rue21 CEO Discusses Q4 2010 Results - Earnings Call Transcript

Mar.15.11 | About: Rue21 Inc (RUE)

rue21, Inc. (NASDAQ:RUE)

Q4 2010 Earnings Conference Call

March 15, 2011, 4:30 pm ET

Executives

Joseph Teklits – IR, ICR

Bob Fisch – President and CEO

Kim Reynolds – SVP and General Merchandise Manager

Keith McDonough – CFO

Analysts

Anna Andreeva – JPMorgan

Adrienne Tennant – Janney Capital Markets

Michelle Tan – Goldman Sachs

Paul Lejuez – Nomura Securities

Paul Alexander – Bank of America/Merrill Lynch

Jeff Klinefelter – Piper Jaffray

Janet Kloppenburg – JJK Research

Jeff Black – Citi

Randy Konik – Jefferies

Operator

Good day and welcome to the rue21 Fourth Quarter 2010 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Joseph Teklits of ICR. Please go ahead.

Joseph Teklits

Good afternoon. Thanks for joining us for rue21 fourth quarter and fiscal year 2010 conference call. Hosting today's call will be Bob Fisch, President and CEO.

As a reminder, some of the statements made on the call during the prepared remarks and response to your questions may constitute forward-looking statements that are made pursuant to 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 that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the company’s annual report on 10-K, filed March 31, 2010.

Investors should not assume that the statements made during the conference call will remain operative at a later time. Rue21 undertakes no obligation to update any information discussed on this call.

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

Bob Fisch

Thank you, Joe and good afternoon everyone. I am very pleased with the results we’re able to deliver to our shareholders again this past quarter. For the fourth quarter, we achieved a net sales increase of 22%, a comp sales increase of 1.5% on top of an 8.6% increase for the same period in 2009 and a net income increase of 41%.

Turning to the full year, 2010 was our first full year as a public company, but it reflects the type of consistent results that we've been able to achieve for 36 straight quarters. Looking back at the year, we certainly enjoyed a strong first quarter on same store sales increased by approximately 8%, and operating income almost doubled. But it was our ability to consistently grow earnings every quarter, even when comps were more challenging that illustrates what our model is all about.

We are not just a comp story. We are a total growth company and we drive profits with square footage increases, margin increases and comp store sales increases.

In 2010, our net income increased by 37%, and we again achieved our financial goals for the year. We operated throughout the year with a strong balance sheet and cash flow and as of yearend, we had no borrowings on our credit facility, no debt and $50 million in cash and cash equivalents compared to 27 million at the end of 2009.

Rue21 is a new reality of retailing. We leverage our flexible sourcing model with domestic based vendors and domestic importers to deliver great fashion, quality and everyday value to our customers.

We are gaining market share as we continue to grow and open stores in new markets. I'm pleased to say we are now at 654 stores strong in 44 states. We also continued to increase the average square footage of our stores as we convert approximately 30 to 35 per year to the larger etc! format.

Consistency and experience is key to our success, and our management team continues to focus on speed to market capabilities in merchandise and real estate as we open in underserved communities that are starving for fashion. Let me give you an example of that. New Iberia, Louisiana, a community of 50,000 people with the nearest mall is at least 20 miles away.

Wal-Mart, we shadow Wal-Mart a quarter miles away from our store, and we expected to do approximately $900,000 our first year in the store. Well, the store has achieved almost $200,000 in the first 20 days.

We have shown that disciplined growth is sustainable, and we have a lot of momentum going into 2011. While our girls business remains strong in 2010, accessories was our fastest growing category of business and we continue to see significant opportunity across this category going forward.

Our five prongs of etc! footwear, fragrance/beauty, accessories, jewelry and our tarea brand of intimate apparel and sleep wear has been huge in driving incremental sales. This is a high margin business with great potential for us at rue.

We will continue to build our regular price footwear business and we expect to become the dominant specialty retailer in this category within the next four to five years. The business is there to be had. We are the fragrance destination for our customers also.

During 2010, we launched our 11th and 12th exclusive fragrances, 21 Black and Carbon elements and recently also re-launched our exclusive fragrance tarea by rue21. Kim and her team are doing an amazing job of staying on top of trends, and our stores today reflect our ability to deliver fashion at a great value which has been and will continue to be a key to our success.

We continue to push for merchandise that the customer loves and not just likes. And I will tell you our customer loves what we've been delivering so far for this spring.

For our real estate strategy, our goal was 100 new stores in 2010, and we opened 105 stores during the year across all real estate classes and all regions of the country and in small and medium sized markets. We also converted 31 stores to our etc! concept. Our flexible real estate strategy continues to be successful.

We opened stores in 50 malls, 53 strip centers and two outlet centers in 2010. We saw consistently strong results and returns on investment on these 2010 openings and continue to see plenty of great real estate opportunities for this year. In 2011, we now plan to open 110 new stores and convert 35 stores to etc!

Now, I would like to focus on cost concerns. While the economic environment remains challenging and the pressure on raw material costs continue to increase, we believe that rue21 is in a unique position to control the impact of that on our business. And we have several key initiatives that position us well for the future that I'd like to discuss with you.

One, we are not dependent on any one supplier. So we have the ability to maneuver around sourcing issues. This past year, we expanded our vendor matrix by over 20% and now sorts from over 450 domestic based suppliers and domestic importers.

