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rue21, inc. (NASDAQ:RUE)

Q3 2011 Earnings Conference Call

November 30, 2011, 14:30 p.m. ET

Executives

Joe Teklits - IR, ICR, Inc.

Bob Fisch - President, CEO and Chairman

Kim Reynolds - SVP and General Merchandise Manager

Keith McDonough - SVP and CFO

Analysts

Adrienne Tennant - Janney Montgomery

Michelle Tan - Goldman Sachs

Brian Tunick - J.P. Morgan

Paul Lejuez - Nomura

Erin Murphy - Piper Jaffray

Janet Kloppenburg - JJK Research

Paul Alexander - Bank of America/Merrill Lynch

Brian Rouncheck - BLR Capital Partners

Operator

Good day and welcome to the rue21 Third Quarter 2011 Earnings Results Conference. Today’s call is being recorded. At this time I’d like to turn the conference over to Joe Teklits of ICR. Please go ahead.

Joe Teklits

Thanks and good afternoon everyone. Joining me today are Bob Fisch, President and CEO of rue21; Kim Reynolds, SVP and General Merchandise Manager; and Keith McDonough, Chief Financial Officer.

Before we begin today’s call I need to remind you that during the conference call, management will make certain forward-looking statements based upon information which represents the company’s current expectations or beliefs. Results may differ materially from those expectations or beliefs states on risks factors included in our quarterly and annual reports filed with the SEC.

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

Bob Fisch

Thank you, Joe, and good afternoon to everyone. Good to be on the call. In the third quarter of 2011 we completed our second year as a public company, and we are very pleased to report results for the quarter that again represent our primary goals for rue21 to deliver consistent and predictable earnings growth to our shareholders driven primarily by strong performance from our new stores.

In the third quarter, our sales increase by 19%; operating income by 17%; and net income increased by over 22%. We successfully opened 30 stores this past quarter and 120 for the full-year. And year-to-date sales are up approximately 22% and net income has improved by approximately 35%.

We are delivering earnings growth in a very top macro environment in small and medium sized markets around the country, and fortunately we have not had to use the economy as an excuse that affects our performance. I know I don’t need to quote unemployment rates for you on this call, but I do believe that as we continue to build on our store-based in this environment and lock in long-term favorable lease rates, we will see an even bigger boost in productivity and profitability when our economy eventually begins to improve. We have proven that we don’t need a healthy economy to have success, but it could potentially be an incremental layer profit flowing right through our bottom line.

I know that everyone would rather seen a positive comp and a flat comp in the third quarter, but we are proud to post the gross margin increase for the quarter on top of a record quarter three gross margin a year ago, despite the product cost increases that are impacting most of our industry and the deep promotions and many retailers are offering to drive sales in a tough economy.

I will repeat this quarter what I’ve said in the past, when we have met our earnings objectives, but have not achieved high same-store sales. We will not sacrifice profit growth for a short-term win. We prefer to run a smart business and achieve margin and profit growth for the long-term. In this economic environment it is not about what you are going to promote, but whether you are promoting at the right time to have the most impact. We will react when necessary to stay competitive, but we will not rely on deep promotions at the expense of our margins and profit growth. In addition, having a fashion-based business is critical in this promotional environment.

While our same-store sales are important they are not the only driver of our earnings growth. As you know a major part of our five-year strategy is new store growth. We are now 757 stores strong and we believe our flexible real estate strategy gives rue21 the potential to double this store count.

Some investors question whether that is really possible and so, I’d like to offer some examples, where we can open successful stores where other publicly traded retailers have not ventured. We recently for example, opened in a small town in Nevada, a town of only 25,000 people. And is centered with a Wal-Mart, a Sears appliance Center, a supermarket, a movie theater and a few other small stores.

There are no major team retail concepts within many miles. This 5300 square foot store achieve sales of $30,000 in its first day. And its first five days achieved $100,000 in sales. Everybody in town shops at rue. This store was the number one volume store for the month of November for our company. Remember that our new stores are projected to do approximately 900,000 to a million in their first year.

Another recent example, in a store 100 miles Northeast of Dallas, Texas, another rue store achieved $60,000 in its first four days. We are building our brand and our presence in these small markets. And I’m more confident than ever in our real estate strategy. These stores are doing great now and as I’ve said, I think they will do even better in a healthy economy.

