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rue21, Inc. (NASDAQ:RUE)

Q1 2012 Earnings Call

May 24, 2012 4:30 p.m. ET

Executives

Bob Fisch - President and CEO

Kim Reynolds - SVP and General Merchandise Manager

Keith McDonough - SVP and CFO

Joe Teklits - ICR, Inc.

Analysts

Adrienne Tennant - Janney Montgomery

Brian Tunick – JPMorgan

Paul Lejuez - Nomura

Janet Kloppenburg - JJK Research

Erinn Murphy - Piper Jaffray

Lorraine Hutchinson - BofA Merrill Lynch

Operator

Good day and welcome to the rue21 Incorporated first quarter fiscal 2012 earnings results conference. Today's call is being recorded. At this time, I would like to turn the conference over to Joe Teklits. Please go ahead.

Joe Teklits

Great, thanks. Good afternoon everyone and welcome to rue21's first quarter 2012 conference call. As the speakers today are Bob Fisch, Kim Reynolds, and Keith McDonough. And as a reminder, statements made during today's call will contain forward-looking information about our financial performance and prospects. And results could differ materially from those contained in our forward-looking statements.

Risks and uncertainties that could cause our business and financial results to differ materially from those in the forward-looking statements are included in our fiscal 2011 Form 10-K and in subsequent filings we have made with the SEC, as well as in the earnings press release we issued today. These documents can also be found on the Investor Relations section of our website at rue21.com. All information discussed on this call is as of today, May 24,, 2012. And the company undertakes no duty to update its information to reflect future events or circumstances.

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

Bob Fisch

Thank you, Joe, and good afternoon everyone. Thanks for joining us on our call. I am going to keep my comments short and subtle today and then let you hear from Kim and Keith. On our last call, we indicated for the first quarter that we would achieve a low single digit comp increase, total sales growth in the mid to high teens and earnings per share in the range of $0.42 to $0.44. We were pleased to have reported today a 1.7% comp increase for the quarter, total sales growth of 19% and a 21% net income increase with earnings per share of $0.46.

The goal of our management team is to produce consistent and predictable profit growth for this company, each and every quarter. And I am very pleased that this quarter we achieved our growth goals just that we had for the last 10 years. This consistency does not happen by accident. It is a credit to our long term business model, the success we have had in small and middle market communities and the dedication and hard work from our entire team. Experienced, consistency and predictability. It is our secret sauce.

We had a very successful analyst day here in Pittsburgh in April and I enjoyed meeting with many of you in person. That day as we had on our last earnings call, we discussed three priorities for 2012: one, grow square footage; two, drive comparable store sales increases, and three, expand margins. The strategies we have built behind those priorities contributed to our results this past quarter and will continue to drive our results for the second quarter and beyond.

In terms of square footage growth, we opened 40 stores in the first quarter. The new stores had strong openings and we continue to see no resistance to reaching our goal of 1500 productive stores within the continental United States. My real estate team and I just came back from the real estate convention in Las Vegas, and we had great meetings with developers out there. And I feel as confident as ever that we are controlling occupancy costs while getting even better positioning in the shopping centers where we are opening up or relocating.

We continue to target value centers in small or mid-sized communities with a high-teen demographics but few competitors. And I will tell you I was happy that our flagship stores in London, Athens, Dublin and Paris, where in rural markets in the United States and not in Europe this quarter, because we are delivering strong sales in these under-appreciated markets. We plan to open 35 new stores during the second quarter and we will be converting four existing stores to our larger etc! format.

Turning to our goals of comparable store sales growth and margin expansion, we have achieved a 1.7% comp store sales increase during the first quarter on top of a 5.2% increase in fiscal 2011, and we did it without affecting our gross margin which remained flat on top of last year’s 100 basis point increase for the quarter. We accomplished this goal by staying true to our promotional plans and by investing in current trends like colored bottoms, casual dresses and activewear that were starting to ignite at the end of the fourth quarter. Our customer reacted favorably to our merchandise assortments especially with the great weather in March.

While sales were slightly tougher in April because of the Easter shift and some turn in weather, we maintained our pricing integrity and did not promote more aggressively than we had in prior quarters. We ended the first quarter with yet another increase in average unit retail.