With our speed to market merchandise strategy, we don't need to place orders as far out as many of our competitors. Not only can we react quickly to get in and out of trends, but we aren't locked into the higher prices some of our peers are experiencing.

Two, we continue to gain leverage through buying clout. We are now purchasing for 700 plus stores so the larger we become, the more leverage we have. We drive costs down by the fact that we are a growing retailer and a company that many vendors are eager to partner with.

Three, we will continue to expand our merchandise assortment and aggressively pursue our etc! business. Right now, approximately 25% of our business is from the etc! category which is mainly a non-cotton business. As I've said previously, as we convert more stores to etc!, we not only drive square footage growth but we are able to grow these higher margin etc! categories.

Number four, we believe there is an opportunity to improve both our sales and our merchandise margin performance through new planning and allocation business processes and systems. And we are developing and implementing strategies that will enable us to better distribute the right products to the right stores to maximize results at the right time.

And finally, we are not seeing any price resistance when the fashion is right. We have the potential to raise prices on certain better quality fashion items, not because of necessity but because of opportunity. Our good, better, best strategy has shown that there is no price resistance when you have the right fashion and quality at everyday great value.

I will let Kim Reynolds share a little more about some of our merchandise plans for 2011 but what has been key is that we saw very good regular price selling in juniors, guys and accessories in the fourth quarters that is carrying through into the spring season of 2011.

In the fourth quarter, our good, better, best strategy helped to push our AUR higher by approximately 3%. We are seeing even higher AUR increases in quarter one. And I feel very good about our February results and momentum going into Marpril period which is March and April.

So to wrap up, we are proud of our fourth quarter and fiscal 2010 results, both the growth that we posted and the consistency that we were again able to deliver. We feel confident about 2011. We believe our real estate opportunities and current merchandise trends gives us the ability to continue to gain market share.

While there are industry pressures caused by rising raw material costs, our business model gives us the flexibility to maneuver around cost inflation and will give us a competitive advantage when some of our peers may be forced to raise prices. We are confident that for the 10th year in a row, we will deliver on our goals which include at least 20% earnings growth.

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

Kim Reynolds

We really focused on providing our customers with fashion and quality at a great value in the fourth quarter and the results showed with higher AURs and stronger regular priced selling. Boots and fashion tops were strong sellers and going into the first quarter of 2011, we’re continuing to see a trend of regular priced merchandise performing well.

We have already started getting some strong weeks and girls and guys better denim, girls and guys shorts, passionate tops and our amazing sandals. So we think we have a good indicator, earlier than usual that we’re in right direction as we move forward.

Our exclusive and unique assortments are testament that when we offer our customers fashion, quality and value that last, there is no price resistance. For example, we have denim shorts and other shorts for $19.99, which is a better starting price than our competitors and have achieved tremendous sell-throughs without needing to promote. It continues our everyday great value strategy.

Our highest price denim has been the best in terms of all the jeans we offer right now. As Bob told you, etc! was a growing category for us this past year and we see this as a category with great potential for 2011. Etc! currently represents over 25% of our total sales.

One of our competitive strengths we offer to our customers is the ability to create an entire look. They combine a complete house in our stores including shoes, bags, belts, jewelry, cosmetics and fragrance in a fun-filled good atmosphere. In most of the rural areas, we are also located, we’re the only retailer offering the shopping experience.

We’ll continue to launch new exclusive fragrances in 2011, and we have planned to expand our offerings in etc! to include more of rue beauty products such as nail polish and body lotions as well as expanding our tarea brand to offer more bras and undies.

My team and I are committed to both strengthening our existing vendor relationship as well as forging new partnerships when it makes sense for us to do so. We know there is pressure on costs out there but we have the flexibility to maneuver around the trouble areas and source to find the best prices.

We are controlling costs, not letting costs control us. We have vendors competing for our business and our speed-to-market merchandise strategy means we are never locked into high prices but it is in our business model. But again, what is most important, we feel very good about spring and the merchandise in our stores, our good, better, best strategy continues to deliver results. There's no price resistance when you have the right fashion at everyday great value and that’s what we focus on delivering to our customers.

With that, I will turn the call over to Keith McDonough to go through the financials.

Keith McDonough

Thanks Kim. I'll review the details on the financials for the quarter and year and then provide our outlook for 2011. Net sales for the quarter were $190.1 million, up 22.3% from $155.4 million for the fourth quarter of 2009. The increase was driven by a comparable store sales increase of 1.5% for the quarter combined with the weighted average footage growth of 24% from a year ago.

This comp increase was on top of an 8.6% increase in the fourth quarter of 2009. We operated 638 stores at the end of the quarter and year, consisting of 523 comparable stores and 115 non-comparable stores or about 18% of the total versus last year's total store count of 535 which include 417 comparable stores and 118 non-comparable stores or 22% of the total.

The comp store increase was driven by an increase in AUR of 2.8% offset by decrease in units per transaction of 0.9%. Each of our major merchandise categories performed well, especially accessories.

We opened 10 stores in the quarter versus three stores in the fourth quarter of 2009 and did no conversions in the quarter compared to one done last year. Gross profit for the quarter increased by 22.7% to $68 million and gross margin expanded by 10 basis points to 35.8% due to stronger IMU in the quarter. Other fixed costs and cost of sales held constant as a percent of sales from last year.

