10-Q 1 d576604d10q.htm FORM 10-Q FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED AUGUST 3, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER 1-34536

 

 

rue21, inc.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   25-1311645

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

800 Commonwealth Drive

Warrendale, Pennsylvania 15086

(Address of principal executive office)

(724) 776-9780

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the Registrant’s common stock was 23,508,312 as of August 26, 2013.

 

 

 


rue21, inc.

Form 10-Q

Quarter Ended August 3, 2013

INDEX

 

         Page  
Part I.   FINANCIAL INFORMATION   
Item 1.   Financial Statements   
  Consolidated Balance Sheets: August 3, 2013 (unaudited), February 2, 2013 and July 28, 2012 (unaudited)      3   
  Consolidated Statements of Income: Thirteen and Twenty-six weeks ended August 3, 2013 (unaudited) and July 28, 2012 (unaudited)      4   
  Consolidated Statements of Cash Flows: Twenty-six weeks ended August 3, 2013 (unaudited) and July 28, 2012 (unaudited)      5   
  Notes to Unaudited Consolidated Financial Statements      6   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      14   
Item 3.   Quantitative and Qualitative Disclosures about Market Risk      25   
Item 4.   Controls and Procedures      25   
Part II.   OTHER INFORMATION   
Item 1.   Legal Proceedings      26   
Item 1A.   Risk Factors      26   
Item 2.   Unregistered Sales of Securities and Use of Proceeds      27   
Item 6.   Exhibits      27   

 

2


PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

rue21, inc. and subsidiaries

Consolidated Balance Sheets

 

     August 3,     February 2,     July 28,  
     2013     2013     2012  
     (Unaudited)           (Unaudited)  
     (in thousands, except per share data)  
Assets       

Current assets:

      

Cash and cash equivalents

   $ 49,832      $ 43,519      $ 39,835   

Short term investments

     —          20,000        17,000   

Accounts receivable

     11,000        10,555        11,322   

Merchandise inventory, net

     182,825        157,269        160,864   

Prepaid expenses and other current assets

     15,821        13,905        14,126   

Deferred tax assets

     7,303        5,910        5,854   
  

 

 

   

 

 

   

 

 

 

Total current assets

     266,781        251,158        249,001   

Property and equipment, net

     158,920        144,852        133,202   

Other assets

     4,525        3,499        3,335   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 430,226      $ 399,509      $ 385,538   
  

 

 

   

 

 

   

 

 

 
Liabilities and stockholders’ equity       

Current liabilities:

      

Accounts payable

   $ 134,989      $ 108,760      $ 121,525   

Accrued expenses and other current liabilities

     22,437        24,202        19,538   

Accrued payroll and related taxes

     8,067        8,932        12,259   

Deferred rent and tenant allowances, current portion

     10,860        10,228        9,478   

Accrued income and franchise taxes

     1,541        126        —     
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     177,894        152,248        162,800   

Non-current liabilities:

      

Deferred rent, tenant allowances and other long-term liabilities

     64,884        59,325        54,774   

Deferred tax liabilities

     5,542        9,625        7,560   
  

 

 

   

 

 

   

 

 

 

Total non-current liabilities

     70,426        68,950        62,334   
  

 

 

   

 

 

   

 

 

 

Commitments and Contingencies

     —          —          —     

Stockholders’ equity:

      

Preferred stock— par value $0.001 per share, 10,000 shares authorized; none issued or outstanding

     —          —          —     

Common stock— par value $0.001 per share; 200,000 shares authorized; 24,771, 24,694 and 24,570 shares issued and 23,506, 23,755 and 24,063 outstanding, respectively.

