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rue21, inc. (NASDAQ:RUE)

Q2 2012 Earnings Conference Call

August 23, 2012, 16:30 PM ET

Executives

Bob Fisch – President and CEO

Kim Reynolds – SVP and General Merchandise Manager

Keith McDonough – SVP and CFO

Joe Teklits – ICR, Inc.

Analysts

Lorraine Hutchinson – Bank of America

Paul Lejuez – Nomura

Steph Wissink – Piper Jaffray

Janet Kloppenburg – JJK Research

Adrienne Tennant – Janney Capital Markets

Operator

Good day and welcome to the rue21, Inc. Second Quarter Fiscal 2012 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Joe Teklits. You may now begin, sir.

Joe Teklits

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

The risks that could cause our business and financial results to differ materially from those we currently expect are included in the fiscal 2011 Form 10-K and in subsequent filings we made with the SEC, as well as the earnings press release we issued today. All these documents can be found on the Investor Relations website at rue21.com. The information discussed on this call is as of today, August 23, 2012. And the Company undertakes no duty to update this information to reflect future events or circumstances.

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

Bob Fisch

Thank you, Joe, great job and good afternoon to everyone. For the second quarter of 2012, we achieved total sales growth of 17% consisting of both strong new store productivity and positive comp store sales. Merchandise margin increased 10 basis points and overall gross margin increased 30 basis points to a record 39.4%, the highest in rue's history.

Net income increased by over 18%, so we were pleased with our performance and ability to again show top and bottom line growth in what was certainly a volatile period for retail. The industry is seeing a trend of customers buying closer to need and with schools opening later than last year and the important tax free days in August, we did see end of July business move into the third quarter.

The shifted business due to later back-to-school openings is even more pronounced than last year. For example, the state of Texas, our largest volume state where we have 92 stores is going back-to-school one complete week later this year, next week. That happened in a significant amount of states where our stores are located and impacted our sales.

Through the middle of July, our comps were approximately a point higher than where we ended up. This positive side of this is that we are getting the business back in focus that we did expect and we are very pleased with the customers' reaction to our back-to-school assortments. But before I go into the third quarter, I want to go over with you some of the strengths of our business model that drove our results in the second quarter.

On every call like a broken record, I speak about the importance of consistency and delivering predictable results. We were again successful in the second quarter because of our core three three-prong strategy of diversification. We don't need to rely on just one channel or category of merchandise for profit growth.

As a reminder, our multi-prong strategy includes the following; number one, a flexible real estate strategy where we operate in strips, outlets and malls. Two, diversified product where we offer our customers girls and guys apparel and a wide assortment of etc! accessory categories including footwear, beauty, jewelry and tarea our intimate apparel. And three, balance sales growth that includes new store growth, conversion store growth and comparable sales store growth.

So first looking at a flexible real estate model, some or many of our mall stores performed better than our stores and outlets and strips. And why? There was oppressive heat across much of the country in July and in areas where many of our stores are located and people didn't want to shop outside. We capitalized on the traffic in the malls when business in the outside shopping centers like that was kind of tougher. The key for rue is that we are in all three channels and not reliant on one just -- one type of business for sales.

Next in merchandise, we don't just carry growth we also have a great mix of guys apparel and accessories. We are seeing a resurgence of dual gendered merchandise. We haven't seen that in a while. And we are in a position to capitalize on this trend. And in each category we don't just offer fashion, we have a balance assortment of key volume business drivers as well as the latest fashion trends.

This quarter, our girls sportswear performed well led by dresses, shorts and woven tops. And our guys business was our number one performer and also delivered strong results. In accessories, we were up against some great fashion trends from last year, so our accessory business particularly in jewelry was a little tougher.

However, footwear was a strong category and our broad product assortment enabled us to weather the underperforming jewelry accessory category without seeing detrimental impact to our overall sales or our gross margins. And more important, our fast sourcing model has allowed us to refocus our accessory assortments for back-to-school. That is always our secret sauce.

I want to take a minute now to make a point that I think is important to understand about rue. We should not be pigeonholed as exclusively a fast fashion player. We are a traditional mall team player. We are successful because we incorporate the best of both of these models. Fast fashion is not one trend, it is how quickly and how nimbly you react to a trend.