Selling, general, and administrative expenses increased 17.1% to $44.3 million. As forecasted, public company expenses and stock comp expense differences from last year in Q4 were favorable when we include the final Apax [ph] management fee charge that was paid in conjunction with IPO in November 2009. Excluding these costs from this year of $1.2 million and last year of $2.6 million, expenses grew by 22.3% for the quarter.

Operating income for the fourth quarter was $17.8 million versus $12.9 million, a year ago, up 38%, including the non-comparable expenses, I just described. Excluding those same expenses, operating income increased by 22.8% in the quarter.

The quarter’s effective tax rate was 38.5% versus 39.5% for the same period a year ago. The lower effective tax rate was primarily a result of an increase in state tax credits and additional deductions related to ISO stock options.

Finally, net income increased by 41% to $10.9 million for the quarter, up from $7.7 million a year ago. Fully diluted earnings per share were $0.44 versus $0.32 a year ago on a share count of 25.0 million this year versus 24.3 million last year.

Turning to our results for full 2010 fiscal year. Sales increased by 21% to $635 million reflecting a comp store sales increase for the year of 2.1 on top of 2009's full year comp rate of 7.8%.

We opened 105 stores and closed two and the total weighted average square footage growth for the year was 23%. This is on top of opening 88 stores in 2009 and closing two that year.

For the year, the breakdown of our sales is as follows. Girls’ apparel grew by 19% and represented 56% of sales versus 57% in 2009. Guys’ apparel and accessories grew by 17% and represented 18% of sales versus 19% in 2009. And finally, girls’ accessories or our etc! category grew by 28% and represented 26% of sales versus 24% last year.

Gross margin expanded by 120 basis points to 37.0 and operating margin expanded by 90 basis points to 7.9%, including incremental public company and stock comp expenses that negatively impacted margin growth by 20 basis points. Depreciation and amortization also increased by 20 basis points year-over-year.

Net income for the year increased 37% to $30.2 million and 22 – up from $22.0 million a year ago. And earnings per share were $1.21 versus $0.96 a year ago.

Moving onto some balance sheet highlights, cash and cash equivalents grew by 87% or $23.4 million to a balance of $50.1 million at year end. Inventory totaled 96.1 million, which is 32% higher than last year. Inventory to square footage basis was up 5.6% which relates to our spring sales expectation.

I would also add that comp inventories near zero at mid quarter are one 2011. Our payables leverage on inventory grew by 290 basis points year-over-year. Payables represented 85.4% of inventory at year end reflecting a ship from 75 day terms to 90 day terms with a portion of our list of U.S. based import vendors.

Our current ratio is up to 1.42 from 1.23 last year, and equity now represents 39% of our assets at year end compared to 36% a year ago. We have zero long term debt on the balance sheet but our revolver facility allows for borrowing capacity, up to $85 million and carries an accordion feature for another $15 million if ever necessary. We did not utilize the line at all in 2010 and have no plans to in 2011.

Now, turning to our outlook for 2011, as we've stated, we plan to open 110 stores in 2011 with approximately 35 stores opening in the first quarter. We are also planning 35 conversions this year with 10 in the first quarter.

We may close the additional [ph] stores later in the year, all which would have leases that are expiring. We’re planning for a low to mid single-digit same-store sales increase for the first quarter and low single-digit increases the remainder of the year.

We expect gross margin for the year to increase by approximately 20 basis points with the greater part of that progress of that goal relative to last year coming in the first half and annual operating margin to expand by approximately 20 basis points, more than offsetting incremental stock comp expenses and increasing depreciation as a percentage of sales.

So, for the full year 2011 incorporating the store growth and same-store sales increases, I have discussed. We expect sales growth to be in the high teens and net income to grow by at least 20%. EPS to be in range of $1.40 to $1.44 on a fully dilutive share count $25.2 million.

For the first quarter of 2011, we expect diluted earnings per share in the range of $0.27 to $0.29. this guidance is based on total sales growth in the high teens coupled with expanding leveraging gross margin including merchandise margin in the quarter as compared to last year.

We expect first quarter SG&A increase by a similar percent to sales due in part to incremental stock comp expenses. And diluted weighted shares outstanding is projected to be to approximately $25.1 million or one million share – excuse me. As a reminder, our long-term forecast includes square footage growth in the high teens, low single-digit comp growth and annual net income growth of at least 20%.

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

Bob Fisch

Thanks, Keith. Again, we are pleased with our performance this past quarter and for fiscal 2010. And we are totally committed to delivering strong earnings growth again in the first quarter of 2011. I look forward to giving you those results in May.

And, at this point, we would like to open it up to – this call up to questions. Thank you very much.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And today’s first question will be from Brian Tunick with JPMorgan. Please go ahead.

Anna Andreeva – JPMorgan

Hi. Good afternoon. Actually it’s Anna Andreeva for Brian. How are you, guys?

Bob Fisch

Good. How you doing, Anna?

Anna Andreeva – JPMorgan

Pretty well. Congrats to a good start to the year.

Bob Fisch

Thank you very much.

Anna Andreeva – JPMorgan

I have a couple questions. Could you maybe give us some color how comps progressed throughout the quarter?