So, we opened in the past year, in London, we opened in Paris and we opened in Moscow. These are rue flagship stores. Stores all in the United States and they are all doing great.

I know most of you are curious about the holiday season so far including last weekend business, it's quite a buzz. We didn’t have pepper sprays, we didn’t have [riots], but we did very well. It was very interesting to see customers respond to the new Thursday Madness and Black Friday promotions that were heavily marketed by the big retailers like Wal-Mart, Kohl’s, Target, Old Navy and others. Many retailers opened up earlier than ever this year including rue21, and those earlier openings created crazy shopping excitement and may have changed the landscape of holiday spending forever, as new shopping traditions were created.

We certainly saw the impact both on business during the weeks leading up to Black Friday weekend which was a little softer as customers waited to shop for deals and then over the weekend beginning Thursday night when rue opened early in many centers along with these big box retailers, while we are pleased with our results for Midnight Madness and Black Friday, and the sales with the early openings give us this year, it really made me think.

What happens in November stays in November. Black Friday is one vehicle for holiday. But we are now focused on December and executing our business strategies that will enable us to achieve our goal for the total year to total holiday.

So, in summary, we believe our business model continues to provide us with many growth opportunities in any economy, and our management team is experienced and very well equipped to foster this growth. We have a strong yet simple plan in place; one, open stores in markets with the customer is starved for fashion and convert stores to our larger etcetera format so that we can do even more business in current markets. Two, leverage our unique sourcing strength to maintain or improve our product cost while continuing to offer fashion at every day great value. Three, continue to update our offerings of new and expanded product categories. And fourth, implement new tools and planning and allocation in other areas so that we are always improving our operation.

We will continue to focus on these four key strategies. They have provided for our growth so far and we believe they will be providing for a growth in the future. If we keep it simple, we will achieve our long-term goals.

Now I’d like to turn this over to Kim Reynolds to provide some merchandise highlights from the quarter.

Kim Reynolds

Thank you, Bob. Overall, our back-to-school sales were on plan and we were pleased with our performance for the quarter, especially in high gross margin categories, including foot wear, accessories, fragrance and beauty, and jewelry. We launched two exclusive fragrances Runway 21 for girls and INTENSE by rue21 for guys in the quarter and the fragrance and beauty business continue to be a consistent performer and growth opportunity for rue21.

I’m pleased to say that our guys business also delivered solid results for the quarter and we are seeing some positive performance with our current assortments. We did see some weakness in girls and guys screened tees for the quarter and sales in jackets, outer wear and cold weather categories were not as strong as we would have like to have seen. This was partially due to the unseasonably warm weather for the quarter and we are seeing stronger outer wear performance more recently.

For the quarter, our dresses, fashion woven tops, and fashion denim performed better than our knit key items and basic denim showing once again our customers are focused on quality and fashion and not just on price. AUR was up for the quarter by 7.6% with average dollar sales up 3.1%.

As we’ve discussed on previously call, our sourcing model continues to deliver consistent quality and value without incremental cost increases as a cost of raw materials including cotton have stabilized. Our vendor metrics remains focused on delivering the best fashion at every day great values to rue21 as our customer has come to expect.

In November, we introduced Breaking Dawn t-shirts in conjunction with the opening of the third installment of the Twilight series movie. We also partnered with Sony Music Entertainment and the band Hot Chelle Rae on a promotion for the release of their new CD. If you are not familiar with Hot Chelle Rae they just won the best new group at the American Music Awards. These are beliefs that are partnering with artists and participating in socially relevant trends, it will drive traffic into our stores.

Looking forward to December and January, we have get novelty gift guidance continue to flood our stores and we will also be highlighting dresses for holiday parties which is a growing and successful business. We continue to work closely with our planning and allocation teams to get the benefit out of our new allocation system as we drive the business. Our expectations to get the right inventory to the right stores for the most impact in 2012 and we are excited about the potential for margin increases as a result.

And with that I’ll turn the call over to Keith McDonough.

Keith McDonough

Thanks, Kim. I will review the financial details for the quarter and then provide our outlook for the fourth quarter and also have some additional commentary regarding 2012.

As Bob pointed out, overall results for the quarter were solid with top line growth of nearly 19%, expanding gross margin and expense leveraging after adjusting for incremental stock comp expenses. In the flat comp sales environment, we delivered earnings per share of $0.35 driven by 22% net income growth and improved net income margin by 10 basis points.

