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rue21, inc. (NASDAQ:RUE)

14th Annual ICR XChange Conference

January 11, 2012, 08:27 a.m. ET

Executives

Robert Fisch - President, Chief Executive Officer and Chairman of The Board

Keith McDonough - Senior Vice President and Chief Financial Officer

Operator

We are going to get started now with our next speaker Rue21. For any of you guys who don’t know them they are another one of the really dynamic new growth stories that we have had the pleasure of getting to know over the last several years. And here to give us an update on the story and the company is CEO Bob Fisch.

Robert Fisch

Thank you Michelle. Well, I can guess Lululemon [ph] is not really part of the teen environment, so it’s a little different story. I think that before we even get into the whole presentation and I think we have a very good one to show you quickly today. I think that everybody has been concerned about the retailers in the teen environment and the promotional environment in the fourth quarter and I am sure people have that same feeling about rue. And, we feel really good about the fourth quarter, I just wanted to let you know. And while our comps will be basically flat to maybe slightly down and partially due to the cold weather situation environment where it was not as cold out there and probably predominantly more outer wear so a slight effect on that.

I am very positive about the factor that we did not panic in the fourth quarter and especially December to be overly promotional. I have been in this business many many years and I have made a lot of mistakes. And one of the things I wanted to be careful about for this fourth quarter is that the business does come in the final two weeks and that we held our own, we are not (inaudible) in promotions, but we held our own and it paid off because we see that our margin will not be affected and we will be able to maintain, at least maintain our margin to what we projected and gave our guidance to. And in addition to that we believe that we feel good about reiterating our guidance to our earnings and to our profits to what we said for the fourth quarter and for the year.

So that to me puts us in a very good position. And one of the things that were also as good is that in the time period from thanksgiving through current right now we have been increasing in low single-digit comps. And, so to me that in the most promotional time period without us promoting more than last year, because we had controlled inventory and for the factor that I think we didn’t panic, I think that really puts us in a good position and we started to sell a lot of good regular price merchandize. And I know in a crazy environment out there that that wasn’t always happening in lot of areas but in addition to our promotional cadence that we didn’t and we will be discussing some of that in our breakout sessions today and we are proud of that.

And you know, you sit here and you think about that you have to make clad decisions. And what we are proud of is that you know, comps at a cost is not what we see for rue and what our future is, but gross margins and profits as a plus to build on our business now and for the future is what rue21 stands for and will stand for in the future.

And we want to be careful to not get into the addiction of promotions because when that happens and when you stop people still want more. And I think that we will keep promoting where we need to be, but at the same time we are really excited about going into the new year and we have something exciting to show everybody. So, we are proud of our achievements, we are proud to be public for the past two years and we care very much about what our shareholders think and what we do now for today and for the future is important to rue21.

So, I would like to then now move forward and get into the presentation. Go through the Safe Harbor Statement.

rue21 has doubled its store base in the past four years and we plan on doing it again we are little over 750 stores, we are one of the larger growth companies in America and we believe that we can be 1500 stores plus in the United States alone.

We have a total consistent sales growth. If you look at the charts from 2003 to now it’s the smoke stack rising higher and it’s about a 28% compound growth over that past 8 years. And the same thing is with the earnings is that about a 49% compound growth since 2003 where it’s a $4 million profit growth to $84 million the third quarter of a trailing 12 months. So we believe that we can keep growing this company to the rate that we have been telling everybody and we are pretty confident about it.

And for some of you that have seen that we have a 3-3 Prong Strategy and so we are not just tied into the girls business, we are not just tied into the guys business, but we also have the accessories business called etcetera under our merchandizing strategy. And also our real-estate strategy is malls, strips and outlets. And what makes us I think key in building our growth is its comp story, it’s also a new store story and it’s a conversion relocation story that’s important. And that’s our historical predictable abilities in our three-pronged growth.

However, we are adding something as we go forward, because I think you have got to keep building and growing as you go forward and we now are going after a multi-pronged strategy. So in addition to the merchandize strategy and our real-estate strategy we look to add within the next couple of years going after Canada and Puerto Rico and which I think that we have been talking about for a while is that in addition to our growth story that we believe that e-com it will be time within the next two years, probably either by late 2013 or early 2014 that we will be building our e-com platform and we think that there are some good opportunities there to get between 6% and 10% annual growth there due to e-com.