I’d like to turn this focus now to the second quarter and the summer selling reason. As I discussed in prior calls, we are really excited about our powerful presentation of key items our customers want this season, like sandals, sundresses, skirts and shorts. These strong sellers would drive our business throughout the second quarter. We will break the mold of soft second quarter comps through the depth of our wear-now merchandise and the ability to balance our assortments between regular priced summer product and sale items.

I also want to emphasize the importance of our marketing focus and the potential it has to generate sales growth in 2012. We now have over 1 million fans on Facebook. We have made our website interactive and we stay relevant to our keen customers with online content and events that make us internet destination. Events in the first quarter included a partnership with the pop artist Carmen and tie-ins into the teen hit The Hungry Games and we will be participating in more viral partnership opportunities going forward.

We drive traffic to our stores by leveraging social media which resonates with our demographic rather than traditional advertising methods which we believe are less important to the teens. This also controls costs as advertising remains less than 1% of our total sales and builds a platform for ecommerce which is an initiative we see in our future as early as 2014.

Finally, I am pleased to announce today that we’re instituting a share repurchase program to buy back up to $50 million of rue21 common stock. This program reflects our confidence in the strength and stability of our cash flow, and since our new stores are self-funding, the buyback will not hurt our growth plans nor will it affect any of the initiatives I have discussed with you such as ecom.

So in summary, we are pleased with our business, our positioning and our continued consistent and predictable results. The second quarter is off to a good start, and I am encouraged by our current performance, including our comp store sales and the compelling merchandise assortments in the store that means so much to us. We have plans in place to finish it the same way and carry our momentum into the second half of the year.

And now I would like to turn the call over to Kim to give you some color of what she sees as our merchandise wins and opportunities for the second quarter and our back-to-school season. Kim?

Kim Reynolds

Thank you, Bob. One of our competitive strengths in merchandise in this quarter came from our speed to market sourcing capabilities. Our fast sourcing model gives us the flexibility to pull away from a trend when we see it losing traction and to reposition our buy into an outperforming trend. We can offer our customers a variety of look, preppy, aggie, active, whatever may be trending and with our own interpretation and our own rue21 exclusive brands. We identified what our customer wants and we act quickly the emerging trends to get them into our stores quickly.

The translation of our fast sourcing model as it applies to our first quarter performance meant a move away from sexy, clubby looks in both girls and guys and a shift to some cleaner, less trick up fashion with tons of colors for spring. For girls, our best sellers were dresses, shorts, woven shirts, colored bottoms, sandals and casual shoes. I want to add that our guys business are a continuation of positive comp performance momentum continuing from the fourth quarter of 2011, driven by tank tops, shorts, shoes and bottoms.

On a really great note, all three categories of business, girls, guys and etc! accessories comped positively for the first quarter. Looking into the second quarter, we are transitioning through spring into summer with a brighter color pallet and continuous flow of newness into our stores. As Bob mentioned, we are excited about the powerful assortment and depth in the stores of categories like dresses, shorts, sandals and casual shoes that we will promote as planned to drive sales in the quarter. We continue to rely on a balanced assortment of compelling price points to deliver margin expansion and achieve higher AURs on the fashion our customers love and expect at rue21.

In our etc! accessory business for the second quarter, we are launching a new pop-up fragrance (indiscernible) summer next week and we’ll continue to expand our offerings of rue beauty products for summer and into back to school. We continue to build our footwear business to be a dominant destination for all categories, especially in sandals and casual shoes. We continue to expand our good, better, best strategy and for back to school, we will be launching our premium 3999 denim in both girls and guys to complement our already compelling fashion denim offerings at 19 and 2999 based on our successful testing. Another great example of our good, better, and best strategy.

Our firm commitment is to continue to drive this out and profit through offering merchandise that customers love, through our fast sourcing model and trend way product that distinguishes rue21 as the fashion destination for our customers. And now I will turn the call over to Keith to go over the numbers.