We can react to current fashion and consume the preferences and shape it into a trend. If it doesn't work, we clear out of it and we move on. If it is a strong seller, we reorder it and flow it back to the stores. And like a more typical mall team retailer, we also carry core fashion basics like denim or key item tops and [gifts] which Kim Reynolds will explain to you in more detail in a little later.

This quarter, we had a clearly defined strategy to go after key items and categories like colored bottoms, sundresses, sandals and guy tanks and all of those key volume categories delivered strong sales results. Which brings me to the third prong of our core business model, growth. This past quarter we opened 39 new stores and we now are 843 stores stronger. The 79 stores we opened in the first half of 2012 are even more profitable than in any prior years with record performance in terms of both sales and profits.

These latest openings include stores in smaller communities like our 772nd store in Vernal, Utah or our 788th store in Goshen, Indiana. But also stores in more populated areas like our 800 store in Massapequa, Long Island. Yes, I've got a place for you all to shop now in Long Island. That store is doing so well that we now plan to open eight to ten stores in Long Island over the next two years. Again, with our low overhead and value priced business model, growth in many different types of communities is certainly achievable.

Our first half performance has generated great financial returns and I'd like to spend a moment on the strength of our balance sheet. We have committed to using our excess cash for the following. One, to invest in our infrastructure and what is to support future growth and to explore new opportunities such as ecommerce. And two, to increase the returns for our shareholders by repurchasing our stock.

Because of the low build out costs for our stores and high return on investments, we will keep generating cash while we are making strategic investments in our future and executing our buyback program, all of which will continue to drive returns and our earnings.

Now I'd like to focus on a few of the strategic initiatives that we believe will positively impact the back half of the year, which is very important. First, focusing on profit growth by staying true to our promotional plans. As we showed last holiday season, even in a very tough promotional environment, we can compete and drive the business with our everyday low prices on fashion that our customer loves. We don't want sales without margin expansion, we want both. So we will again implement a targeted approach to promotions rather than total store wide sales.

And just like we did last holiday season, we intend to grow our top line without sacrificing our bottom line margin expansion. For the third and fourth quarter, we are not up against a deeper, promotional cadence like many other retailers and we believe this will be a competitive, compelling advantage for us at rue.

Second, we will begin to see results from our planning and allocation initiatives as we become more efficient at shipping to the right -- at the right merchandise to the right stores at the right time this fall and holiday season. And we have developed a hot zone store strategy that will generate incremental sales for us beginning in September.

Third, strengthening our brand and driving comparable store sales will be through marketing initiatives. We've continued to connect to our customers through social media and email [blast] and we are now on a campaign to increase our email signups that will help drive traffic in the back half of the year as well as being a prelude to our ecommerce development shortly.

And finally, our operation simplification program. We are implementing processes in technology that will allow our associates to spend less time on tasks and more time on delivering excellent customer service to drive sales. And this includes introducing this holiday season mobile scanners to our stores and improving on our scheduling templates.

So, in summary, we are seeing healthy back-to-school sales results so far this August, at a turnaround in categories of business that were tougher than the first half of the year -- in the first half of the year. We are looking forward to a strong back-to-school season and once again achieving consistent and predictable sales and profit growth at rue21.

Now, I'd like to turn the call over to Kim for some more highlights.

Kim Reynolds

Thank you, Bob. As Bob mentioned earlier, we ended the second quarter with a clear vision to intensify key categories of seasonal merchandise including growth and guy shorts, dresses, tank tops and footwear. We achieved success with this strategy and combined with strong positive reactions to colored bottoms and woven shirts in both girls and guys. We achieved a good performance in sportswear.

We also delivered a fantastic assortment of sandals and casual shoes that drove positive sales for the quarter. We're pleased with our fashion and color direction for the quarter as well as our direction going into the second half of the year. We had healthy full price selling in both girls and guys as we delivered a 7% increase in AUR as we were able to sell fashion merchandise at everyday great values without additional promotion.

We continue to build on and expand our good, better, best strategies as we delivered positive results and distinguishes rue21 as a fashion destination. We were disappointed in our performance in girls accessories, especially jewelry, where we were up against huge increases from last year as a result of maximizing our key feather trend. We were the feather destination in earrings last year and it is not the trend this year.