We talk about this year, and this year we talk about total growth and rue21 is a total growth story. However, we wanted to be a strong comp story too and both of those are very important for our future. And one of the comp drivers in addition to what we build in our juniors and our guys business is our etc! Business, it is now up to 26% of our business. And the categories in there are five key prongs and that is our footwear business, where we believe over the next four years or so that we could become one of the largest dominant specialty retailers in footwear in the United States.

And we are building strong with categories of boots and categories of sandals and we are increasing our business dramatically there. But we also are building our fragrance and beauty business, we now have 13 exclusive fragrances and soon to be 15, that’s going to happen in 2012. We are constantly growing and we are building the beauty business. And also, we keep going after our accessories business and our jewelry business and we are starting to really develop our tarea business, which is our lingerie business of bra’s and undies and that’s a growing business for us. So we continue to see this growing for our future.

Now, a couple of things. In talking about drives our square footage growth obviously is a key driver and we are going keep building on our square footage growth. And you are looking in this slide I am going to show a video in a second, because I am not so sure everybody in this room is seen a rue21 store or what our new larger etc! stores look like and I would like to show it you, but when you walk into a store you have big impact for girl’s area. Across the floor is a guy’s area with a CARBON elements, which is our guy’s accessory business, which we are also starting to expand and those are some of the plus leverage that we have. In the center is our fragrance and ruebeaute!, which you will see on the video and towards the back of the stores and it is really you are talking about 5000 foot platforms, you have your etc! business or accessories and then we are starting to build the tarea business, which I said which is our lingerie business. So, I would like to go to a video that is just a couple of minutes that shows you one of our larger stores and may be gives you a good impact of what rue21 is building for the future.

(Video)

That’s the (inaudible) store calling. Anyway, I hope you have enjoyed that and what we do is that we differentiate ourselves from other people that, we are like a mini little department store for girls and guys in these 5000 square foot boxes. And, what I think is important also is that we are an everyday great value and so that sometimes we are very much compared with some of the other teen retailers in the malls and I think that sometimes that the everyday trade value is more that can be compared with looking at a bigger boxes TJ Maxx or Ross Stores they give a great value and I think that that what helps us propel our business going forward.

In addition to comp drivers as is that also some of the categories we are going to go after this year is club rue, it is a little more what we call it ‘hoochie mamma’ clothing and it is a little more fashion and that I think that is an emerging trend right now and fashion at a great value is what is selling today and you don’t have to promote it. I believe very much in active sports where you saw a great Lululemon before going after yoga wear and we see in the teen environment that we could be a dominant headquarters for that value business in America.

And that in denim, we are tired of just promoting denim at $19.99 and having to be cheaper and you are going to have to still do some of that but we are going to go after $39.99 denim, we are going to go after fashion denim and that we sell a little less units at a lower price and make money at the higher price, that’s what we want to do. And that the guys business is starting to really turn around, we have had a little slower year in the past year-and-a-half and it is starting to get stronger and we are going to really go after the dress business, because we think we can be dominant in that versus the rest of our competition.

And one final thing, buyback programs, when it is tough out there in the second to third quarter and sometimes our comps have been flattish at that time, that instead of just POSing our brains out, we are going to buy back into key item categories whether it is dresses; sun dresses; whether it is sandals; whether it is denim shorts and have that impact merchandize at a great price to sell and bring in our customers.

And I think it is also important because people get nervous about our growth and I understand it because very few people have grown to a 1000 plus stores, but we have multi-chance. It is not just a mall business. If you look at this chart we have 395 strip centers right now and that is 16% of that commodity of being 2,500 strip centers in total, so we have a lot of room to grow. We don’t want to just be a mall store, we are not just an outlet. We believe this small market strip center is big and we will do a predominance of increasing of strip centers versus mall locations in 2012.