Keith McDonough

Thanks Kim. I will read the financial highlights for our first quarter and then provide an update to our outlook for the second quarter and for the full fiscal year 2012. Our Q1 performance included an excellent top and bottom line results with sales up nearly 19% and net income growth of over 20%. We maintained gross margin equal to last year and we delivered 40 basis points of expense leveraging, including the impact of stock compensation – excuse me, excluding the impact of stock compensation.

Inventory at the end of the quarter was in line with our low single digit guidance, up 2.3% per square foot and we opened 40 stores, one more than last year in the quarter but we generated 81% or $4.4 million more in cash in the quarter than the last year.

Sales growth in the quarter was 18.9% or $32.7 million supported by a comparable store sales increase of 1.7%. Importantly, this comp performance was delivered on top of a 5.2% comp sales increase in the first quarter of 2011. As is always the case with rue21, our total sales growth was driven primarily by non-comp store sales growth which contributed over 90% of our overall growth. This quarter, we enjoyed an AUR increase of 4.7% which drove average ticket up 3.6%.

We opened 40 stores and converted seven to the etc! format compared to 39 stores and 12 conversions last year in the first quarter. We were operating 795 stores at the end of this quarter, up 17.4% from last year, consisting of 635 comp stores and 160 non-comp stores or just over 20% of the total. Last year’s total comp at Q1 end was 677 consisting of 533 comparable and 144 non-comparable or just about 21% of the total.

Gross profit for the quarter increased by 18.5% to $79.7 million, up from $67.2 million last year. Merchandise margin was equal to last year and we de-levered slightly by 10 basis points in the areas of stock for store occupancy and distribution costs related to our recent distribution center expansion. These gross margin results were on top of last year in Q1 that were 100 basis points improved from the year earlier.

SG&A expense margin was equal to last year at 26.2%. Store expense margins maintained from last year in the quarter and admin expense, excluding stock comp, leveraged by 40 basis points and then the incremental stock comp expense is off that leverage. This overall SG&A expense margin performance was actually above our expectations. As we have guided, we expect expense leveraging but stock comp would take us into an overall deleveraging position in 2012. The incremental difference in stock comp expenses in the first quarter was $1.1 million and we anticipate that incremental difference to grow in quarters two through four.

Depreciation and amortization totaled $7.5 million, increasing 23% over a year ago. Expense represented 3.7% of sales within our expectations, deleveraging up 20 basis points from last year. We were planning 2012 CapEx to approximate $39 million net, which includes 120 store openings, 28 to 30 conversions, store maintenance and fixture CapEx and our continuing IT support and supply chain investments.

Operating income for the first quarter grew by 16.4% to $18.4 million, up from $15.8 million a year ago. Our operating margin shrunk by 20 basis points to 8.9 in the quarter which was due entirely to 60 basis points of non-cash expenses deleveraging previously discussed, namely the stock comp and depreciation expenses. The quarter’s effective tax rate was 36.9% versus 39.1% for the same period a year ago. The lower effective tax rate was a bit better than our range of expectations for the quarter and going forward in 2012, we expect a rate closer to 37.5%.

Finally, net income increased by 20.6% or $2 million to $11.6 million for the quarter, up from $9.6 million a year ago. Fully diluted earnings per share were $0.46 versus $0.38 a year ago on approximately the same fully diluted outstanding share count of 25.1 million.

Now moving to our balance sheet, cash and short term investments at the end of the first quarter were $81.8 million compared to $55.6 million at the end of the first quarter of 2011. During the quarter, we generated $9.9 million in cash compared to $5.5 million last year in the first quarter. This increase includes the impact of incremental CapEx in the quarter of $3.4 million. As I have said earlier, inventory levels at the end of the quarter are up 2.3% on a square foot basis. We have no long term debt on the balance sheet and our revolver facility limit is $85 million plus another $15 million accordion feature option. We did not borrow at all during the quarter and we have no plans to do so throughout 2012.

This strong predictable cash flow is the primary reason our board recently approved the repurchase of rue shares up to $50 million. We look forward to creating shareholder value through a buyback program as we move through 2012 and beyond.

Now turning to outlook, we continue to plan for 120 new stores in 2012 with a split of 75 in the first half and 45 in the second. Conversion should be 28 to 30 for the year. We also plan to close a handful of stores later in the year all of which have leases that are expiring. On average, rue21 has closed less than two stores per year over the last five years. In the second quarter of 2012, we expect the diluted earnings per share in the range of $0.32 to $0.34. This guidance assumes a low single digit same-store sales increase and total sales growth in the high teens.