Net sales for 194.8 million up 18.8% from 163.9 million for the third quarter of 2010. Comp sales were flat compared to 1.8% increase last year. Sales growth metrics for the quarter included transaction growth of over 15%, AUR growth of 8%, and an average dollar sale increase of over 3%.

Like last quarter, the AUR increased we attribute primarily to less reduced price merchandise on hand and more initial price selling achieved through stronger inventory management. Inventory at quarter end is up 2.5% per square foot and position well for Q4. We are also seeing impact from continued opportunistic up selling related to our good, better, best merchandising strategy.

We opened 30 stores in the quarter versus opening 33 stores in the quarter last year. We converted 8 stores in the quarter versus 9 stores last year. We now have 740 stores opened at the end of the quarter consisting of 580 comparable stores and 160 or 22% non-comparable stores versus last year’s total store count of 628 which included 493 comparable stores and 135 or 21% non-comparable stores.

A highlight of the quarter once again was another expansion of gross margin in an extremely promotional environment. As Bob and Kim promised repeatedly in past quarterly calls, we have not accepted nor have to try and pass on to our customers any cotton and labor inflation and impact that most of our peer group is experienced.

Gross profit for the quarter increased by 18.9% to 71.4 million, and gross margin expanded by 10 basis point to 36.7%. The gross margin expansion was driven by 20 basis point increase in merchandise margin and was offset slightly by 10 basis point deleveraging of the other fixed cost and cost to sales.

Selling, general and administrative expenses increased 19.2% to 50.8 million as a percent of sales expenses increased by 10 basis points to 26.1% versus 26.0% last year. The deleveraging was fully attributable to stick comp expense. Without that line item SG&A expense would have leveraged 20 basis points in the quarter.

Operating income for the third quarter was 13.8 million versus 11.7 million a year ago, up 17.4% including the burden of incremental stock comp expense. Without those costs operating income would have grown by 23% and operating margin would have expanded by 30 basis points in a flat comp sales quarter.

Tax expense was another bright spot in the rue21 third quarter financial performance coming in and an effective rate of 36.4% compared to 38.9% last year. The lower effective tax rate was primarily a result of non-recurring discrete tax items although we are beginning to see some impact from the previous long-term tax planning initiatives that we have put in place.

Finally, net income increased by 22.4% to $8.7 million for the quarter up from 7.1 million a year ago. Fully diluted earnings per share were $0.35 versus $0.29 a year ago on a diluted share count of 25.1 million versus 25.0 million last year.

To review quickly our performance for the first three quarters year-to-date, sales now stand above last year by21.5% to $540 million reflecting a comp increase year-to-date of 1.5% and a 23% square footage increase. Gross margin is expanded by 70 basis points on top of 170 basis point increase last year, most of which is attributable to improved merchandised margin although fixed cost in margin leverage as well by 10 basis points.

Operating margin expanded by 50 basis points and operating income is up 30% including share based comp expenses and is up over 35%excluding those incremental expenses. Net income for the three quarters is up 35% and net income margin has increased by 40 basis points on top of the 50 basis points expansion of a year ago Q3.

Highlights of the third quarter balance sheet include the following. Cash is $36.1 million is up from $18.7 million last year. Inventor was up 26% over last year but again it's only up 2.5% per square foot, and an excellent inventory position for Q4, there is no long-term debt on the balance sheet and our revolver facility passed these $85 million. We have not borrowed on that revolver since our IPO by the way and we have no current plans to do so.

Turning to our outlook for the remainder of 2011, we are raising the lower end of our year-end EPS guidance range to $1.51 to $1.54. For the fourth quarter we expect diluted earnings per share in the range of $0.47 to $0.50, using diluted shares outstanding were approximately 25.1 million. This earnings range is based on total sales growth in the high teens and flat comp sale growth which was the performance we just turned in the third quarter.

One final lid on our guidance for the remainder of 2011, is that we are reducing our forecast for CapEx from 39 million to 33 million and that’s net of tenant allowances.

A few additional comments regarding fiscal 2012 for those of you that will be building your models prior to our coming back on the call again. First up 2012 was a 53 week fiscal year for rue21, which of course, will impact the fourth quarter and total year results. We will forecast the first quarter and full-year 2012 in the low single-digit comp sales for range combined with square footage growth in the mid to high teens.