And a couple of things before we kind of close. I mentioned something in our third quarter analyst call that like some other illustrious [ph] retail members that we have flagship stores too. And so, we have London, it might not be England, but it is in Kentucky and that’s one of our stores and what it looks like. Next one you got to love. We have Paris, it is not in France, but it is Paris-Texas. It looks like a prison, but this store will do, I know – sometimes I stand up here and I go, oh my god, people are going to laugh me out of the stage, but this store will do over 1.5 million in business in less than 5000 square feet at low rent, so we are very proud of that Paris prison, so it is very good. And we have Moscow, but it is not Russia, but it is in Idaho. So, to me it is these small markets -- our number one store in November was in Elko, Nevada, okay. And we opened the first day into $30,000 of business in the community that has 23,000 people. So everybody shopped in rue21 so it is an interesting environment, that is what we are going to keep going after.

And so I have one more video and I think that I want to show you the culture of rue. I am not able to go to every store we open. We opened 120 stores this year and 38 relocation stores, but every store we sit weekly and look in a merchandise strategy meeting and at the end of the showing the visual of the store we have a skit that these manager and team perform, even though they have to open up a store and I think this will give you a great understanding of the small markets of rue.

(Video)

That’s our small markets everybody. And believe it or not, that is the team in that store, so obviously it’s not professionally done but they did a great job.

And finally for me before Kim, I think that our margin expansion opportunities are huge and our operating income keeps growing year-after-year and we look to get to that increase to double digits very shortly. And I would like now to turn this over for the next few minutes to Keith McDonough, our CFO. Thank you.

Keith McDonough

That is a tough thing to follow that video. I only got a couple of numbers but we will go through quickly.

This is the reason why operations management -- we have doubled our square footage in the DC recently. Software is on its latest releases. We’ve talked about in the past planning and allocation systems. Allocation went live last year and planning will go live this year. We have talked a lot about margin and margin expansion, Bob just finished with margin expansion. This is the reason why we feel comfortable saying that we will be able to increase our margins.

Traditionally, we’ve looked at this business over the last two or three or four years. We have not been the leader in terms of gross margins or operating margins, but these investments are the reasons why we think we can expand those margins and hit that double-digit operating margin in the near future.

This is our DC; we recently put an addition onto our DC, just a couple of shots of our headquarter support centre. As of note, we are going to invite everybody to Investor Day/Analyst Day in our support centre on April 18, so save the date.

One of the primary reasons that I am more optimistic about this business today than I ever have been, the metrics on our new stores continue to compel this business. We are paying these new stores off in less than a year. This is a self funding new store growth model. It continues to pay for the infrastructure that I just talked about. In 2011 stores, metrics and performance in terms of ROI’s, which I measure, are in line with 2010, 2009, 2008, and so on.

Consistent long term growth margin, we have grown the gross margin line consistently over the last four years. The last bar there is Q3 trailing 12 months, 37.5%, I feel comfortable that that they will either maintain or grow through the full year 2011.

Real gross margin long term gains, yes, this is important because we tend to be measured on the last quarter or the last half, here are the year-to-date numbers relative to our peer group. And these two slides that I have, I would like to just demonstrate what’s happened to this business over the last three, four years. 2008, we are looking at, these are just deltas, the growth in gross margin rue21 delivered versus the peer group, or our peer group, 2008, 2009, 2010, and 39 weeks 2011, so we have shown the gross margin gains in each one of these reporting periods far in excess of the peer group.

This is another comparison to the peer group, but our long term consistent comp sales gains. Starting out at 2007 at $100, what happened to our comp sales relative to the peer group over 2008, 2009, 2010 and 39 weeks? So as you see we have grown our comps consistently, we are proud of that fact. We have not given back and had to club back any comp sales growth. We are very consistent from a comp sales standpoint. And then we add to that the square footage growth that we have delivered over the years, and that is what is driving the 20% net income growth that we have delivered, we said we would deliver and we continue to say we will deliver long term.

Another slide that talks a little bit about comps, this is each quarter 2007 through 2010 and then the last three quarters. I have highlighted a couple of things. We have got net sales growth, net income growth and comp sales growth. I wanted to highlight the quarters by which we were at either flat or negative comp store sales growth. You will see in 2008 a negative 5.2% in the first quarter, 0.7% in the second quarter, but look at the net income growth that we delivered. Each one of these highlighted boxes, I think tells a story about our ability to produce profitability, grow square footage, grow our margins both from a gross margin standpoint and an operating standpoint and that is what is delivering the net income growth that we have delivered even latest in the last and third quarter.