Fortunately, the last two compares are relatively easier as we enter into the second half and because of our flexible sourcing model, it allows some quick deliveries and change in trends, we were able to fine tune our back-to-school assortments and the team and I feel comfortable that we're properly focused on trend for the second half.

Our footwear business continues to build in both girls and guys and we see this as a growth opportunity. In the second half of the year, there were several initiatives that we're excited about. Number one is continuing to deliver color multipliers key items in depth.

We're seeing a return to fashion basics or bodies interpreted with fashion attitude. We converted our merchandise from a print dominated assortment the one focused on fashion solid and stripes. That's [corrigible] from previous seasons and has cleaned up, is a current trend.

The second is maximizing gift giving for holiday. We thought that we had missed some opportunity in this category from last year and we'll be increasing our assortments to recapture sales in this area. Gross novelty gifts, fragrance and beauty delivered the additional sales we see as opportunities for incremental growth in the fourth quarter.

Third and finally our good, better and best strategy in denim is performing extremely well currently and we've continued to take advantage of scale efficiencies among our vendors and will enable us to offer our best fashion at competitive retail.

And now, I'll turn the call over to Keith to go over the numbers.

Keith McDonough

Thanks, Kim. I'll review the financial highlights of the second quarter and the first half and then provide an update to our outlook for the remainder of the fiscal year. Solid top line growth supported by both comp and non-comp results, gross margin expansion, expense management and a lower tax rate were all drivers pushing net income growth of 18.5% in the second quarter.

Inventory at quarter end was down 2.8% and cash used in the quarter was exactly equal to last year even though this year, cash utilization included $12.9 million for the rue stock repurchase program. Updating you as of today, cash used for stock repurchases have grown to $18.2 million since the program began in June.

Sales growth in the quarter of 17% or $29.3 million was driven by a record 2012 new store sales results. Non-comp sales results in a comparable store sales increase of 0.5%. As is generally the case with rue21, our total sales growth was driven primarily by non-comp store sales which contributed over 97% of our overall growth for the quarter. This quarter we enjoyed an AUR increase of 7% which drove average ticket up 5%.

39 new stores were opened in the quarter as compared to 34 in the second quarter of last year and our quarter end store count is up 17.5% to 834 stores as compared to 710 last year. Store mix this year consisted of 662 comp stores and 172 non-comp stores or 20.6% of the total. Last year's non-comparable store count was 154 or 21.7% of the total.

Gross profit increased by 17.6% or $11.9 million to $79 million and gross margin expanded by 30 bps to a record 39.4%. Merchandise margin was up 10 basis points above last year and distribution cost leverage to provide the remainder of the gross margin expansion.

SG&A expense leverage by 50 basis points including the impact of non-cash stock compensation expense. As previously guided for all of 2012, we anticipated expense leveraging generally but incremental performance based stock compensation expense will take us into an overall deleveraging position.

This was exactly the outcome in the second quarter. We leveraged both store expenses and administrative expense combined by 50 basis points but the incremental margin in stock comp expense of 80 basis points put overall expense into a slight deleverage position of 30 basis points.

Our stock comp expense actual for the second quarter and forecast for 2012 is increased from last quarter, due to an acceleration of amortization of our performance based share ramp issued this spring. We anticipated a straight line schedule of the three-year life but later determined an accelerated amortization was required. In dollar terms, in the second quarter, the incremental stock comp different from last year was $1.8 million and we anticipate a similar year-over-year increase in quarters three and four.

For fiscal 2012, we anticipate stock comp expense in the range of $11.5 million to $12 million compared to $5 million last year. I will touch on this subject once more in a few minutes along with our outlook for the remainder of the year. We were very satisfied that excluding these incremental stock comp costs that will normalize in 2013, we leveraged expenses in the quarter by 50 basis points.

Our other material non-cash expense, depreciation and amortization totaled $8.0 million, increasing 25% over a year ago. The expense represented 4.0% of sales within our expectations deleveraging up 30 basis points from last year. We are planning 2012 CapEx for approximately $39 million net which includes 120 store openings, 25 to 28 store conversions, store maintenance and fixture CapEx and our continuing IT support center and supply chain investments.

Operating income from second quarter grew by 11% to $13.7 million. Our operating margin contracted by 30 basis points to 6.8% in the quarter which was due entirely to 110 basis points of non-cash expense deleveraging previously discussed, mainly stock comp and depreciation expenses. If we exclude just the incremental stock comp expense for the quarter, operating income growth would have been 26%.