     25        25        25   

Additional paid in capital

     52,425        50,281        43,442   

Treasury stock, 1,266, 939 and 507 shares, respectively

     (35,831     (25,399     (13,258

Retained earnings

     165,287        153,404        130,195   
  

 

 

   

 

 

   

 

 

 

Total stockholder’s equity

     181,906        178,311        160,404   

Total liabilities and stockholders’ equity

   $ 430,226      $ 399,509      $ 385,538   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3


rue21, inc. and subsidiaries

Consolidated Statements of Income

 

     Thirteen weeks ended     Twenty-six weeks ended  
     August 3,      July 28,     August 3,      July 28,  
     2013      2012     2013      2012  
     (Unaudited)  
     (in thousands, except per share data)  

Net sales

   $ 229,322       $ 202,059      $ 453,697       $ 407,674   

Cost of goods sold (includes certain buying, occupancy and distribution center expenses)

     149,763         122,528        284,442         248,462   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     79,559         79,531        169,255         159,212   

Selling, general, and administrative expense

     68,477         57,801        132,181         111,596   

Depreciation and amortization expense

     9,342         8,017        18,387         15,545   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from operations

     1,740         13,713        18,687         32,071   

Interest expense (income), net

     22         (22     17         (52
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before income taxes

     1,718         13,735        18,670         32,123   

Provision for income taxes

     633         4,645        6,786         11,430   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 1,085       $ 9,090      $ 11,884       $ 20,693   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic income per common share

   $ 0.05       $ 0.37      $ 0.50       $ 0.85   

Diluted income per common share

   $ 0.04       $ 0.36      $ 0.49       $ 0.83   

Weighted average basic common shares outstanding

     23,510         24,420        23,659         24,458   

Weighted average diluted common shares outstanding

     24,314         25,022        24,377         25,079   

See accompanying notes to the unaudited consolidated financial statements.

 

4


rue21, inc. and subsidiaries

Consolidated Statements of Cash Flows

 

     Twenty-six weeks ended  
     August 3,     July 28,  
     2013     2012  
     (Unaudited, in thousands)  

Operating activities:

    

Net income

   $ 11,884      $ 20,693   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     18,387        15,545   

Impairment of long-lived assets

     161        85   

Deferred taxes

     (5,476     (4,758

Stock based compensation

     5,530        5,123   

Excess tax benefits from stock-based compensation activities

     (630     (326

Changes in:

    

Accounts receivable

     (445     (4,647

Merchandise inventory, net

     (25,556     (29,728

Prepaid expenses and other current assets

     (2,541     (2,359

Accounts payable

     26,227        17,611   

Accrued payroll and related taxes

     (865     214   

Accrued expenses and other current liabilities

     (1,765     2,968   

Deferred rent and tenant allowances

     6,153        8,880   

Accrued income and franchise taxes

     2,045        (742

Other

     (411     (78
  

 

 

   

 

 

 

Net cash provided by operating activities

     32,698        28,481   

Investing activities:

    

Acquisition of property and equipment

     (32,567     (30,971

Purchase of short term investments

     —          (17,000

Proceeds from the sale of short term investments

     20,000        30,000   
  

 

 

   

 

 

 

Net cash used for investing activities

     (12,567     (17,971

Financing activities:

    

Shares of common stock withheld from employees

     (1,229     (341

Repurchase of common stock as part of a publicly announced program

     (13,575     (12,917

Excess tax benefits from stock-based compensation activities

     630        326   

Proceeds from stock options exercised

     356        297   
  

 

 

   

 

 

 

Net cash used for financing activities

     (13,818     (12,635
  

 

 

   

 

 

 

Increase (Decrease) in cash and cash equivalents

     6,313        (2,125

Cash and cash equivalents, beginning of period

     43,519        41,960   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 49,832      $ 39,835   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Cash paid for interest (line of credit fees)

   $ 134      $ 150   
  

 

 

   

 

 

 

Cash paid for income taxes

   $ 10,246      $ 14,345   
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5


rue21, inc and subsidiaries

Notes to unaudited Consolidated Financial Statements

Thirteen and Twenty-Six weeks ended August 3, 2013 and July 28, 2012

(Dollars in thousands unless otherwise indicated)

NOTE 1 — Organization and Basis of Presentation

rue21, inc. and subsidiaries (the Company or rue21) is a specialty retailer of girls and guys apparel and accessories with 959, 877 and 834 stores as of August 3, 2013, February 2, 2013 and July 28, 2012, respectively, in various strip centers, regional malls and outlet centers throughout the United States. Sales are generally transacted for cash or checks and through the acceptance of third-party credit and debit cards.