Keith McDonough

We generally don’t give that guidance in terms of interim quarterly comp growth or guidance.

Anna Andreeva – JPMorgan

Okay. And you mentioned strength in February and March. Maybe quantify what comps are running quarter to date?

Bob Fisch

Well, I don’t think we’ll be saying exactly what the comps are, but I think that Keith and I said that we would be going from where we normally say low single-digit comps and raising that from low to low to mid-single digit comps. And we feel confident that we can achieve those results. And we’ve started off so far. We feel comfortable with our first six weeks, five, six weeks of the season so far and our performances.

Anna Andreeva – JPMorgan

Okay. That’s great. And can you maybe talk about by category. I think Kim mentioned something about strength in denim. But what’s driving those results? Is it continued strength in the accessories business, are you seeing strength in apparel as well?

Kim Reynolds

We’re seeing strength in all three families of business but especially in girls and accessories, and I mentioned, selling at full retail. We’re seeing increases in AUR again.

Anna Andreeva – JPMorgan

Okay. And how should we approach the second quarter? Bob, you just mentioned, you guys raised guidance for the first quarter, it’s your toughest compare. Second quarter historically has been difficult from topline perspective but this comparison gets significantly easier. Can you maybe talk about how you are approaching second quarter?

Bob Fisch

Well, I think, it’s a little premature before we know, where we think exactly second quarter is going to be and as you did say and we heard in the last couple of years. We’ve been kind of consistent in not having huge increases in the second quarter but still making our profit achievements.

We’re going to go into that. We’re not going to over promote as we said, we were going to do last year. And I think based on the results of what we see it’s a little early yet because we still have most of maple March and April to go through before I really have a good handle on the second quarter. But I feel confident with our original guidance and maybe we able to add some more color when we report at the end of May.

Anna Andreeva – JPMorgan

Okay. That’s great. Thanks so much and best of luck this spring season.

Bob Fisch

Thanks, Anna.

Operator

Moving along we’ll hear from Adrienne Tennant with Janney Capital Markets. Please go ahead.

Adrienne Tennant – Janney Capital Markets

Good afternoon. Nice job, everybody.

Bob Fisch

Thanks, Adrienne.

Adrienne Tennant – Janney Capital Markets

Bob, my question for you is when you open your 110 new stores for 2011, are you going to be doing filling an existing market or are going to new markets that you are going to be opening in?

For Keith, if you can just go through the transaction metrics or yeah, the metric number of comp transactions, AUR, you said it was up three and then UPT [ph] and ending square footage?

And for Kim, can you talk about the good, better, best strategy. Are there any shifts either in spring or this year, meaningful shifts in terms of those price points? Thank you.

Bob Fisch

I’ll take the first step. We’ll do a combination ageing of both going into existing markets because we have so much potential still whether it’s in the Southwest or actually we have a lot of great opportunities in the Western also, Midwest. So we’ll be doing that.

We are strengthening our position in the Northwest, which is something that we started to build two years ago with six stores and we’ll end this year with over 20 stores. And we’re also going into states like Idaho and we’re going to be entering Montana in the spring season. So that is something where we believe there’s great opportunities in Montana for that teen customer that wants everyday great value. So you’ll start to see that being developed.

Adrienne Tennant – Janney Capital Markets

Bob, do you prep the market with, I mean, or do you just give a soft opening?

Bob Fisch

I’m sorry, I couldn’t hear that.

Adrienne Tennant – Janney Capital Markets

Do you prep the new markets, new markets that you’re going into, do you prep the market?

Bob Fisch

Good question. What we do is, when we go into a market is we do a lot of grass roots marketing. So what we do is we’ll approach maybe the newspapers in town. Let them notice this great value company is coming in there. They sometime this will give us articles that they will talk to there, to their readers about. We’ll also do a lot of canvassing of our coupon events, so we will canvass coupons around the area, so let them know.

And you know what the number one thing Adrienne really is, is that, is our customers a lot of times are employees and employees are our customers. And the word of mouth through that hiring from high schools and colleges really drives the business.

Adrienne Tennant – Janney Capital Markets

Great.

Keith McDonough

Adrienne in terms of transaction metrics, the AUR being approximately 3%, the value of those transactions were basically flat and so the sales growth of 22.3% leaves about 19% in 10 transaction growth for the quarter.

Adrienne Tennant – Janney Capital Markets

Great. Thank you.

Kim Reynolds

With regard to your question about good, better, best. We’ve started this initiative about a year ago in select categories of business. We found by adding belts or destruction or trims to our garments, we’re actually adding a lot more fashion for the merchandise and day in day out great value. We’re not finding any resistance to paying for extra fashion lots and our customer.

Adrienne Tennant – Janney Capital Markets

Great. Thank you very much. The stores look great and good luck.

Bob Fisch

Thank you, Adrienne.

Operator

Moving along we will hear from Michelle Tan with Goldman Sachs.

Michelle Tan – Goldman Sachs

Great. Thanks. Keith, I was wondering if you could help us think about the merchandise margin. I think it was up 10 basis points this quarter. And you guys are looking for a little bit more improvement than that in the first half of 2011. So help us think about the incremental drivers are, is the freshness of the inventory or is there something else in terms of distribution costs or other benefits that you see in first half?