For the full year 2012, we are increasing EPS guidance by $0.02 to be in the range of $1.76 to $1.81 on a fully diluted share count of 25.4 million. Our upward adjustment is attributable to our first quarter performance and to better visibility into the second quarter. For the year, we continue to expect comp sales growth in low single digits and overall sales growth to be in the high teens. Our guidance does not assume any share repurchase program and any shares we decide to buy this year will most likely have a bigger impact on 2013 earnings than 2012 earnings given we will soon be at the midway mark of 2012.

That completes my prepared remarks. So I will turn this call back over to Bob.

Bob Fisch

Thanks Keith. Again, I want to thank our rue community for delivering strong results for the first quarter. We are excited about our strategies going forward to deliver similar consistent and predictable results for the second quarter and the back half of the year. And now I will turn the call over to any of your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Adrienne Tennant with Janney Capital Markets.

Adrienne Tennant - Janney Montgomery

Bob, I actually just wanted to ask you whether you saw – I know your business is a little bit more inflated. But what do you think you’re doing differently than, say some of your competitors, I think whoever they are, in that sort of fashion teen arena, did you see a material deceleration in the back half of April? And can you give us sort of month to date May comps, that will be great? And then I have one for Keith and one for Kim.

Bob Fisch

And as far as fashion, Adrienne, I think the key point, and because I think that there sometimes needs to be a clear understanding of it is fast fashion to us is not a look, it’s really It's really certainly being quick and nimble to go after emerging trends. So whatever those trends might be, we are able to react. We are not set in a certain way of being a conservative store or updated store. And in teen fashions, I think you have to react to trends, and I think that one of the things that we’ve looked at is that – and I think Kim explained it very well, is that we originally thought maybe clubby fashions are going to be really good and what rue can react on, we didn’t really get affected by it. It didn’t pan out the way we wanted to, and that was one small category of business. But we really went after woven tops and sheer tops that were great, and we’re really expanding our dress business which is going to be something major that we think we can dominate in the industry.

As far as April, I think that the deceleration was not because of something happening to faster fashion or something, that, and again I think we are just nimble. I think that we did see a little weather effect in the end of April and obviously there was an Easter effect. But when a lot of people here for analyst call or in some of our meetings with analysts or some of our other discussions, we were conservative about April. And we felt that we did well in March but we were not going to sit there with it, with a weather being so strong in March, thinking that April was also going to continue the same way. However and positively, I am very happy because we did not promote more in April to panic and say, oh I better get that last second comps and you know that we are very consistent and predictable on that.

May has been something where we are achieving into our guidance of what we said of low single digit comps. So right now, and I can’t really get into what that is right now. In fact, I looked at the numbers today at the 2 o’clock triple pole reading and we did pick up 20%. But I can’t really go by that for the rest of the quarter. So just for the day, but seriously you know how us retailers are we get crazy and all this. But seriously I am confident that we’re going to deliver what we say and I do want us and I see us breaking that mold of the last three years of not achieving that comp. We make our profits and this quarter, we’re going to look to achieve and make our comps to what we guided as well as our profits.

Adrienne Tennant - Janney Montgomery

Well, Bob, the consistency is highly commendable. Kim, I have a question for you. Where is that premium denim going to be in stores across all the stores and then for your dress business, when will that be at peak and how much are you distorting it year on year? And then really quickly for Keith, can you just talk about inventory units of dollars? I know you didn’t have any AUC impact for the back half of the year? Thank you.

Kim Reynolds

Okay. To answer the question about the premium denim, we actually start rolling out to the stores in June and our peak season is right around the first and second week of August when customers are ready to come in, start shopping for back to school. On the dress question, we are pretty much sitting at inventory right now. Now in the next three to four weeks you can see it at any rue21 stores you visit today.

Adrienne Tennant - Janney Montgomery

Okay. How much more distorted is that, is it however you do a percentage of sales or percentage increase over last year?