The consolidated financial statements include all of the accounts of the Company and its wholly-owned subsidiaries, r services, llc and rue services corporation. All intercompany transactions and balances have been eliminated in consolidation. At August 3, 2013, the Company operated in one reportable segment.

In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of consolidated financial position, results of operations, and cash flows for the interim periods presented. The accompanying unaudited consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to ensure that the information presented is not misleading. Accordingly, these unaudited consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended February 2, 2013 included in the Company’s Annual Report on Form 10-K.

The results of operations for the current and prior periods are not necessarily indicative of the operating results for the full fiscal year.

Merger

On May 23, 2013, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Rhodes Holdco, Inc., a Delaware corporation (“Parent”), and Rhodes Merger Sub, a newly formed Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), providing for the merger (the “Merger”) of Merger Sub with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates of Apax Partners L.P. (“Apax”). The merger consideration is $42.00 per share in cash, without interest. The transaction will be supported through financing to be obtained by affiliates of Apax.

Under the Merger Agreement, each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the Merger (other than (i) shares owned by Parent, Merger Sub, or any other direct or indirect wholly owned subsidiary of Parent and shares owned by the Company or any direct or indirect wholly owned subsidiary of the Company and, in each case, not held on behalf of third parties, (ii) shares as otherwise agreed to in writing before the effective time of the Merger between Parent or its affiliates and the holder of such shares and (iii) shares owned by stockholders who have not voted in favor of adoption of the Merger Agreement or consented thereto in writing and who have properly demanded and not withdrawn a demand for appraisal with respect to such shares under Delaware law) will be converted into the right to receive $42.00 per share in cash, without interest.

The Merger is subject to the approval by (i) at least a majority of all outstanding shares of common stock and (ii) a majority of the then-outstanding shares not beneficially owned, directly or indirectly, by Parent, Merger Sub, certain Apax entities, SKM Equity Fund II, L. P. and SKM Investment Fund II (together, the “SKM Funds”) or certain other specified parties, receipt of regulatory approvals, and other customary closing conditions, including, among others, the absence of any order, judgment, injunction, award, decree or writ restraining, enjoining, prohibiting or otherwise preventing consummation of the Merger. The Company has received notice from the Federal Trade Commission granting early termination of the mandatory waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, receipt of which was a condition to consummation of the proposed Merger.

 

6


Under the terms of the Merger Agreement, the Company and its advisors were permitted to actively solicit and negotiate alternative acquisition proposals from third parties during a “go-shop” period that began on May 23, 2013 and expired at 11:59 p.m. EDT on July 2, 2013. With the expiration of the “go-shop” period, the Company is now subject to customary “non-solicitation” provisions that limit its ability to solicit, encourage, discuss or negotiate alternative acquisition proposals from third parties or to provide non-public information to third parties. These non-solicitation provisions are subject to a “fiduciary out” provision that allows the Company to provide non-public information and participate in discussions and negotiations with respect to certain unsolicited written acquisition proposals and to terminate the Merger Agreement and enter into an alternative acquisition agreement with respect to a superior proposal in compliance with the terms of the Merger Agreement.

Concurrently with the execution and delivery of the Merger Agreement, the SKM Funds, which collectively own approximately 30% of the outstanding shares of the Company entered into a support agreement with the Company and Apax to vote their shares in favor of the transaction with Apax (the “Support Agreement”). Pursuant to the terms of the Support Agreement, if the agreement with Apax is terminated and the Company terminates the Merger Agreement to accept an all-cash superior proposal of at least $42.00 per share, the SKM Funds have agreed to vote their shares in favor of such superior proposal on the same pro rata basis as unaffiliated stockholders (although SKM Funds can choose to vote all, or an amount between the applicable pro rata proportion and all of their shares in favor of a superior proposal).