The quarter's effective tax rate was 33.8% versus 38% a year ago. The lower effective tax rate was primarily attributable to a non-recurring tax credit that we were able to capture due in part to some of the system investments made in 2011. Excluding the one-time credit, our rate would have been 37.6%, 40 basis points to low last year and within our range of expectations for this quarter and going forward into 2012.

Finally net income increased 18.5% or $1.4 million to $9.1 million for the quarter. Fully diluted earnings per share were $0.36 versus $0.31 a year ago on approximately the same fully diluted outstanding share count of 25.1 million. Important to note that the share repurchase program previously discussed had zero impact on the EPS calculation results for the second quarter.

In the first half of fiscal 2012, sales growth now stands at 17.9% and comp sales growth is at 1.1% compared to 2.4% in the first half of last year. Gross margin has expanded by 10 basis points and SG&A expenses have leveraged by 60 basis points excluding stock comp expense and that deleveraged by 10 basis points including stock comp.

Operating income growth is $4.0 million to $32.1 million and margin has contracted 20 basis points due to incremental non-cash stock comp and depreciation expenses of $6 million. Net income year-to-date at $20.7 million is up 19.7% on top of a 42% growth rate last year due to first half and net income margin has expanded from last year by 10 basis points to 5.1%.

Highlights of the quarter end balance sheet include cash and short-term investments at the end of the quarter of $56.8 million compared to $43.4 million at the end of the first, second quarter of 2011. We expended cash at 12.9 for share repurchases in the quarter. CapEx in the quarter was $14.5 million compared to $15.8 million last year.

Inventory levels at the end of the quarter are down 2.8% on a square foot basis. We have no long-term debt on the balance sheet and our revolver facility is $85 million plus and another $15 million accordian feature.

We did not borrow at all during the quarter, or the first half and have no plans to borrow for remainder of 2012. A strong predictable cash flow is the primary reason our board approved the repurchase of rue shares up to $50 million. We look forward to continue to create shareholder value through our buyback program as we move through 2012 and beyond.

Now, turning to outlook. We continue to plan for a 120 stores in 2012 after having opened 79 in the first half. We also plan to close a handful of store 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 third quarter of 2012, we expect diluted earnings per share in the range of $0.38 to $0.40 this [kind of distribute] a low single-digit same store sales increase and total sales growth in the high teens. For the full year 2012 we are increasing earnings per share guidance by $0.04 to be in the range of a $1.80 to $1.85 on a fully diluted share count of 25.0 million.

Our upward adjustment is attributable to our second quarter performance, share repurchases through today and better visibility into the second half. Importantly, our regional forecast or performance stock compensation expense for the year has grown from the first quarter but we remain confident increasing guidance based on the strength of our actual results for the first half and forecasted results for the second. We continue to expect comp sales growth in low single digits and overall sales growth to be in the high teens.

Our guidance does no assume any further share repurchases other than what I have discussed on this call.

That concludes my prepared remarks. I'll turn the call back over to Bob.

Bob Fisch

Thank you, Keith. Again, we feel our business strategy is really deliberate for this past quarter, now we're excited to look forward to a strong back-to-school season, and delivering similar consistent and predictable results for the back of the year. And now I'd like turn the call over to any of your questions that you would like to ask.

Question-and-Answer Session

Operator

Yes, thank you. (Operator Instructions)

And we'll go first to Lorraine Hutchinson with Bank of America.

Lorraine Hutchinson – Bank of America

Thank you, good afternoon.

Bob Fisch

Hi, [maybe] guidance in spite of the higher incentive comp, can you just talk about which line item, the categories were favorable versus your initial plans this quarter?

Keith McDonough

We, improved against our forecast both at the gross margin level and the SG&A level, I mean the particular interest is a 0.5 comp sales quarter and we combined that with a 50 basis point leverage and expenses other than stock comp expense.

We're pretty proud of that and I think it's indicative of the business model that we have a lower than normal I think leverage point and I think that's based on the profitability and the maturity of the stores that we open when we open them.

Lorraine Hutchinson – Bank of America

And then as we look to merchandise margins in the back half, can you talk a little bit about what you're expecting for prices and average unit cost.