Keith McDonough

Merchandise margin is primarily the merchandise driving, I mean, we’ve talked about a little bit of distribution cost capitalized, but it’s really not a factor as we’ve grown and scale the business, become less and less of factor. What we’re seeing when we see the AUR increases is basically mix, inside categories and across categories.

Michelle Tan – Goldman Sachs

Okay. Great. And then what – I guess, it seems like there’s a slightly better outlook for first half on the merchandise margin front at least in terms of year-over-year improvement. Does that have to do with the full price sell-through that you guys are talking about mainly then?

Bob Fisch

I think, it’s a combination Michelle between what Kim had mentioned on full price sell-through and I think controlling of our inventories. I think that’s very important to us and we’re going to stress that even more this year. And I think with our initiatives in planning and allocations and working on that, I think it’s going to really help our margins.

But we are pleased with our fashion sell-throughs and that’s what’s really important. Because right now I believe the more that you can give that customer that fashion that at a great value it’s going to drive better results to our company.

Michelle Tan – Goldman Sachs

Yeah. Now it certainly sounds like you’ve guys had a nice start to this season. The one other thing I had on my list was, just on the whole inflation topic, I think, you did a great job of kind of framing out your cost exposure and the relative inflation that you have.

But one issue I was trying to understand is with the domestic importers that you work with, where are they sourcing the goods from and how healthier are they, are they able to really absorb pressure that they see from there, sourcing partners and not pass it through to you. I mean, how does that dynamic work?

Kim Reynolds

I think every vendor of ours attacks this in a different way but our domestic importers are pretty much sourcing in China, India and a little bit in Bangladesh. We’ve not being creative in the countries for sourcing it right now. So it’s pretty much the same avenues, I think, countries have always been souring in.

One comment that I’d made and I think Bob alluded to you, if we’re now buying for over 700 stores and it order from which 21 is the very large order, have the ability of sourcing with more than one maker, so my makers are actually bidding against each other in some cases and I think it creates an healthy competition out there. We’re not taking anything, the garment we are not trading down the way this fabric or the content of fabric. We are not raising our prices where it doesn’t make sense to do.

Michelle Tan – Goldman Sachs

Great. Thanks. That’s helpful color.

Operator

And moving along we will hear from Paul Lejuez with Nomura Securities. Please go ahead.

Paul Lejuez – Nomura Securities

Hi. Thanks guys. Just trying to connect the dots between your comp guidance and your comment about strong regular price selling here in the first quarter, I would have expected that to get us to a slightly higher EPS number, just wondering if I’m maybe missing something on the expense line. And second, I guess this for Keith. What was your comment about comp inventory mid-quarter if you could just repeat that?

Keith McDonough

Hi, Paul. I answer that one first the comp inventory. We talked about comp inventory growth being 5.6% at year end and that near zero at mid-quarter.

Paul Lejuez – Nomura Securities

Is that on plan, Keith?

Keith McDonough

Yeah. Yeah.

Paul Lejuez – Nomura Securities

Okay.

Keith McDonough

And I’m sorry, your first question?

Paul Lejuez – Nomura Securities

Just trying to connect the dots between the comp guidance and your comment about strong regular price selling. How do we get to the EPS number, I’m just making sure, I’m not missing something on the expense side, seemed like it would have got to a higher number?

Keith McDonough

Yeah. Well, what we said is that we’re seeing expanded gross margin and expanding operating margins. But by the same 20 basis point it increase? And what we’re seeing from an expense standpoint is a little conservative but also paying down the incremental margins on stock comp expense in the first quarter, as well as depreciation expense in the first quarter.

Paul Lejuez – Nomura Securities

And I guess…

Keith McDonough

We’re able to pay those incremental costs off all and still not be deleveraging in terms of expenses and so that gross profit expansion margin does drop to operating income.

Paul Lejuez – Nomura Securities

Okay. And are you looking for a compressed spread between comp and total sales in 1Q versus 4Q, I guess?

Keith McDonough

No.

Bob Fisch

No.

Paul Lejuez – Nomura Securities

No. Okay. And then, I guess maybe for Kim, can you just talk about which categories within accessories are performing the strongest maybe in order to, as you could talk about the year-over-year increases?

Kim Reynolds

With, our strongest increase is really coming out of footwear categories, followed by our jewelry and beauty business, but all areas are experiencing successful comp.

Paul Lejuez – Nomura Securities

Okay. Great. Thanks and good luck, guys.

Bob Fisch

Thanks Paul.

Operator

We’ll take the next question from Lorraine Hutchinson with Bank of America/Merrill Lynch.

Paul Alexander – Bank of America/Merrill Lynch

Hey, guys. It’s Paul Alexander for Lorraine.

Bob Fisch

Hi, Paul.

Paul Alexander – Bank of America/Merrill Lynch

Staying with footwear for a second, it sounds like you’re really going to push that category. How much of etc! is footwear currently and how much bigger do you think it can be?

Bob Fisch

Well, I don’t think, we’ll get into what percentage it is of etc! But, as I said in my quotes, I see us really leveraging this to be an explosive and as dominate as any other specialty retailers industry in next four to five years. I see major growths.

Because what we’re doing is giving that space more now as we’re building more of the etc! stores and giving a very good space and ability between the four season of boots, the spring season of sandals but there’s also very good strength in the rest of the shoes and wedges and flats and whatever.