The proposed Merger is expected to close before the end of the 2013 calendar year, subject to approval by the majority of stockholders unaffiliated with the SKM funds as well as customary closing conditions.

The Merger Agreement and the above summary of certain of its terms have been included to provide you with information regarding the terms of the Merger Agreement. Factual disclosures about us contained in this report may supplement, update or modify the factual disclosures about us contained in the Merger Agreement and described in this summary. The representations, warranties and covenants made in the Merger Agreement by us, Parent and Merger Sub were qualified and subject to important limitations agreed to by us, Parent and Merger Sub in connection with negotiating the terms of the Merger Agreement. In particular, in your review of the representations and warranties contained in the Merger Agreement and described in the above summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purposes of establishing the circumstances in which a party to the Merger Agreement may have the right not to close the Merger if the representations and warranties of the other party prove to be untrue due to a change in circumstance or otherwise, and allocating risk between the parties to the Merger Agreement, rather than establishing matters as facts. The representations and warranties may also be subject to a contractual standard of materiality different from those generally applicable to stockholders and reports and documents filed with the SEC and in some cases were qualified by disclosures that were made by each party to the other, which disclosures are not reflected in the Merger Agreement. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this report, may have changed since the date of the Merger Agreement and subsequent developments or new information qualifying a representation or warranty may have been included in this report.

For further information on the Merger, the Merger Agreement and related agreements, please refer to the Current Report on Form 8-K filed on May 24, 2013. The foregoing descriptions of the Merger Agreement and Support Agreement are subject to, and qualified in their entirety by, the full text of those agreements as attached as Exhibits 2.1 and 10.1 respectively to the Form 8-K filed on May 24, 2013, each of which is incorporated by reference herein.

NOTE 2 — Summary of Significant Accounting Policies

Fiscal Year

The Company’s fiscal year is 52 or 53 weeks ending on the Saturday nearest to January 31 of the following year. As used herein, the “second quarter of 2013” and the “second quarter of 2012” refer to the thirteen week periods ending August 3, 2013 and July 28, 2012, respectively. “Year-to-date 2013” and “Year-to-date 2012” refer to the twenty-six week periods ending August 3, 2013 and July 28, 2012, respectively.

Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

 

7


Seasonality

Our operations are seasonal in nature and consist of two principal selling seasons: Spring (the first and second quarters) and Fall (the third and fourth quarters). Generally, our highest sales volume occurs in the fourth quarter, which includes the holiday selling season. Accordingly, cash requirements are highest in the third quarter as our inventories build in advance of the holiday season. In addition, our quarterly results can be affected by the timing of new store openings and store closings, the amount of sales contributed by new and existing stores and the timing of certain holidays.

Recent Accounting Standards

The FASB issues Accounting Standards Updates (ASU) to amend the authoritative literature in Accounting Standards Codification (ASC). There are no ASUs during the current period that (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are expected to have a significant impact on the Company.

NOTE 3 — Earnings Per Share

Earnings per common share has been computed as follows:

 

     Thirteen weeks ended      Twenty-six weeks ended  
     August 3,
2013
     July 28,
2012
     August 3,
2013
     July 28,
2012
 
     (in thousands, except per share data)  

Net income

   $ 1,085       $ 9,090       $ 11,884       $ 20,693   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average basic common shares outstanding

     23,510         24,420         23,659         24,458   

Impact of dilutive securities

     804         602         718         621   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average diluted common shares outstanding

     24,314         25,022         24,377         25,079   

Per common share:

           

Basic income per common share

   $ 0.05       $ 0.37       $ 0.50       $ 0.85   

Diluted income per common share

   $ 0.04       $ 0.36       $ 0.49       $ 0.83   

Stock options to purchase 296,365 and 386,453 shares of common stock during the second quarter of 2013 and Year-to-date 2013, respectively, and 974,742 and 946,687 shares of common stock for the second quarter of 2012 and Year-to-date 2012, respectively, were outstanding, but were not included in the computation of weighted average diluted common share amounts as the effect of doing so would have been anti-dilutive.