Bob Fisch

Kim, you can talk about that, I mean, quite since you're so close to it.

Kim Reynolds

I don't have any concerns in costing as we get into the second half or the first or the beginning of 2013 as it works through in competitive.

Keith McDonough

And I think everybody else is place there's looking forward to better cost and because they absorb these higher cost last year, at least that's what the industry was saying last year. We never absorbed those costs. So we're not looking forward to any tremendous improvement in IM yield, or Kim gets that just about every quarter. So I'm sure she's working hard on it.

Bob Fisch

And I think also the factor that – by the end of this year we'd probably be in the 875 store ranges and so, that competitive advantage really helps us. We're not putting those into our numbers but we certainly plan on doing well with our quest to costing control as we always do and as we did last year too.

Lorraine Hutchinson – Bank of America

Thank you.

Bob Fisch

Thank you, Lorraine.

Operator

And we'll next to Paul Lejuez with Nomura.

Paul Lejuez – Nomura

Hi, guys.

Bob Fisch

Hey, Paul, this is the first time ever that I think in any of your calls anywhere they got your name right, so we really wanted to come through for you.

Paul Lejuez – Nomura

Well, you've done it, thank you. So couple of questions, one, just wondering if you were seeing any differences in comp performance by class of stores, just wondering if maybe some of the younger classes or our comp being the older classes or if truly when you stores open they really – are opening at full productivity and is really not much of a discrepancy in any one class versus another, so that's the first.

And then, second, just curious how many centers if you know that you guys share with J C Penney. And if you do share a bunch, just wondering if you've seen any pick up in those stores? Thanks.

Bob Fisch

The second question, first. That's a – it's a very good question, I would – we'll get back to you later at some time and then to see when we can talk about J C Penney. I don't know exactly how many they are but I can find that out. And so I'd rather, not just give you any answer that's not concrete, I don't see any big blips in the centers that I do know with J C Penney's, so I don't know if I see that.

But the class of stores, it's funny or ironic, we're still a consistent all the time whether it's the older stores 2003, or the newest stores 2011. And that I don't see that the older stores are up or down any differently. What I did see at the end of the quarter, which I said on the transcript, is I saw a little strengthening in malls, because and I really it had a lot to do with the weather, because I don't see that big a disparity or change, discrepancy, excuse me, in August. So it's exactly to what I thought. So I don't see that, I'm just happy that our newer stores that are non-comp continue to do well but we still keep seeing that same increase in the existing stores whether they are more mature or not mature.

Paul Lejuez – Nomura

Got you, and this one probably for Kim, the dual gender merchandise, just maybe needed a little education there, what's that all about?

Kim Reynolds

Well, it's not actually duel gender merchandise, it's the fact that we have girls and guys in our stores and one change we're seeing now is that the trends are successful businesses and categories are very consistent in both the girls and the guys area, particularly in the categories I mentioned earlier in bottoms as well as in the weather wear.

Paul Lejuez – Nomura

Got you. That's actually a relief, thank you.

Bob Fisch

You know, it goes back to what – yes we are coming up with a new classification, but we won't get into that on this call. But it's really going back to what things happened in the late 90s and thing and I think led by the Gap at that time, it was one, where merchandise – our merchandise in the past 10 years and girls has been more into the prints and patterns and dressing and clubbing, in addition to key items and now, it's going back into, as Kim said, more color multipliers but there's more crossover of looks in girls and guys, not that they are going to be wearing the same clothes.

Paul Lejuez – Nomura

Perfect thanks, good luck guys.

Bob Fisch

Thank you, Paul.

Operator

And we'll go next to Steph Wissink with Piper Jaffray.

Bob Fisch

Hey, Stephanie.

Steph Wissink – Piper Jaffray

Thanks, guys. Hello, hello our congratulations. Just wanted follow-up on a couple of questions that have already been asked, just a clarification, Keith. You are indicating that no further stock repurchases are planned in the back half, other than what you've done to date. Can you just remind us what that is to date?

Keith McDonough

No. Let me clarify that, I didn't – I didn't say that so much as none of the guidance that we've given in the back half reflect any further share repurchases other than what I've brought you up to date too in terms of the whole program, which is $18.2 million being spent up to today.