Bob Fisch

Well, we don’t really get into those numbers in dresses or by categories. But as we said all along, I think the key thing that was very important is starting even from the second quarter conference call last year through end of the year and at some of our meetings is that it was very important that we looked at our mix of business in this quarter to make sure that we are to strike the back to school too early not to get the business on it, and I promised everybody that we would really look at it to make sure our assortments would be into key categories driving the business whether it’s dresses, and dresses is a business of two-fold. It is key item dresses and it’s also fashion dresses. And as we get closer more into the second quarter, we will be even stronger in being able to have very dominant strong promotions that was in our plan and in our markdown and gross margin plans that will drive our business.

Adrienne Tennant - Janney Montgomery

And Keith, on inventory?

Keith McDonough

Yeah, inventory up 2.3%, we were here a quarter ago and it was up double digits. We told you that was Chinese New Year and we’d done that intentionally and that was exactly what it happened. And we had great inventory levels in place for the first quarter, and we are situated very well for the second quarter. I see more and more and even flow of our stores, I think in part because of our nice new allocation tools that we have in place. So I think that’s part of the story too. But I see inventory in great shape now.

Bob Fisch

Also, it’s something that Kim and I are working on early is we’re still buying through July and August. So we have opportunities to take advantage of great buys and trends that are emerging and that’s what faster fashion is. It’s not just a pace, it’s a sourcing of what we can do.

Operator

And looks like, we will take our next question from Brian Tunick with JPMorgan.

Brian Tunick – JPMorgan

Not many company raising earnings guidance I guess right now. So I guess one for – two for Keith and then one for Bob. I guess, for Keith on the gross margin line as we look into the back half, we understand you weren’t negatively impacted last year from sourcing costs. But just wondering if you could see any benefit at all given what’s happened to cotton prices and your relationship with your vendors. Also for Keith, maybe on the $50 million share repurchase program is there any timeframe on when you have to complete that. And then maybe Bob, on the store side, just curious you’ve come back from ITSC, just maybe what’s going on out there as far as your occupancy costs, as far as maybe taking smaller stores, sort of what do you think the landscape looks like from your real estate side?

Keith McDonough

Yes, from a gross margin standpoint, Brian, we still feel as something we have in the past about our long term guidance and that’s a 150 basis points worth of growth. And we have continued to talk about that as you know. We talked about growth at that line item in 2012 and we still feel confident of that. And yeah, I do feel looking at the year more confident in second that we can pick up a couple of 10s or 20 basis points in the second half. And so I am optimistic about the second half in terms of gross margins.

The share repurchase program, there is no time element to it, and we are going to still walk before we run. But we were in Jamie Dimon’s conference room with you and we talked about that share repurchase. We learned a lot from the investors that day in terms of their desire to have one in place, so we’ve delivered that and then we are going to – as 2012 develops, we will be strategic about how we introduce that program and make it as a viable accretive program for our investors.

Bob Fisch

And to your question on that Brian about the convention, I have to tell you I couldn’t be more proud of my team led by Bob Thomson and his group. And we have six strong real estate manager directors who worked very well with us there that I felt more confident in this convention than any other time that we will continue to see prices being maintained and not increase. I do not see at this particular time that all of a sudden something is changing out there, there is plenty of wide space availability in our sizes for spaces that are in the 4000, 5000 or 6000 range. And that is between our small store communities that are going after strips and value malls, or going after the B malls where we’re also taking some opportunity there because we get some advantageous price. But I met with some very big developers and the key people as well as the one-off individual developers. And rue21 resonates very well to them and really in a very powerful position to continue to leverage positively the occupancies and to continue to have rents over the next 10 plus years that are going to increase whether the economy gets better or not.

So Brian, I really – I felt even better than last year. I feel just as confident that we only – we don’t have that many stores that we are going to still make deals on this year because we’ve completed most of them and I am very positive about 2013. And the last part of your question is on smaller stores. Looking at that, here’s what I think is big win. We have been able to, as you know and some of you know on this call, been able to maintain our price of occupancy level whether we have a 4000 or 5000 or 6000 square foot store. But what we look at is to make sure that we are going to achieve less dollars a square foot going forward and that we’re actually opening up stores that are probably approximately 400, 500 square foot less. But looking to do the same or more business as we did this past year but being able to control more the occupancy, the payroll, the utilities and the inventory level.