NOTE 4 — Stock-Based Compensation

On June 7, 2013, the Company’s stockholders approved the Amended and Restated 2009 Omnibus Incentive Plan (the 2009 Plan) pursuant to which key employees, officers, and directors shall be eligible to receive grants of stock options, stock appreciation rights, restricted stock, restricted stock units or performance awards to purchase or receive, as applicable, up to an aggregate of 5,626,000 shares of common stock based on eligibility, vesting, and performance standards established by the board of directors. Stock options granted are generally exercisable ratably over three or four years, subject to certain employment terms and conditions. The stock options generally expire ten years from the date of grant.

Effective May 15, 2003, the Company adopted the 2003 Ownership Incentive Plan (the 2003 Plan) pursuant to which key employees, officers, and directors were eligible to receive options to purchase common stock for an aggregate of up to 19.8% of the number of shares of the common stock outstanding upon adoption of the 2003 Plan based on eligibility, vesting, and performance standards established by the board of directors. Upon adopting the 2009 Plan, the Company discontinued use of the 2003 Plan and no further equity awards have been or will be made under the 2003 Plan.

 

8


The Company recognized $2.7 million and $5.5 million in compensation expense related to stock-based compensation during the second quarter of 2013 and Year-to-date 2013, respectively, and $3.2 million and $5.1 million in compensation expense related to stock-based compensation for the second quarter of 2012 and Year-to-date 2012, respectively. As of August 3, 2013, the Company had 3,889,455 shares available for equity grants.

Stock Options

The following table represents stock option activity during the Year-to-date 2013 period.

Stock Option Grants

 

                  Weighted         
           Weighted-      Average         
     Common     Average      Remaining      Aggregate  
     Stock     Exercise      Contractual      Intrinsic  
     Options     Price      Term      Value  
     (in thousands)     (per share)      (in years)      (in thousands)  

Outstanding February 2, 2013

     1,553      $ 20.26         6.66       $ 16,056   

Granted

     135      $ 27.80         

Exercised

     (81   $ 4.43         

Expired or forfeited

     —        $ —           
  

 

 

   

 

 

       

Outstanding August 3, 2013

     1,607      $ 21.69         6.57       $ 32,369   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested at August 3, 2013

     1,158      $ 18.80         5.91       $ 26,665   
  

 

 

   

 

 

    

 

 

    

 

 

 

There were no stock options granted in the second quarter of 2013.The weighted average fair value of stock options at the grant date was $14.08 during Year-to-date 2013, and $14.35 and $13.71 during the second quarter of 2012 and Year-to-date 2012, respectively. The intrinsic value of options exercised was $2.2 million and $2.7 million during the second quarter of 2013 and Year-to-date 2013, respectively and $0.7 million and $1.0 million for the second quarter of 2012 and Year-to-date 2012, respectively. All outstanding vested options are currently exercisable as of August 3, 2013.

The fair value of stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following range of assumptions:

Fair Value of stock options

 

     Thirteen weeks ended    Twenty-six weeks ended
     August 3,    July 28,    August 3,    July 28,
     2013    2012    2013    2012

Risk-free interest rate (1)

   —      1.2%    1.2% - 1.27%    1.2% - 1.8%

Dividend yield

   —      —      —      —  

Volatility factors for the expected market price of the Company’s common stock (2)

   —      53.0%    54.0%    53.0%

Weighted average expected term (3)

   —      6.0 years    6.0 years    6.0 years

 

(1) Based on the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of stock options.
(2) Expected stock price volatility is based on comparable volatilities of peer companies within rue21’s industry.