It’s an explosive business that as I mentioned it’s there to be had because in these underserved markets, especially there’s just not that bigger opportunity of other people going after it the way we are at great value. As well as the factor there, I think we’re the only retailer that does it small, medium, large, extra large. So what’s the beautiful thing about this is we are able to not have to have a lot of back stock, we don’t have to pour a lot of inventory in it and it’s at a very high margin.

Paul Alexander – Bank of America/Merrill Lynch

Do you feel like there are any stores right now that are already kind of doing the footwear business that you want to eventually do or are you going to have to expand the category across the Board?

Bob Fisch

I think the store that has done that well and has in the past and probably does it now, and we saw the roots is there, has been very strong and building a very successful footwear business and a fairly high percentage of their business.

And I see though where, they are more of a mall based business. I see in the more – in the strip center and value mall in underserved markets that I don’t see other competition that can compete with us and where we’re going in this. And we want – we think we can be a huge player and the most dominant whether it’s in the mall business or the strip center business.

Paul Alexander – Bank of America/Merrill Lynch

Great. And then one last question. How do you see the way Easter impacting your business, is there any effect there?

Bob Fisch

You know, I’ve been doing this for over 35 years and every year I think I give a different answer on that. But because, and I hear – and I’ve been hearing on all these calls, everybody has all different answers whether an earlier Easter helps them or late Easter hurts them. You know what I really think? I think that there obviously we are not magicians in the nine week maple, we won’t get right by week.

But I think that, the only time Easter really is a major effect for us because each of our weeks are pretty consistent in volume size, except for the week before Easter and right after Easter. And I think that our everyday good value fashions that keep good flow of merchandise is going to get us to achieve to our plans in March and also in April.

But I’m sure, as I’m sitting here that there’ll be a screw up for some week and that everybody is going to get nervous around here and I’ll just have to keep them controlled since I’ve been doing this for 35 years.

Paul Alexander – Bank of America/Merrill Lynch

And then just one more, actually, I was just thinking about calendar shift. Do you guys have a handle what’s going to happened at any calendar shifts around state tax holidays or back-to-school?

Keith McDonough

Georgia was the wildcard last year, but I think it’s too early to tell if there is going to be any major changes.

Kim Reynolds

It’s a little early in that and we’ll be looking at that because some of these states do not come out with that information of changes yet. Georgia, as Keith said last year, did affect us by about a percent of business in that second quarter – in the Q2. So, I see right now not anything dramatic.

If, if there is something, then probably again by the May call that we have we would probably have a better color for you on that.

Paul Alexander – Bank of America/Merrill Lynch

Got you. Thanks.

Operator

And the next question will be from Jeff Klinefelter with Piper Jaffray.

Jeff Klinefelter – Piper Jaffray

Yes, thank you. Just a couple of questions, guys. I am sorry, as this was after I got cut off when the questions started. But on the etc! stores, you continue to remodel, you said 35 for this year, what percent of total would you have complete by the end of this year and how high can that rate go realistically.

And then also, the etc! stores remind us again on the productivity lift you get once those are complete.

Bob Fisch

Hey Jeff, there’s approximately 185 left to do; by the end of the year it will be 150. Of course, the fleet will move up to from 630 or 640 up to 740. So, the percentage will certainly shrink.

Jeff Klinefelter – Piper Jaffray

No, but I think that it also – I think we could get to 95% or something of what we have – in almost every store we have. I think that there’ll be a few handful of stores that would not be become etc! over the next four or five years, I believe, on that.

And Jeff, what was your other question?

Jeff Klinefelter – Piper Jaffray

In terms of the productivity lift that you are getting, just remind me as to that is it consistent across the group as you remodel them? What kind of lift are you getting in the payback – that you are getting on those?

Bob Fisch

The payback continues to be plus 30 in the range of 30% to 35% and that’s the consistency. They do vary when it comes to cost and performance. But year wise they we’ve been very consistent for the last three or four years and we have seen that right through 2010 and expect it in 2011.

Jeff Klinefelter – Piper Jaffray

Okay. And then in terms of the – overall store openings next year, malls versus strips and outlets, what do you expect in terms of total malls that would represent those? Is that continuing to increase – opportunities in malls starting to increase rather, and again are there any meaningful economic differences between what you’re seeing in new stores as you open across strips and malls?

Kim Reynolds

Now when you say next year, you are meaning 2011?

Jeff Klinefelter – Piper Jaffray

Yeah. Correct, this year.

Kim Reynolds

Okay. I can’t believe it’s also the middle of March either. But anyway I think last year as you saw, we – it was a little closer to a little over 50% in strips versus malls. I see this being somewhere in the 57%, 60% range of strips to malls.

We still will be opening opportunistic malls but there is a lot of good strips out there, which is going to be still, Jeff, our dominant growth. But to the point earlier, as we’ve discussed before, it’s very hard to pass up an opportunity in a good center where you can get incredibly good rents that you are locking in for 10 to 15 years. So we will continue to do so, but our growth will still be value strip centers dominant.

Jeff Klinefelter – Piper Jaffray

Okay. And then in terms of the performance, the returns on those strips, malls, outlets, those have been fairly consistent?