Steph Wissink – Piper Jaffray

Okay, yes. Sorry about that. And then just a follow-up question Kim, on the accessories categories allowing the weather trends from last year what are you planning into for the back half how are you thinking about that category overall? I know you have a little bit about some other themes that you're seeing but in general are you de-emphasizing you're mutually emphasizing or expanding emphasis in that category.

Bob Fisch

Well (Inaudible) as I referenced earlier is that business started the down trend last year, at about this time, so right around Labor Day, that compares to commensurate in the accessory world. So I think that kind of over that hurdle now, but a challenge for the first half of the year.

Steph Wissink – Piper Jaffray

And last question for us is, is this on your new store run rates, as you're looking at the next class of leases to sign, or you're still finding favorable, real estate. Capable real estate environment in where should we look for some of those in terms of a kind of a strip mall – or break outs?

Bob Fisch

Well, yes we are still – obviously we are not end of August, believe it or not, 2012 and so we are – we have looked and I have signed with Bob Thomson a good number of our leases. In fact, Bob and I will be sitting down Saturday for another go around. And I'm seeing the same and Bob I've seen the same opportunities as we saw this year. What's happening is that the small market growth is continuing to strengthen. And for example, we've been opening up about 10 days ago in [Havre], Montana there's 9000 people that live there, believe it or not, and maybe all 9000 of these shoppers still have this past weekend.

And because the sales are really good, it's still – we think there's more to peel back of the onion skin, Stephanie, in those centers and I think the balance is, you know, we're going to be a little stronger in strip centers as we've always said but it's not that we are – we are going to keep going after those valuables and then we still will open up some of those good "B" malls that we get those great rent reliefs on. So I'm seeing a consistency in both malls and the strip centers and I feel just as encouraged, with the next 100 plus stores as the once we've opened this year.

Keith McDonough

From my perspective, it's been a lot of fun watching the new stores perform in 2012 on average, with 300 or 400 square feet less than we were in the 2011 family of new stores. And we're railing off the things that we've said going off record sales, record profits so. It's just that – then speaking of the new stores for 2012 so the impact on the entire chain will not be as dramatic but it is a very positive sign and certainly these stores are seeing increasing sales per square foot, gross margins per square foot and floor wall per square foot.

Steph Wissink – Piper Jaffray

Great, guys. Thanks for the details. Best of the luck.

Bob Fisch

Thank you, Stephanie.

Operator

And we'll go next to Janet Kloppenburg with JJK Research.

Bob Fisch

Hey, Janet.

Janet Kloppenburg – JJK Research

Hi, everybody, congratulations, nice quarter.

Bob Fisch

Thank you, Janet.

Janet Kloppenburg – JJK Research

I first, if I could just ask Keith a question. Are you saying that incremental in the quarter you had – incremental to original expectations in the quarter or the year, of $1.8 million difference in your stock-comp – stock options.

Keith McDonough

Yeah, in fact, thanks for bringing that up again. Just to clarify it was $1.8 million above last year expense…

Janet Kloppenburg – JJK Research

In the quarter?

Keith McDonough

In the quarter, and we expect that same delta, that same difference approximately in quarters three and four. And…

Janet Kloppenburg – JJK Research

Incremental to what we thought it was going to be.

Keith McDonough

No, incremental to last year.

Janet Kloppenburg – JJK Research

Oh, incremental to last year, okay.

Keith McDonough

If you go back to the transcripts, in the first quarter we talked about $1.1 million delta that was going to increase but not to the level of $1.8 million certainly so. You know there's a message there that we're expecting one more expense but increasing our guidance for the year.

Janet Kloppenburg – JJK Research

Okay. And then so next year, so this year it's going to be about a 11.5 to 12. And next year it's going to be the same.

Keith McDonough

No, it will not that – that incremental we've been saying is for a couple of years out. Because this is kind of a three-year program of – that has to mature three years. Next year, the – first year the IPO, the 2010 grants will complete – be done by with [expensing]. So that year goes away we add 2013 to these material incremental increases in this line item we'll stop and I've said before that, I probably you won't hear me talking about this as a reconciling line item that we need to discuss.

Janet Kloppenburg – JJK Research

Okay, great. And then, Bob…

Bob Fisch

Yes.