 

9


(3) Represents the period of time options are expected to be outstanding. The weighted-average expected option term was determined using the “simplified method” as allowed by Staff Accounting Bulletin Topic 14. The expected term used to value a share option grant under the simplified method is the midpoint between the vesting date and the contractual term of the share option.

As of August 3, 2013, there was $6.8 million of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized over a weighted-average period of 1.05 years. The total fair value of shares vested during the second quarter of 2013 and Year-to-date 2013 was $0.6 million and $3.9 million respectively, and $1.7 million and $3.4 million for the second quarter of 2012 and Year-to-date 2012, respectively.

Restricted Stock Units

Time-based restricted stock unit awards vest generally over three years.

Performance-based stock unit awards either vest evenly over three years or cliff vest if the performance goal is achieved in the first year period. The level of goal achievement, if any, will determine the number of shares that may be received.

The following table summarizes information regarding non-vested outstanding restricted stock units as of August 3, 2013:

Restricted Stock Unit Grants

 

    Time-Based Restricted Stock Units     Performance Share Units  
    Twenty-six weeks Ended August 3,  2012     Twenty-six weeks Ended August 3,  2012  
    Shares     Weighted Averaged
Fair Value at Grant
Date
    Shares     Weighted Averaged
Fair Value at Grant
Date
 
         
    (in thousands)     (per share)     (in thousands)     (per share)  

Non-vested as of February 2, 2013

    280      $ 28.12        155      $ 27.24   

Granted

    187      $ 28.75        194      $ 27.79   

Vested

    (104   $ 28.35        (52   $ 27.24   
 

 

 

   

 

 

   

 

 

   

 

 

 

Non-vested as of August 3, 2013

    363      $ 28.38       
297
  
  $ 27.60   
 

 

 

   

 

 

   

 

 

   

 

 

 

As of August 3, 2013, there was $10.2 million of unrecognized compensation expense related to non-vested restricted stock unit awards that is expected to be recognized over a weighted-average period of 1.30 years. The total fair value of shares vested during the second quarter of 2013 and Year-to-date 2013 was $0.4 million and $3.0 million respectively, and $1.4 million and $1.4 million, respectively, during the second quarter of 2012 and Year-to-date 2012 period.

As of August 3, 2013, there was $6.4 million of unrecognized compensation expense related to non-vested performance share unit awards that is expected to be recognized if achievement of performance goals becomes probable or as the service period is fulfilled.

 

10


NOTE 5 — Property and Equipment

 

     August 3,     February 2,     July 28,  
     2013     2013     2012  
     (in thousands)  

Furniture and fixtures

   $ 125,509      $ 114,992      $ 104,732   

Leasehold improvements

     143,918        129,750        119,876   

Computer equipment, software and other

     40,216        32,494        24,851   
  

 

 

   

 

 

   

 

 

 
     309,643        277,236        249,459   

Less accumulated depreciation and amortization

     (150,723     (132,384     (116,257
  

 

 

   

 

 

   

 

 

 
   $ 158,920      $ 144,852      $ 133,202   
  

 

 

   

 

 

   

 

 

 

In accordance with the FASB’s authoritative guidance related to the impairment or disposal of long-lived assets, impairment losses may be recorded on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. If such a condition occurs, the assets are adjusted to their estimated fair value, which is determined based upon prices for similar assets. Impairment charges are recorded in selling, general, and administrative expense in the accompanying Consolidated Statements of Income.

NOTE 6 — Fair Value

The FASB’s authoritative guidelines require the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:

 

   

Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities. The Company’s cash, cash equivalents, and short term investments of $49,832, $63,519 and $56,835 as of August 3, 2013, February 2, 2013 and July 28, 2012, respectively, are reported at fair value utilizing Level 1 inputs.

 

   

Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

 

   

Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. The Company determined that the fair value measurements related to the impaired long lived assets disclosed in Note 5 are derived from significant other observable inputs. These non-financial assets are measured on a non-recurring basis when events and circumstances warrant.