Gross margin expectations are that we will increase our 2011 and we also expect our operating margin to expand. We anticipate continued positive movement in our effective tax rate next year given our long-term rate improvement initiatives in place and underway. And CapEx net be approximately $42 million in 2012.

As a reminder, our long-term forecast metrics that have not changed include the followings. Square footage growth to mid to high teens, low single-digit comp growth and gross margin expansion of at least 150 basis points over the next five years. We will continue to leverage SG&A expenses through economies of scale. Finally, those metrics will generate net income growth of approximately 20% over the long-term.

That completes my prepared remarks, so I will turn the call back over to Bob.

Bob Fisch

Thanks, Keith, very good. Again we were very pleased with the results we achieved this quarter, although we have been a public company for only two years, we have an experienced management team that has produced consistent earnings growth as a company over the past 10 years. We have achieved our goal by delivering fashion and everyday great value to our customers by executing on our unique real estate strategy and by focusing and running this business for the long-term good of the brand while achieving our financial objectives. We are intent on staying focused and continuing to produce strong results as a public company as we did when we were private.

Now I’d like to turn this over to any questions that you would like to ask.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Adrienne Tennant with Janney Capital Markets.

Adrienne Tennant - Janney Montgomery

Kim, actually my first question is for you, is on the Breaking Dawn apparel. Is it meaningful to the quarter and have we already seen sort of the bulk of that since the movie already opened. So, that’s my first question. And then Bob, can you actually quantify the number of stores that were opened at midnight this year versus those the number of stores that were opened at midnight last year. And can you characterize any shift in the sales pattern throughout Black Friday day, if that make sense. Thank you.

Kim Reynolds

In answer to your first question, it's not the Breaking Dawn t-shirts themselves that generate a lot of business for the quarter, I believe the commentary made and the point that we are making is more socially relevant, we are to our customer than what we believe that will drive traffic into our stores. Hot Chelle Rae CD was released earlier this week or went to the few retailer that do carry that and we are looking for other interesting aspect that will attract customers into our stores.

Bob Fisch

And to your question, I think it's a very good question. I think that we it's hard to quantify exactly, because some stores last year we opened to 12, this year we opened to 10. I can tell you the following, it's a very interesting phenomena and I think it's going to become something that will be a tradition in retailing. We opened up the stores between 10 and 12 midnight because Wal-Mart we have set the tone I think of the Universe being $450 billion retailer and we figured that out that people do about 2% of their business during that one day, that’s about 9 to $10 billion, which is pretty crazy.

What happened is that we received [lots] of customers coming in that were young customer, and that I believe helped our business. I’d say overall, somewhere 25 to 30% of the stores might have opened up earlier from instead of being opened 3, 4, 5 or 6 in the morning to between 10 and 12 o’clock.

So, that would be one of the things happening and I think that we reaped the benefits of that business and with not just customers, just to let everybody know, shopping just for gifts, it was also a shopping for themselves and that’s why it's important to have the fashion in addition to the key basic items. And that’s important. Number two, there was a shift in a pattern and being very straight about it, is when you are going to have four of the five of the biggest retailers in the world opening up at between 10 and midnight, including the Macy's in the mall in addition to these strip centers and value more stores, we saw an incredibly strong Thursday into Friday and a little tough for Saturday, but it was exactly what we would expect to happen but we were overall pleased with the results.

Adrienne Tennant - Janney Montgomery

So, overall your Black Friday showing some Thursday through Sunday the weekend was actually above planned, is that fair to say.

Bob Fisch

I’d say that is very fair to say.

Operator

And we will take your next question from Michelle Tan from Goldman Sachs.

Michelle Tan - Goldman Sachs

Sorry I jumped on a little late, so sorry if you guys went through this already, but can you talk about what you are seeing in the business in terms of traffic trends and how competitive it feels out there to gain traffic, is that an issue you guys are grappling with at all. I know to some extent you have the luxury of operating in less competitive markets. But I was wondering if you can just talk about that dynamic a little?

Bob Fisch

I think this probably will be the most competitive holiday season ever and you all can see that by just how certain people have been promoting and promoting so early. And I think everybody has to e careful of seeing the promotions too much too early and if you think about we are still in November 30th right now, we are not even, we have four weekends to go before Christmas. And fortunately, unfortunately I’ve been doing this for 38 Christmas’ so I have been through a lot of this.