Operator

We’ll hear next question from Paul Lejuez with Nomura.

Paul Lejuez - Nomura

So guys just a big picture question, historically for you guys your second quarter has been greater than your first quarter from a sales and earnings perspective. That wasn’t the case last year. And I am sort of wondering what changed last year and why you continue as we look at 2Q guidance this year, why do you continue to kind of think that 2Q remains the smaller quarter? Thanks.

Keith McDonough

Paul, I think from a trend that’s not just last year. I think we have seen over the last two or three years that, that business has been sucked into Q1 and maybe pushed into Q3. And I think we’ve talked, we probably talked constantly this past 12 months about learning from that and adjusting to that. And I am here to tell you I think that Bob and Kim have a great plan for Q2 and maybe reversing some of that is entirely possible by looking at the quarter for what it is. And there is a short promotional kind of summer quarter and I think we are positioned to take advantage of it.

Bob Fisch

Maybe something else, Paul and I don’t have the exact numbers. But I believe we are one of the biggest if not largest tax free companies in the United States at over 50%, 55% of our stores, which each year has got even more into August. And what I think that we learned from last year and the year before is that to make sure that we are in position and strong, powerful, we are now merchandise with, I think we said in our transcript, and what Kim is saying, I think Kim has really put together a good program, a good balance and not just to set up our stores, very straightforward early like to just have denim looking shop in the end of June and early July where it doesn’t get you the business. And it’s too premature to promote. So I think that to me is that we have taken this very serious and have discussed with some of you in advance and on this call, I have just going forward to say we take that very serious and we feel comfortable with our guidance to deliver that strength in the second quarter.

Paul Lejuez - Nomura

And then Keith on the SG&A side, should we continue to expect SG&A up in the high teens going forward?

Keith McDonough

Well, yeah, as you know the store versus the admin is somewhere between three quarters to two-thirds store related. And what Bob has been talking about from a real estate strategy standpoint and get that smaller and have been able to leverage sales per box is only going to support leveraging store spend. So I look forward to that. That’s a longer term trend, it’s not going to happen overnight but I have absolutely seen the boxes getting smaller that we are signing for 2012. And I think that’s a positive because we see it’s a good, great sales result.

The admin expenses continue to leverage, we’ve talked about the headwind in comp stock, comp expenses. 2012 is kind of the third year of a three year plan, not that we’re not going to have them in 2013 but I think these large incremental increases that we’ve seen these first, two, three years being a public company, will start to dissipate and you will see faster leverage beginning in 2013.

Paul Lejuez - Nomura

Just as you increase the mix of some higher price point items within the assortment, have you seen any resistance in those efforts and then I am just wondering as the mix changes, does the margin structure remain the same? I don’t know if that’s for Kim or Bob or Keith.

Kim Reynolds

We have not seen an erosion of margin as a result of this good, better, best program we have been working on for the last several years. And I don’t think that value is about just price points. I think value has to do with what a customer loves and how much value we can give and how much faster we can give them. We’re not finding that there are price point resistance and we actually only tested this 3999 denim previously, almost a year ago during back to school, and very cautiously before we rolled it out for this back to school.

Paul Lejuez - Nomura

And what’s the AUR impact as we look to the back half of the year of that mix shift? If we looked at it versus like the second quarter for example.

Keith McDonough

I continue to see upward momentum on AUR. I think it is a mix related but for the most part I also think we are selling less promotional items and more first out the door. Back to the trend we have seen for the last probably six or seven quarters and so far I haven’t seen that slowdown and I am very happy about that.

Operator

We’ll hear next question from Janet Kloppenburg with JJK Research.

Janet Kloppenburg - JJK Research

Bob, just a question on the comp trend, do you think that perhaps a strength in the first quarter stole anything from the second quarter or do you think that the strength in bottoms can continue? Sometimes I worry that maybe the customer got satiated with bottoms in the first quarter. And I am wondering what your view point on that is. And Kim, if you could talk a little bit about the product flows this quarter. I know you’ve got a lot of exciting merchandising strategies in place. And I am wondering if there would be flowing more frequently or differently versus last year. And for Keith, I know the inventory per store up 2.3% but the totals came in a little bit higher, and I expected maybe the store opening plan is higher for the second quarter than it was last year. But I truly love to hear about that. Thank so much.