Janet Kloppenburg – JJK Research

-or Kim, if you could talk a little bit about your strategies that you implemented in the second quarter that included more wear now product than maybe some planned promotions and – your level of satisfaction with the performance there. And I was curious after you talked a little bit about the weather and such, and later back to school. If you could tell us if your comp trend was strong or until the latter part of July? Thank you.

Bob Fisch

I think I'll answer that. Yes, as we said that we were up approximately around at least 1% higher than where we ended up for the quarter. So that, yes, it was higher. And really it's very simple, it's like clockwork is that there was a significant number of stores and states that this year and I'm not sure everybody, have seen that in retailing and I'm sure it's just happening with rue. But that are – later so it's Texas is one of them, Georgia, Alabama, South Carolina, I could go on with more states.

Janet Kloppenburg – JJK Research

Okay. But do you feel like you're getting that back, Bob? Can you see it in the business?

Bob Fisch

Yes, yes, I do see that in the business that's what I was saying. I am pleased to – what we expected to happen in the August period is happening with those later back to school. So that is what's happening.

Janet Kloppenburg – JJK Research

And you feel like you have a good read on –

Bob Fisch

Let me – you know what, let me give you a story, let me give you an example. Example would be taking Georgia and [low cust growth] Georgia. Business should have been very strong in the last week of July, because it was right before a peak week of back to school. So that we connect. So this is a good manager this is a good district and we dropped 20% in that store that week. So this freaking us out.

The next week when it was – tax free days which was their plus tax free days, we still dropped 5%. The second which was which was a year ago was the week after back to school, which this year was the key back-to-school week. We picked up 15%. So for the period, we're up 25% in that store. If we – just the switch of it and I could take that multiply that by a couple of hundred stores, as far as that. Not going to increases of comp than that – but to the differences by week. Does that help you a little?

Janet Kloppenburg – JJK Research

Okay, it does a lot. Thank you. And for Kim, the slowdown that you're seeing in accessories, I'm a little confused, is footwear a part of accessories and if so are you suggesting that the down turn in jewelry is being fully compensated for by the uptick in footwear.

Kim Reynolds

I don't think I related it to the data – our foot wear business in both girls and guys again – duel gender categories continues to grow and that growth opportunity really hasn't changed for us. We drove that through casual shoes and sandals during the second quarter. We see that continuing into third. And then opportunities going to fourth quarter. The weather trend that we had last year in jewelry was a driving force for huge increases last year and as I said we're almost over that hurdle. The increases are much smaller from last year as we go into the third quarter.

Janet Kloppenburg – JJK Research

So you expect accessory category to continue to be strong going into the fall season.

Kim Reynolds

Absolutely.

Janet Kloppenburg – JJK Research

Okay, and just lastly if you could comment on your change in merchandising strategy for the second quarter and how effective you thought that was? Thank you.

Kim Reynolds

We were extremely pleased with it, Janet. What we did was we really focused into key categories that we are now. We [planned] the size, we made [prim-stages] in advances we tested a lot of the categories, that's what we actually committed to it. We were able to trigger goods and deliver within 60 days, sooner in some categories. And we're ending – based on Keith's comment, I mean a quarter actually down in inventory on a per square foot basis. And we think the timing was perfect.

Janet Kloppenburg – JJK Research

That's a lot. Thanks.

Bob Fisch

Thank you, Janet.

Operator

And we'll go next to Adrienne Tennant with Janney Capital Markets.

Adrienne Tennant – Janney Capital Markets

Good afternoon. Nice quarter, guys.

Bob Fisch

Thank you, Adrienne, (Inaudible).

Adrienne Tennant – Janney Capital Markets

You're welcome. Bob, my question for you is if you can give us sort of – kind of an update on DTC, it seems like that we're a lot of a other people are seeing some acceleration, does this – does this make you want to accelerate to your plan to roll out DTC?

For Kim, can you talk about these $39, the Premium Denim launch, it sounds like it went really well. Where do you think your – getting customers to testing for that denim?

And then Keith, just two housekeeping, did you gave us the 53rd week sales yet, and if it's meaningful, and the ending square footage for the quarter? That'd be great. Thank you.

Bob Fisch

As far as – just going back, an [E-com] launching. Right now, we are looking at the beginning of 2014. So it's about a year a half from now. We have decided to put certain people key in place in hiring that. I want to make sure we do this right, Adrienne and yeah, I'd like to do it tomorrow because I think it's going to give us some great upside potential opportunities when we do launch it.