 

11


In accordance with ASC 820, the following tables represent the fair value hierarchy for the Company’s financial assets (cash equivalents) measured at fair value on a recurring basis as of August 3, 2013 and July 28, 2012:

 

     Fair Value Measurements at August 3, 2013  
            Quoted Market                
            Prices in Active             Significant  
            Markets for      Significant Other      Unobservable  
     Carrying
     Identical Assets      Observable      Inputs  
     Amount      (Level 1)      Inputs (Level 2)      (Level 3)  

Cash and cash equivalents

           

Cash

   $ 49,832       $ 49,832       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 49,832       $ 49,832       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value Measurements at July 28, 2012  
            Quoted Market                
            Prices in Active             Significant  
            Markets for      Significant Other      Unobservable  
     Carrying      Identical Assets      Observable      Inputs  
     Amount      (Level 1)      Inputs (Level 2)      (Level 3)  

Cash and cash Equivalents

           

Cash

   $ 39,835       $ 39,835       $ —         $ —     

Short Term Investments

   $ 17,000       $ 17,000       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 56,835       $ 56,835       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 7— Income Taxes

The provision for income taxes is based on the current estimate of the annual effective tax rate and is adjusted as necessary for discrete events occurring in a particular period. The effective income tax rate for the second quarter of 2013 was 36.8% as compared to 33.8% for the second quarter of 2012. The higher effective income tax rate was the result of a higher effective state income tax rate and lower federal tax credits as compared to the prior year. The Company classifies interest and penalties as an element of tax expense. The amount of tax related interest and penalties for the second quarter of 2013 and 2012, respectively, was not material.

The Year-to-date 2013 effective income tax rate was 36.3% as compared to 35.6% for the Year-to-date 2012 period. The higher effective income tax rate was due to a higher effective state tax income rate and lower federal income tax credits as compared to the prior year.

The Company recognizes income tax liabilities related to unrecognized tax benefits in accordance with FASB’s authoritative guidance related to uncertain tax positions and adjusts these liabilities when its judgment changes as a result of the evaluation of new information. The Company does not anticipate any significant changes to the unrecognized tax benefits recorded at the consolidated balance sheet date within the next 12 months.

 

12


NOTE 8 — Stock Repurchase Program

On May 24,2012, rue21’s board of directors authorized a stock repurchase program granting the Company authority to repurchase up to $50 million of the Company’s common stock. On March 21, 2013, the authorization was increased by $25 million for a total authorization of $75 million. Under the stock repurchase program, the Company may repurchase shares in the open market or through privately negotiated transactions. During the second quarter of 2013 and second quarter of 2012, the Company repurchased 92,300 and 495,900 shares, respectively, of its common stock on the open market at an average price of $34.00 and $26.05, respectively for an aggregate cost of $3.1 million and $12.9 million, respectively. During the Year-to-date 2013 and Year-to-date 2012, the Company repurchased 444,003 and 495,900 shares, respectively, of its common stock on the open market at an average price of $30.57 and $26.05, respectively for an aggregate cost of $13.6 million and $12.9 million, respectively. The Company has not purchased any stock through privately negotiated transactions. As of May 23, 2013, the Company suspended its stock repurchase program.

In addition to the shares of common stock we purchased under our stock repurchase program, during second quarter of 2013 and second quarter 2012, we withheld 990 and 11,280 shares from employees for the payment of taxes, respectively, not in excess of the minimum statutory withholding requirements, in connection with the vesting of shared-based payments. During Year-to-date 2013 and Year-to-date 2012, we withheld 41,613 and 11,351 shares from employees for the payment of taxes, respectively, in connection with the vesting of shared-based payments. The aforementioned shares have been recorded as treasury stock.