So, I’d say as far as in the traffic patterns and things like that, I mean in the projection of what’s our competition. I think we did very well against that. We looked at our studies of maybe with very promotional we did very well, Navy centers we did extremely well, in Wal-Mart and Target and I think being in a lot of these small markets really helps us tremendously and having a balance fashion and key items that we are not just only hit to head in malls. However, we did not see mall suffering as a trend or anything like that. And I think that we certainly promoted but we did not really change our promotions any deeper than what we did last year, whereas other people did and in many cases. And did not see us getting hurt, Michelle, because I saw we got the traffic coming into our store. And some of these centers believe it or not, where Wal-Mart opened and Old Navy, and some of these as you know are small centers it's 10 or 12 stores in there. Some of them which is us and them, because we opened the people said, we need to buy the fashion too getting into our stores.

Michelle Tan - Goldman Sachs

And I guess, my other question, anything you guys were thinking about differently from a gifting perspective as move to the balance of the holiday season?

Kim Reynolds

I think we focused our assortments more into small electronic gifts, which we think is a plus for us in store. I think we were a lot less distorted, but I believe we have the right depth for impulse buying and gift giving.

Operator

Our next question comes from Brian Tunick with J.P. Morgan.

Brian Tunick - J.P. Morgan

Okay. Couple of questions, first, Keith, you are guiding comps I guess low single-digit, I know being your longer term plan anyway I guess for Q1 or for next year, you had obviously the last couple of quarters and Q4 you are guiding flat. So, Keith, what you are thinking of why we should expect an acceleration I guess to some degree of the comp. And then staying on the comp you look at the year-to-date comp, is there a big discrepancy between the class of stores or where the stores are between the outlets and the strips. And then on the gross margins obviously you guys have done a great job this year, kudos to Kim and the team. So, when we think about next year second half and everyone else gets some relief, do you expect to participate in that. Can we see the AUC opportunity flow into your gross margin next year or you protected them this year.

Keith McDonough

Well, I will start there, I think because it kind of answers your first question. I mean I know comps are critically, we all know comps are critical, we have talked that. But the gross margin we believe is more essential and one of the reasons that we have taken the positions in the fourth quarter is we have because we believe it's going to be competitive out there. It's going to be promotional. But we intend to protect our gross margin. So, we feel comfortable with the guidance, because it stands out there and we think it's going to be another solid quarter for us.

From a general gross margin picture next year, I know Kim is backed at work, hammering and leveraging the vendor community that we operate with, these are partners. And there are again looking at sharing in growth of upward 20 to 25% in our franchise next year. So, there is a lot of opportunity for them, they have seen that as they have seen in the past. So, we expect to see continued leveraging in gross margin.

The store count this year was about 50-50 malls and scrips as we have said before, the opportunities were there, we have got plenty of great stories where we have locked in mall locations, they are just phenomenal rates. And that kind of drives us Brian, we are, we still consider ourselves a scrip based retailer, that continues and will continue in the future. But when the deals are that compelling, we intend to take advantage.

Bob Fisch

I think to add something Brian, talking about the gross margin when you say about that maybe next year some of the other retailers are going to have easier comps and the gross margin. I don’t know about that because what I look at right now and I think this is what I look at and I know one thing is how to build the business now and for the future. And when I see and other retailers it's not important who they are, having 300 to 800 or 900 gross margin basis point drops in the third quarter and projecting some of that into a fourth quarter. Some of them are picking up comp are not. What’s happening is that they are projecting that into estimates and guidance and then promoting to that. And that people are thinking they are getting market share, in my history or long-term experience in this business, is that you got to think for the long run and my concern would be is once you start that promotional paddle that deep how do you stop it.

And unless the fashion becomes unbelievable out there, but some people are into a fashion business that makes it tougher Brian, I think it's not that easy just to say next year because they are up against it. And some of the retailers who are up against the (inaudible) to go even deeper this year, and I’m not so sure those are the ones that are going to have the best results. The ones that are going to have the best results which we hope includes the rue, which we think it will is the one that have the balance of fashion and the key items and isn’t just a come to promote just to gain quick market share. And I think we don’t have to do that and that’s what I look at for now and for the future.

Brian Tunick - J.P. Morgan

And just one more. I’m just being curious if Kim can comment maybe on what category as we look into Q1 or the Spring season as you look back on last year. I mean was there any key categories you felt like you can do better or that you will expand into this year?