But with opening a 120 plus stores a year, the team building – planning and allocation new systems, the DC that we just doubled in size. We're working on operations simplification to really leverage things and getting extra business in addition of our standard. I think that – right now, if I – anything changes we will let you know. But I do see this as a real uptick, when we get to that time period that should be great for our company in growth.

Adrienne Tennant – Janney Capital Markets

Thanks.

Kim Reynolds

To answer your question on the Premium Denim, we started testing the premium denims right back to school last year in the guys area. And then we have – put the test in place in girls during fourth and first quarter. The testing was extremely successful and the roll out is also extremely successful. I think these kids shop everywhere as possible, they're looking at a customer who wants the value of supple looking merchandise, but I think we're also treading up our own customer who buys denim at rue.

Keith McDonough

And the 53rd week Adrienne, I have not given that specific number and I'm not giving it to you today, I think looking at the market play, if the analysts estimates, I will probably be taking guidance up if we talk specifically about sales for the quarter. But I'm not sure that I would be moving operating income at all based on the expenses that time of the year, but I will have more detail and color on that next quarter.

Adrienne Tennant – Janney Capital Markets

Okay, great. And then the ending square footage?

Keith McDonough

I don't have it for you right here, but I can get it for you.

Adrienne Tennant – Janney Capital Markets

No problem. Bob, just one last clarifying question to that example you gave for Janet's question was very helpful and I'm just trying to figure out, it seems like the peak when you recover it, is far more than what for – I shouldn't say far more, it's more than what you might have been below expectations. Is that fair to say?

Bob Fisch

Yes.

Adrienne Tennant – Janney Capital Markets

Okay.

Bob Fisch

That is fair to say. It's just that – we knew that there was going to be some later back to school. It's really crazy, Adrienne, in this country. Some of them – I wish I could told everybody earlier or even our own financial people, but some things didn't happen until two months ago. So at least we were on top of it and I think you're going to see that in different parts of the country and different retailers. And so we're pleased to see that and that – we see it not just rolling into August, but it will go into early September. Because, believe it or not, our fiscal September's start on Sunday, August 27th so.

Adrienne Tennant – Janney Capital Markets

Great. Well good luck, for fall.

Keith McDonough

Adrienne, the ending square footage is 4.123 million.

Adrienne Tennant – Janney Capital Markets

Thank you very much.

Keith McDonough

Welcome.

Bob Fisch

Thanks Adrienne, speak soon.

Operator

And we'll go next to [Sameer Sehgal] with JPMorgan.

Unidentified Analyst

Hey, guys, congrats.

Bob Fisch

Hey, thanks to…

Unidentified Analyst

So Bob, and I apologize if I missed it. Can you specify any more on the August trends or just that they accelerated and then guys in terms of your metrics. Just to clarify the metrics you gave were those comp metrics or total sale and correct if I'm wrong, I think you've been running negatives UPTs for that. Is there a point where that pressure maybe goes away and can give another lift to the ATV?

Bob Fisch

As far as August trends, I mean it's really it's what I said on my discussion point, is that we were pleased to see that the centers again and states that to move to later back to schools are producing the results that making up for the businesses that happened, didn't happen, earlier at the end of July timing. So that we are happy to see the results, it's what that is.

Question on total sales…

Keith McDonough

Just the metrics there you are in the – the average ticket, there was – those were total company?

Unidentified Analyst

Okay. And then – was I -- I don't know if I could be mistaken on that UPT point, but I think you have been – I mean is that an opportunity you're –

Bob Fisch

Sometimes the unit per transactions – we don't always have as much reduced merchandise and so some times in the past when we have more reduced merchandise you have a higher UPT increased percent that doesn't always make for more profitability or better business, so I don't think there's anything significant there, [Sameer].

Unidentified Analyst

Okay, great, good luck.

Bob Fisch

Thank you.

Operator

That does conclude our question and answer session. At this time I would like to turn the call back over to the speakers for any additional or closing remarks.

Bob Fisch

Well thank you everyone, I appreciate everyone being on this call and we really look forward to giving you the results after the third quarter the next time we speak so everybody have a good rest of this summer and try to make it last a little while longer. Take care, good bye.

Operator

That does conclude our conference you may now disconnect.

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