Bob Fisch

Sure. I will go first on that, Janet. No, I am more encouraged about bottoms going forward that, I think that as much as that we made a statement and we started actually if you remember, we started in December, at the end of December. And we were one of the only retailers not to promote at that time of the year, and we were able to sell new colored neon bottoms great and we went into another transition pallet. But actually I think that we probably could have even had more business in the first quarter if we had even more bottoms and color. And Kim has really put together a great plan for the second quarter that we will be able to be in June, July and then moving into August in new color. I see colored bottoms going through all the year – through the year and probably into spring new year. I think this is a real trend happening and it’s not just in denim, it’s in softer cotton fabrics too. It’s not just in denim, it’s in twelve different and different fabrications. So I think that’s strong too. As I think in shorts, it’s also strong in different colorations.

I think that in March, I’d be silly to say, I remember when sitting down at different meetings and even at our analyst day, of course, we got certain business in March because of being an 80 degree weather in Minnesota, that you don’t know it yet. But I see right now that we have a balance of categories that really will get us our business in the second quarter and I am encouraged about the second quarter.

Kim Reynolds

Janet, to your question about flows and we are flowing to the stores, we are first of all controlling our inventories very carefully and not looking to be higher than last year. They even want to be more efficient than last year. I think what we are looking at, what we are doing differently is really the flows to the categories that customers want to wear now. Bringing full length denim earlier than customers are ready to buy them for back to school doesn’t make a lot of sense in these days and shifting it into dresses and wrappers and wear now categories is where we think our advantages for the second quarter. And we also flow to our stores every day, and that hasn’t changed.

Keith McDonough

And I think that’s the message from me too Janet is that, it’s not so much the level of inventory that I watch but the age of the inventory and how it’s flowing. I feel very good about our positioning through the first quarter and where we stand today. The inventory is up 25%, so if you do the math, the square footage is up probably 22%. And that’s I think what we have done over the last eight quarters, six quarters, as we get a little larger in our store. That is reversing but that will take some time and as we move forward, I think we will see lower inventories related to lower inventory per square foot.

Operator

And we will take our next question from Erinn Murphy from Piper Jaffray.

Erinn Murphy - Piper Jaffray

Bob, just a quick question for you. As you think about the flow of Q2 this year versus – for last year from a comp perspective, can you just provide any detail if it was a little bit of a tougher compare in the first half and the easier compare in the second half, because if you think about last year you had less wear-now kind of heading into that July period. Just trying to think about the cadence for the comp for last year.

Bob Fisch

As far as you’re talking about the flow in second quarter this year versus --

Erinn Murphy - Piper Jaffray

Comp flow in the second quarter, yeah, for last year, so we can think about the set-up as we head into this year.

Bob Fisch

Well, I think if I am reading you right on this, I’d say first of all, the wear-now right now softer fabrications are really good and like, even it’s not only just a hot bottoms or something like that, it’s also in skirts very strong, whether it’s high low skirts, or whether it’s tiered skirts. And we are more into short dressing as well as in dresses. Kim, do you have anything you would like to add to that or –

Kim Reynolds

I think Bob has made a good point. As we said earlier, what the customer wants to wear-now, there is no point in investing inventory in denim and full length pants when really what they are looking for is cold weather wear. And that’s what we’ve capitalized on this year.

Bob Fisch

Look, we make mistakes all the time and I think that the key is that we learned from that to help for the future and it was commitment by Kim and I and the team to make sure that we have the balance that we think is right this year. What used to be right in 2008, ’09 and ’10 is not right for 2011 and 2012. The world is changing, you have to change with it. So to me we still get hyped up and everybody and analysts and investors say, are you all set for back to school in early July? The answer is no, I don’t want to be just set, because I am going to look good but not do as well. And as Keith said it is the shorter season and I want to be prepared so I can – I have the promotions planned within the margin to drive that business in the second quarter and then go after the third quarter back to school predominantly properly.

