you can make mistakes in inventory. That becomes a positive opportunity for the future. And we really review that in each category of business in each of our stores. So I see that as a real positive.

The world isn't just about promoting. Black Friday was in some ways of an insult to retail intelligence sometimes, because it's how high can you promote. And what I've said before is that I am going to be able be promotional, but the success of rue21 is building our brand for the future and putting out merchandise that's exciting for the customer that the pressure is on Kim and Mark and the team to produce that, and that's where the pressure should be.

Sean Naughton - Piper Jaffray

Just lastly on the inventory front. Are you seeing good product availability with the vendors that you are working with in terms of fashion merchandise that you were looking forward to put in your stores?

Kim Reynolds

We have great makers that actually create our fashion vision. I'm not sure how much my vendors actually give us of that. We did (inaudible) them. So I'm not seeing a shortage of fashion in the marketplace.

Operator

(Operator Instructions) Next we'll go to Michelle Tan.

Michelle Tan - Goldman Sachs

I think we've talked about some opportunities you've been seeing actually with stores that are on the mall and maybe in some higher traffic locations than you have looked out in the past. Any update you can give us in terms of what you're seeing on rents in those types of locations, how those locations where you have opened are performing, what the productivity looks like versus the cost and the bottomline margin?

Bob Fisch

Michelle, I couldn't be anymore pleased than to see what's going on in that opportunity to go after that mall business. We do very well in our C malls, as you know, and we've now started to open up a good amount of D malls, and we having very, very strong success.

I am not seeing the rents going up. I am still seeing the rents going down. And as I said earlier, that locks in rents for over 10 to 15 years. So when this world gets better again and everything is all happy, everybody is happy and smiling, we'll still be in great position to leverage those rents.

So the margins are very strong in there. It's not something to get into specifics right now. We will continue to keep building in those centers as well as going after our underserved markets.

Michelle Tan - Goldman Sachs

What about an online opportunity? Have you thought about that more? We keep hearing about all the strength that you're starting to see with online with the holidays. What's your thinking there?

Bob Fisch

Well, we are going to review what's right to do in that. It'll be wrong for us not to do that, Michelle. So we are going to spend time this year to review that and see when is the right time to do an internet e-com business. It's probably not a question of not doing. It is a question of when. And right now, because we have so many major initiatives of putting together our allocation and planning systems, building our D-C expansion or to handle the growth of all the stores and all the other IT major initiatives that we are putting together, it would be wrong to try to start that now. But we're absolutely going to spend time this year to investigate what's the right timing to do that. And then at the right time this year, we would let you know when we think that would be right for the future.

Operator

(Operator Instructions) That does conclude our question-and-answer session for today. I'd like to turn the call back over to our speakers for any additional or closing remarks.

Bob Fisch

Thank you. The closing remark that I have to say to everybody is I really wish everybody a very happy holiday season and new year if I don't speak to you and look forward to seeing you all in the near future. Everybody take care for now. Thank you very much.

Operator

Ladies and gentlemen, that does conclude today's conference. Thank you all for your participation.

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