Kim Reynolds

I think we have talked about them in previous calls as well Brian, we had a tough first half of the year in the guys business. We have seen that business turning around and we have been working very hard to make it more relevant business for us, so I think we are capturing even LLY numbers, create an opportunity in that particular lever of our business. And our accessories it is in the growth of beauty and fragrance continues to be an opportunity grew, growing nail polish and other beauty accessories. And it is one of our levers. [Handheld] is the huge lever for us, and we are in the growth division, both our growth short business and growth dress business. we are banking on these very strong comp increases for the first half of the year.

Bob Fisch

There is something else, Brian, in addition and I appreciate also what Kim and her team have done to in a tough, tough environment to be able to on top of strong gross margin and sales keep it up. We have also strengthened our team certainly which this week actually and have just hired [Karen Gunkowitz], who is coming to us from Aeropostale, where she did a great job there. And I believe that after three to four months of her getting acclimated here, we feel very strong about that to strengthen the team along with Kim, that I think is going to help us even in our sales in the junior area, because she is the junior Senior Director, the desk are going to really help us.

I also number two, think that we haven’t got up in detail is that our planning and allocation new initiatives are also going to be helping us strong for next year and I think that’s a real plus that as we keep building these stores that’s key. And thirdly, part of these comments of our business, we continue to see the stores that we opened in 2011 before strongest 2010 and all these new stores we have not seen a decrease in our business we have an increase in our business in new stores.

So, I think there is a lot of good leveraging there and it's the promotional environment and it goes back to Michelle’ question, affecting economy it continues, so everybody is just promoting their brands our than I think that what I’d like to do is not to promote my brands out with them, I’d like to really just keep the right balance. And if that doesn’t mean the comps are high sometime, I didn’t say to you or anybody on this call that we are not going to make our profits.

Operator

Our next question comes from Stacy Pak with Barlays Capital.

Unidentified Analyst

This is (inaudible) for Stacy. Looks like you converted 8 stores into the larger format in the quarter. Are you still targeting 35 conversions for the year? And then secondly what percent of fleet do you think will be completed by 2012?

Keith McDonough

We have averaged roughly 35 this year and next, and I believe that number we can hit next year. At the end of 2012 that will leave somewhere in the neighborhood about 150 stores left to covert.

Unidentified Analyst

All right. And then can you talk about at all, the comps specifically in these larger format stores versus the smaller format, or perhaps the sales per foot. What the difference is between these two formats?

Keith McDonough

Of course, we have seen great results from the top line, do we see increase in sales per square foot not necessarily, but we see nice increases in the box per box. And when we are able to again leverage the franchise rue21 to bring good rep deals from the table, what happens is we see expanded gross margin primarily from the additional accessories category that drops to the bottom line, because we are leveraging our expenses better.

Bob Fisch

One other thing in that, and some of the stores that’s misleading sometimes then when we look at these sales per square foot, because some of the stores are bigger stores, we get such incredibly good rent deals. We end up taking that space and lot of these stores we do get extra business but it might not always be a higher square footage. However, we are going to look at that also. We still think that we can tightly even that space get the same cheap rents and to be able to do even more profit with sales equal sales at the same-store sizes. So, we are looking to do that too.

Operator

And our next question will come from Paul Lejuez with Nomura.

Paul Lejuez - Nomura

Couple of questions. First, can you just maybe remind us of your Black Friday performance last year and maybe the surrounding days both leading up to and after. And then second, this has been addressed somewhat on the call today, but can retailers definitely are choosing similarly choosing between sales growth and gross margins. It's harder to have both. Most are choosing to target sales, sacrifice gross margin, you guys are going the other way. I’m just wondering at what point you get to, and what comp level would you need to see before you start being frustrated with the loss of market share. And then you then turn around and change your strategy a little bit. And then last just wondering what the accessory comps were in the quarter. Thanks.

Bob Fisch

In the question as far the sales growth and gross margin, where we are doing one of the other. We think we are doing both. We are doing both. We are increasing our gross margin which increasing our total sales. 90% of our sales in the third quarter is from non-comp growth. We could have a comp increase of 2 and if we don’t do well in the non-comps, we do worse in profit performance, than achieving a 2% comp store increases something like that. It's not that we don’t want to do it. So, we are not saying, we are saying in this tough environment that we want to protect this key set of margin and our profit and our earnings per share.