Kim Reynolds

Consistent again. We – that’s something that, each year it keeps being consistent. We’re still having the growth year over year from the 2003 stores all the way up to 2010 and in strips out with the malls. We are still seeing a consistency with very little variances on it.

So, we are having very good performances going into some of these B centers. You know, and high increases to our plans but we are also doing extremely – still consistently doing well in our strip centers and malls. I don’t see a change.

I don’t see a change in our strategy and that I feel very bullish about our 110 stores that we’re opening and the deals that we have already made, now we are going to do extremely with them.

Bob Fisch

I think Jeff that consistency stems from the deal process. Right? We are entering these deals with what we think are fair returns based on the costs that we’re going to encounter, the resource allocations that we’re going to make for a particular store.

And so far, they’ve been proportionate and we have been able to assess and judge, you know, what our returns are going to be and that’s our bottom line on these new stores.

Jeff Klinefelter – Piper Jaffray

Great. Thanks a lot.

Kim Reynolds

Thanks.

Operator

And we will move along to the next question; this will be from Janet Kloppenburg with JJK Research. Please go ahead.

Janet Kloppenburg – JJK Research

Hi, everybody. Congratulations on a good quarter.

Kim Reynolds

Thank you, Janet.

Bob Fisch

Thank you, Janet.

Janet Kloppenburg – JJK Research

Couple of questions. Kim, a lot of people talked about their fourth quarter being highly promotional. I wondered how impactful that was to your business if you were able to avoid it or if it had some sort of meaningful dents in your sales or your gross margins?

Also I hear that the accessories and girls businesses are very strong which is terrific. I am also hearing around that men’s business, young men’s business is quite good and I was just wondering if you could give us a perspective on how your men’s business is doing?

Keith, I was wondering about the inventories right now, I guess, you said they are up about 5.6%. It seems a little higher than the comp trend but it sounds like they are comfortable with that, maybe you could flush that out for me?

And lastly for Bob, last year you talked a lot, Bob, about advantageous wins because of the recession and perhaps a lot of other players not expanding aggressively. And I was wondering if you still saw those advantages coming your way this year? Thanks so much.

Kim Reynolds

Okay. Hi, Janet. How are you?

Janet Kloppenburg – JJK Research

Hi, Kim. I am good. How are you?

Kim Reynolds

Thank you. Yeah, you are right. Fourth quarter was a very promotional time for most retailers. It was at will as well. We did not promote more than once our plans. And part of what we walked away from the quarter was getting more regular price selling which helped contribute to a higher AUR and we see the same trend going into the first quarter, I think we mentioned a little earlier.

Janet Kloppenburg – JJK Research

Okay. So – on the AUR, right. Okay. Yes.

Kim Reynolds

Cloth and accessory business has been particularly strong led by accessories, both very strong businesses. Our guys business, you are right, in reading transcripts of other retailer’s performance, their guys business was, maybe a little bit stronger then it was at girls. We were up against a phenomenal year in guidance in 2009 and we do think that we have some action plans to execute for the balance of 2011 that will bring guys back at highest growth in accessories.

Bob Fisch

I think, Janet that we have good opportunities in there, and I think that we see that things – that we mentioned that given towards the latter part of the year that we thought there were areas that we should have done better in and I think that we have got some good game plans on that, so that gives us an opportunity in 2011.

Janet Kloppenburg – JJK Research

Okay. Great.

Keith McDonough

And then we have sales for the inventory square footage generally was up 5.6% at year end. That was perfectly on plan with us and I think is evidence for that, that we are back to near zero growth over LY mid third quarter.

Janet Kloppenburg – JJK Research

Okay. Great. So you’re in good shape.

Bob Fisch

I think also, Janet, we’ve discussed before on talking to each other is that we also did probably move up a little of goods to make sure that we weren’t going to lose out on key deliveries to start our early February business. February is a very strong regular priced month at rue.

Janet Kloppenburg – JJK Research

Okay. Great.

Keith McDonough

So that was key, and your question to me about advantageous rent opportunities…?

Janet Kloppenburg – JJK Research

Those were the new stores, securing advantageous leaseholds, you’ve talked about that in the past?

Keith McDonough

Yes, I have. I continue to feel good about that going into 2011. I do not see increases in prices on that. And I continue to push with our Head of Real Estate, Bob Thomson to continue to push down and to make more opportunities there. And we still are locking in rents for the next 10 to 15 years at very good prices.

Janet Kloppenburg – JJK Research

And just one more for Kim and Bob, I listened carefully what you said about product cost increases and your advantages there. We are hearing across the board that denim prices are up. So, is it just that your buys are larger and you’re able to win better pricing because you’re buying so much more than you bought last year?

Kim Reynolds

No. We’re not buying more than last year with the exception of additional store.

Janet Kloppenburg – JJK Research

I meant the new stores, Kim.

Kim Reynolds

That does help us, Janet. It also helped us more in sourcing in kind of, we have 700 stores for back to school that we’re going forward with 700 girl stores and 700 guy stores. We are groupings girls and guys together. We have been able to leverage better at cost, and by just, you know, negotiating very tough with our vendors, we are not raising our retails, Janet.

Janet Kloppenburg – JJK Research

Okay. Great. Good luck. Thanks.

Keith McDonough

Thanks, Janet.