Long term financial metrics, we have had this slide up here, since we have gone public in 2009, it hasn’t changed. Our square footage growth mid-to-high teens, comparable store sales growth low, single digits, 150 basis points in improves we delivered that consistently, but I still have it up here as a goal for us, we feel comfortable with that guidance and the net income growth of plus 20% for this business over the long term. One final note again, save the date, we have scheduled an Analyst and Investor Day for April 18, 2012. And that completes it. Thank you.

Robert Fisch

That’s our small markets everybody. And believe it or not, that is the team in that store, so obviously it’s not professionally done but they did a great job.

And finally for me before Kim, I think that our margin expansion opportunities are huge and our operating income keeps growing year-after-year and we look to get to that increase to double digits very shortly. And I would like now to turn this over for the next few minutes to Keith McDonough, our CFO. Thank you.

Keith McDonough

That is a tough thing to follow that video. I only got a couple of numbers but we will go through quickly.

This is the reason why operations management -- we have doubled our square footage in the DC recently. Software is on its latest releases. We’ve talked about in the past planning and allocation systems. Allocation went live last year and planning will go live this year. We have talked a lot about margin and margin expansion, Bob just finished with margin expansion. This is the reason why we feel comfortable saying that we will be able to increase our margins.

Traditionally, we’ve looked at this business over the last two or three or four years. We have not been the leader in terms of gross margins or operating margins, but these investments are the reasons why we think we can expand those margins and hit that double-digit operating margin in the near future.

This is our DC; we recently put an addition onto our DC, just a couple of shots of our headquarter support centre. As of note, we are going to invite everybody to Investor Day/Analyst Day in our support centre on April 18, so save the date.

One of the primary reasons that I am more optimistic about this business today than I ever have been, the metrics on our new stores continue to compel this business. We are paying these new stores off in less than a year. This is a self funding new store growth model. It continues to pay for the infrastructure that I just talked about. In 2011 stores, metrics and performance in terms of ROI’s, which I measure, are in line with 2010, 2009, 2008, and so on.

Consistent long term growth margin, we have grown the gross margin line consistently over the last four years. The last bar there is Q3 trailing 12 months, 37.5%, I feel comfortable that that they will either maintain or grow through the full year 2011.

Real gross margin long term gains, yes, this is important because we tend to be measured on the last quarter or the last half, here are the year-to-date numbers relative to our peer group. And these two slides that I have, I would like to just demonstrate what’s happened to this business over the last three, four years. 2008, we are looking at, these are just deltas, the growth in gross margin rue21 delivered versus the peer group, or our peer group, 2008, 2009, 2010, and 39 weeks 2011, so we have shown the gross margin gains in each one of these reporting periods far in excess of the peer group.

This is another comparison to the peer group, but our long term consistent comp sales gains. Starting out at 2007 at $100, what happened to our comp sales relative to the peer group over 2008, 2009, 2010 and 39 weeks? So as you see we have grown our comps consistently, we are proud of that fact. We have not given back and had to club back any comp sales growth. We are very consistent from a comp sales standpoint. And then we add to that the square footage growth that we have delivered over the years, and that is what is driving the 20% net income growth that we have delivered, we said we would deliver and we continue to say we will deliver long term.

Another slide that talks a little bit about comps, this is each quarter 2007 through 2010 and then the last three quarters. I have highlighted a couple of things. We have got net sales growth, net income growth and comp sales growth. I wanted to highlight the quarters by which we were at either flat or negative comp store sales growth. You will see in 2008 a negative 5.2% in the first quarter, 0.7% in the second quarter, but look at the net income growth that we delivered. Each one of these highlighted boxes, I think tells a story about our ability to produce profitability, grow square footage, grow our margins both from a gross margin standpoint and an operating standpoint and that is what is delivering the net income growth that we have delivered even latest in the last and third quarter.

Long term financial metrics, we have had this slide up here, since we have gone public in 2009, it hasn’t changed. Our square footage growth mid-to-high teens, comparable store sales growth low, single digits, 150 basis points in improves we delivered that consistently, but I still have it up here as a goal for us, we feel comfortable with that guidance and the net income growth of plus 20% for this business over the long term. One final note again, save the date, we have scheduled an Analyst and Investor Day for April 18, 2012.

And that completes it. Thank you.

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