So, I see that number one, as far as our Black Friday performance we don’t get into real numbers, but we had a good Black Friday last year, yes was it a little different in business, as I mentioned earlier there was a little more strengthening of the Thursday Friday which makes sense and a little weaker of Saturday. But not anything used. Overall the performance is extremely strong. So, I don’t want o just be hyping up the gee, Thursday night and Friday was like record creative performances, because I should look at the whole weekend. And so that’s where we have been.

Kim Reynolds

Paul, to your question about comps and accessories, we have a healthy comp performance in the third quarter in the accessories, the division that we don’t report comps by divisions.

Keith McDonough

We will see in a few that total growth for the category was above total company growth.

Operator

We will take our next question from Erin Murphy with Piper Jaffray.

Erin Murphy - Piper Jaffray

This is Erin for Dough. I just have a couple of follow-up questions. And I apologize I disconnected at the beginning of the Q&A, but Kim you were speaking a little bit more about the socially relevant trends in that peak of the business. Could you speak to maybe the profitability of that, and just if you plan the uses to augment your overall business or really as a growth driver at least a piece of growth driver going forward.

Kim Reynolds

We consider really more like a trend, I mean when we look at pretty similar trend also bring that music as a trend to large target customer and we also think that movies and other media are trend for our customer, and it's not margin driver but it's something that makes really an exciting shopping experience for our customer and that’s the type of driver we are looking for.

Erin Murphy - Piper Jaffray

Would you be looking to get into some of the categories into next year for example (inaudible) and I that seems to be a very big license overall to be a pretty impactful trend overall.

Kim Reynolds

Yes, you are absolutely right, yes we are looking to do that.

Erin Murphy - Piper Jaffray

Okay and then just another question just overall with respect to some of the small store performances, Bob, that you mentioned on the call. As you look at going out to kind of the 1,500 door target, you’ve got another 700 plus to go in the U.S, do you bucket those down by population or town populations that are kind of 25,000 under, 50,000 under and how should we think about that as we look at your longer-term growth trajectory?

Bob Fisch

Well, what we look at usually number one is, we do extremely well when we’re in a Wal-Mart Center or shadow a Wal-Mart and so that we’ll look at that first, but we’re looking to peel back more of the onion skins to find more of these 25,000 to 50,000 population areas because we really want to continue on our niche of small and medium markets, that’s the small market but we also do well in medium. What we do not want to do is to get too aggressive in a bigger market. So we will watch that even in the factor of yes, we will go after some B malls because the rents are so great for us to do and we can do well, but we’re going to predominantly go after the niche that we always have discussed is to build our business in strips and malls in these small market centers.

Operator

And we’ll hear our next question from Janet Kloppenburg with JJK Research.

Janet Kloppenburg - JJK Research

Bob, I got on a little bit late but I wondered if you had delineated whether or not your promotional activity was below last year or equal to last year, I think I heard enough to know that it wasn’t above last year and I’m wondering if over the Black Friday holiday if your promotional strategy was similar to last year or how it may have differed? Thank you.

Bob Fisch

Yes sure, Janet. What we mentioned a little earlier was that it was fairly similar to last year and we did not look to have aggressive promotions much deeper than last year and did not want to follow what some of the other retailers did do. We ended up getting a lot of good traffic by just being there, giving a good balance of fashion and the key price point items and so I think that that made us...

Janet Kloppenburg - JJK Research

That was for the third quarter, Bob?

Bob Fisch

That for the Black Friday we’re talking about.

Janet Kloppenburg - JJK Research

So Black Friday, so Black Friday you were similar to last year?

Bob Fisch

Right.

Janet Kloppenburg - JJK Research

Okay. And then, and what about in the third quarter?

Bob Fisch

In the third quarter absolutely we’re similar.

Janet Kloppenburg - JJK Research

Okay.

Bob Fisch

I mean we’re talking this businesses we are basically for the year, one of the few retailers that probably could say that we’re not really haven’t been taking additional markdowns for last year, we’re very consistent on that.

Janet Kloppenburg - JJK Research

Yes, no, no, yes. Okay.

Bob Fisch

And so we didn’t have to inflate also our retails because of cotton prices that then go deep in discount and unfortunately I think that’s hurting people because the other thing I think is important that we mentioned and keep mentioning is to have a good control of our inventory position, we were up 2.5%. And I think that to me that’s really critical that you can do that in an environment and I think that these some people that we’re seeing the higher 20% and 30% more inventories is also affecting their gross margin, so we think that sure if I had 20%, 30% more inventory I probably would pick up a bigger comp, but then I might drop in gross margin huge, is that what I should do so, we don’t think we should.