Operator

Moving along, we’ll hear from Jeff Black with Citi.

Jeff Black – Citi

Hey thanks and congrats on a good start, guys.

Bob Fisch

Thanks.

Jeff Black – Citi

Can you talk a little bit about the timing of planning and allocation initiatives? Is that still a 3Q event? And you know, it’s a pretty big organization, can you just walk us through how you are rolling these initiatives out and whether also that plays into the cost scenario in the second half? Thanks.

Keith McDonough

Sure. The planning and allocation process has begun, specifically the allocation system implementation has begun. We’re into it for six weeks or more. The pilot is planned for June. At that point, the plan will be to have a successful pilot, of course, but then kind of go to sleep on it and manage the business as we should focused on back to school business and then continue to test the allocation systems ensuring the key back to school systems but not implement until after back to school in the September timeframe and being prepared to go live with it and utilize it for the holiday season.

So, that will be allocation. We plan to, at that same point, where we go live with allocation, begin the implementation of our planning – planning system. So, at the – they will take upwards of six months to a year to go live.

Jeff Black – Citi

And regarding the second half cost impact from those, anything significant to talk about – plan for?

Keith McDonough

You mean from a capital expenditure standpoint?

Jeff Black – Citi

Yeah.

Keith McDonough

It’s certainly in our planned expenditures for the year, about some $36 million to $38 million. Those dollars will be expended through allocation, more so, in the first half than the second. And then planning will come at different spots during the second half and into the first half of 2012.

Jeff Black – Citi

Okay. Thanks. Good luck on a smooth transition.

Keith McDonough

Thank you.

Operator

Moving along, we’ll hear from Randy Konik with Jefferies.

Randy Konik – Jefferies

Yeah, great. Thank guys. Keith. The – can you just give us a little bit of color on the new store productivity for the 2010 stores? And how does that compare to the new store productivity for the 2009, kind of, batch? And then should we expect any different type of ramp up on the new batch of stores, and are you seeing anything different there?

And then for Bob, can you just expand upon the comments you made about, I guess, pricing – lack of price resistance on fashion? You said something to the effect of being able to look at price from an opportunistic standpoint versus out of necessity.

So, are you kind of thinking about being, kind of looking towards a new – little bit of pricing paradigm? And does that have long-term implications for higher gross margin structure? Thanks.

Keith McDonough

Randy, I think the new store performance for 2010 is probably one of the most important metrics that I carry out of 2010 into 2011 as we plan for a 110 stores. It’s good to look at 105 stores and be able to say that they performed from an ROI standpoint right in line with year stats whether it was 2009, 2008, 2007, our family of 2010 stores was highly successful.

So as we look to 2011, we are not looking for a drop-off in that performance and no we are not looking for any drastic change in the maturity of the – the 90% to 95% maturity level at opening that we have said – utilized in the past – in past presentations.

Randy Konik – Jefferies

Great. Thanks.

Bob Fisch

And to the question talking about prices, when I talk about the opportunity about going after things that could be higher prices it has nothing to do, first of all, about the concern about cost structure. This is something that we have been looking at over the last two years that with the success of going after more fashion and more availability with our prices.

And as you know our prices are fairly sharp to begin with us, and in the fashion area if we are able to get a little more opportunity in retail and controlling our costs, yes, it would improve our margin. It is our responsibilities and we believe that we will execute that to where we know that we want to go from a high single-digit operating margin to double-digit margins.

And I believe that this company, even though it’s growing incredibly rapidly in sales and opening up stores, must deliver to the shareholder, that increase in the operating margin. So I believe that good, better, best strategy will be also part of our implementation and helping us get there. So it’s not because I am concerned just about the cost structure because, I think, as Kim has said and I have said that we feel pretty confident about it to control. It’s the opportunity that we can go after the opportunities based on our fashion success.

Randy Konik – Jefferies

And just a follow-up on that? Is there any way you can give us a, maybe particular product category that you can give an example of something you see an opportunity in?

Kim Reynolds

Yeah. I would say that a year ago in with the girls’ fashion and top area, we were probably selling things close to the $15, $16. And we found that the average out of the door price right down is essentially a dollar-dollar in case higher than that.

Bob Fisch

And what we’re doing though, you see here’s the other key thing that’s important. People out there that are going to raise their retails on like items of last year that similar. We don’t believe we should do that. If there’s a value item and a key item, we are not looking to raise and we are not going to raise our price points.

The opportunity, as Kim say is we are also more confident now to put more fashion into it. So, for example, even a crochet sandal versus just a basic sandal – rubber sandal or leather sandal that sandal is cheaper. The crochet sandal you can get $3 to $5 more because it’s worth it and because the competition out there would be at much higher prices.

So it’s not unlike merchandise to raise prices, it’s on increased fashion to raise the opportunity of prices.

Randy Konik – Jefferies

Got it. Thanks, guys.

Bob Fisch

Thank you very much.

Operator

And that does conclude the question-and-answer session tonight. At this time, I’ll turn things back over to Bob Fisch for any additional or closing remarks.

Bob Fisch

Well, I appreciate everybody’s comments on this call. And as we said earlier, we look forward to a very strong year and the first quarter and look forward to talking to you again in May. Thank you very much.

Operator

And again, that does conclude today’s conference call. Thank you all for your participation.

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