Erinn Murphy - Piper Jaffray

I guess my question just wanted to – the flattish comp you had in the second quarter of last year, how would that vary by month? Just I am curious if it was a tough – more positive in the front half of this quarter last year, maybe less positive in the second part of the quarter. Just trying to understand that cadence.

Bob Fisch

It did fall off a little in the end of July – in July. So and part of that is with these tax-free differences and parts of that I think was something that we said last year that if we had to do it over again, we would be going after to most of that wear-now key items as we are discussing now. You know what’s great about retailing, a year later you have the opportunity to be able to maximize that opportunity for this year.

Erinn Murphy - Piper Jaffray

And then Kim, just a quick follow up I think was on Janet’s question on bottoms. So if you think about the mix in bottoms in the business, are you building into that from an actual mix perspective as we head into that back to school fall timeframe just given that it is such a compelling trend right now in the marketplace, will that take a higher percentage of your mix?

Kim Reynolds

Slightly higher in my mix, yes, than it was last year but actually it’s really focusing in the key trends rather than assortment. Last year during back to school, our back to school mix would have included synthetics, it would've included denim capris, it might have included many different categories. For this year I think that the assortment is very focused on key trends, and yeah we are seeing opportunity both girls and guys in bottoms business for back to school.

Erinn Murphy - Piper Jaffray

And for top, you mentioned woven as the standout category, we have heard that from a couple of other companies – I am curious how you are thinking about that mix of woven versus knits as you head into the fall, I mean is this woven part of this clean-up trend that we are seeing and should we expect to see more of that as we head into the fall with a more the emphasis of knit?

Kim Reynolds

Yeah very much so. We reshaped our assortments that way. We’ve actually changed a lot of our assortment for June going into July and July you will see an enormous difference between our knit offering and our woven offering.

Bob Fisch

I think something is also changing Erinn on that is that it’s been such an incredible print cycle for many years now. And I think that whether it’s the colored bottoms, it’s also what’s translating – it’s not just key items on a table but it’s key items in sheer fabrics that also work with layering pieces in many, multiple colors which is great. It’s such a quick turning opportunity as the key is now not to be maybe into many prints but to be more in the solid. And all of a sudden the prints are going to start to look better again. So that’s just jumping into a business and reacting to business and we’ll be there to do it.

Operator

We’ll take our next question from Lorraine Hutchinson with Bank of America.

Lorraine Hutchinson - BofA Merrill Lynch

We’ve seen a nice string of AUR increases over the past number of quarters. I was just wondering if you had any initiatives in place to try to get the traffic piece of the comps moving positive over the next few quarters.

Bob Fisch

Well, I think that like we have been saying all along there, I think that what’s going to drive that comps into our business is two things. One, I guess, is what I have been saying and Kim has been saying that we think the compelling items, as wear-now is going to be key, but I think that tied into around our marketing area and marketing development between very strong coupon bounce backs that we are putting into the stores, that not any additional events but strengthening it. And also as we discussed our viral marketing, I think it’s very important tied in along with how we tie in with Facebook in different promotions. So I think that those are important but – if you asked me one big thing, it’s really the impact of our merchandise that’s going to drive the people in it, and I think that I feel as confident as ever about that.

Lorraine Hutchinson - BofA Merrill Lynch

Is there a specific level of cash that you want to keep on hand before you start buying back stock?

Keith McDonough

Just plenty right now, but no, I am not going to opine on our level of cash – the target level of cash. I am comfortable that we are and have been generating approximately $25 million worth of cash per annum over the last few years since being a public company. Looking forward, I am comfortable with that kind of growth and more in cash flow because of our predictable business model. So I think the board will assess the right number, I don’t think it’s the last summer or last program we’re going to announce as a public company. But we will move prudently in the marketplace just to build that value and accretion for our shareholders.

Operator

And that does conclude our question and answer session for today. I’d like to turn the conference over to Bob Fisch for any additional or closing remarks.

Bob Fisch

Thank you. No, I appreciate everybody being on this call. And I really look forward to seeing everybody and speaking to them on our second quarter call in August. Thank you very much and have a good summer. Good bye.

Operator

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

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