Janet Kloppenburg - JJK Research

No. Another question is comp trends by month, for the guys who report we heard October was a very challenging month, September pretty solid. Did your trends follow that pattern and also Kim, I just wondered if you could talk a little bit more about the improvement in the men’s area which is encouraging. Thanks.

Keith McDonough

Janet, we don’t give our guidance by month and so we’re going to forgo that question, if you don’t mind.

Janet Kloppenburg - JJK Research

Entirely, no nuance?

Keith McDonough

Yes, you get your nuance from Bob.

Bob Fisch

Well, it wasn’t that dramatic. Well, it wasn’t that dramatic. So nothing was so dramatic and so I’m sure Keith will speak to you later.

Kim Reynolds

And to your question, Janet, about the guys business, I think that we had a hiccup second quarter going into back-to-school. I think we’ve regained our footing on the appropriate trends for our guy customer. We are seeing pretty healthy business across almost all categories in the guys business, and I feel very comfortable that will carry over into the first half of next year.

Operator

(Operator Instructions) We will move on to our next question which comes from Lorraine Hutchinson with Bank of America/Merrill Lynch.

Paul Alexander - Bank of America/Merrill Lynch

Hi, it’s Paul Alexander for Lorraine, thanks for taking the question. SG&A came in a little lower than expected and the growth rate was the lowest that it’s been in a long time, how much of that was natural flexing down, because of slightly lower sales growth rate than recently or how much of it was you guys pulling back on the reins on some investments? And then is this high-teen growth rate for SG&A more reflective of what we might see next year or do you think it you might pick back up again to the rate we’ve seen in recent quarters? Thanks.

Keith McDonough

We continue to battle this incremental stock comp, and that’s why I keep bringing it up every quarter. Our guidance and pretty much what happened in the third quarter was that we needed to leverage or deleveraged and kind of ate through that stock comp expense and still manage that performance. I was pleased with the quarter overall, was it a – it was a true outlier from a decrease or a low growth standpoint; I wouldn’t say that it is. We had certainly some – and last quarter I was on this call talking about some unfavorable issues with regard to insurance casualty claims and things like that. We didn’t experience that in the third quarter. So I would say it was a fairly standard quarter from an expense growth standpoint, certainly didn’t pull back on investing in the business or any initiatives we have underway.

Paul Alexander - Bank of America/Merrill Lynch

All right. And then just speaking of initiatives, could you update us on the e-commerce feasibility study and should we think about any incremental investment in that next year?

Keith McDonough

The question of investment next year is we’re still looking at it. It really comes down to the avenue we take. I think what you’re going to see in the coming quarters is internal head count. We’re in the market today for some thought leadership, some business leadership that knows this area, and that we can team with as a management team to take that next step. Next year you’ll see investments being made, the type of which, I can’t get into right now. If we do a lot of things in-house, of course you’re going to see a substantial capital investment. If we outsource things, which would be a faster route for us right now, you’ll see more operating type cost investment hopefully matching the revenue as best as we can that we can expect from it.

Operator

And our next question will come from Brian Rouncheck with BLR Capital Partners.

Brian Rouncheck - BLR Capital Partners

Can you guys please address the ramp up in CapEx for next year, the $42 million net versus $33 million this year?

Keith McDonough

Sure. We’ve got the normal slug of new store and conversion store expenditures. We’ll see additional investment in supply chain. We don’t – we probably won’t get into our expansion DC this year, so we what we’re looking for is all the component pieces of the DC. We’ll continue to see major investments in IT of course. This next year, you’ll see the lion share of the advance planning system, which is as I’ve said, a much more complex system requiring pretty much the full-year to impact, so those are the kind of the highlights.

Operator

And that is all the time that we have for questions today. I’d like to turn the conference back over to today speakers for any additional or closing remarks.

Bob Fisch

Thank you, Anthony. I just want to say I wish everybody on this call and everybody at rue too a great holiday season with their families and great luck in getting the business and we’ll speak to everybody again in the beginning of 2012. So thank you very much.

Operator

Once again, this does conclude today’s conference call. We thank you all for your participation.

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