NOTE 9 — Commitments and Contingencies

The Company is subject to various proceedings, lawsuits, disputes, and claims arising in the ordinary course of our business. Many of these actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against us from time to time include commercial, intellectual property, customer, and employment actions, including class action lawsuits. The plaintiffs in some actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages, and some are covered in part by insurance. We cannot predict with assurance the outcome of actions brought against us. Accordingly, adverse developments, settlements, or resolutions may occur and negatively impact income in the quarter of such development, settlement, or resolution. If a potential loss arising from these lawsuits, claims and pending actions is probable and reasonably estimable, we record the estimated liability based on circumstances and assumptions existing at the time.

On May 30, 2013, the Southeastern Pennsylvania Transportation Authority, on behalf of itself and a putative class of public stockholders of the Company, filed a complaint in the Court of Chancery in the State of Delaware against the Company, the directors of the Company, Apax and several funds affiliated with Apax (collectively hereafter, “Apax”) and Apax-affiliated entities participating in the proposed Merger pursuant to the Merger Agreement (the “Apax Entities”). The complaint alleged, among other things, that the Company and its directors breached their fiduciary duties to the Company’s public stockholders by authorizing the Merger for inadequate consideration, without a reasonable independent process and without a fair opportunity to seek and secure the best sale price for stockholders; that Apax, Apax affiliated members of the Company’s board of directors and the Company’s chief executive officer breached their duty of loyalty and entire fairness to the Company through causing or supporting the Merger which plaintiff alleged does not include a fair price and was not the result of fair dealing; and that the Apax Entities aided and abetted the other defendants’ alleged breaches of fiduciary duty. The plaintiff was seeking, among other things, a judgment determining that the action is a proper class action and that the plaintiff is a proper class representative; to enjoin the defendants from taking steps to implement the acquisition of the Company at a price that is not fair and equitable and under terms presently proposed; to rescind the Merger (or awarding damages to the class) in the event of its consummation prior to the entry of final judgment; to enjoin any material transactions or changes to the Company’s business and assets until a proper process is conducted to evaluate strategic alternatives; and the award of compensatory damages and fees, expenses and costs of attorneys and experts. The suit was dismissed without prejudice on July 30, 2013, with each party bearing its own costs.

 

13


Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements other than those that are purely historical are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenues, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies, or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including, but not limited to the following:

 

   

our failure to identify and respond to new and changing fashion trends, customer preferences and other related factors;

 

   

our failure to successfully execute our growth strategy, due to delays in store growth and our e-commerce initiatives, difficulties executing sales and operating profit margin initiatives and inventory shrinkage prevention;

 

   

our ability to receive, on a timely basis or otherwise, the required stockholder and regulatory approvals necessary to consummate the contemplated Merger under which we will become a wholly-owned subsidiary of Apax (see “Our Business – Merger” below);

 

   

the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement relating to the Merger as described in “Our Business – Merger”;

 

   

the failure to complete the Merger could trigger the payment of a termination fee;

 

   

the uncertainties associated with the Merger may cause us to lose key customers and key personnel;

 

   

the failure to complete the Merger could negatively impact our business and the market price for our shares;

 

   

the risk that a closing condition to the Merger Agreement may not be satisfied or waived;

 

   

although not a closing condition, the failure of the acquiring entity in the contemplated Merger to obtain the necessary financing to close the Merger;

 

   

our ability to retain and hire key personnel and maintain relationships with customers, suppliers and other business partners pending the consummation of the contemplated Merger;

 

   

the effect of contractual restrictions on the conduct of our business prior to the completion of the Merger and on our ability to make certain business decisions;

 

   

the ability to solicit alternative acquisition proposals due to contractual restrictions following the expiration of the go-shop period on July 2, 2013;

 

   

the possible adverse effect on our business and the price of our common stock if the Merger is not completed in a timely manner or at all;

 

   

the failure of our new stores or the conversion of our existing stores to achieve sales and operating levels consistent with our expectations;

 

   

risks and challenges in connection with sourcing merchandise from third party domestic and foreign vendors, including the risk that current or prospective vendors may be unable or unwilling to supply us with adequate quantities of their merchandise in a timely manner or at acceptable prices;

 

14


   

our level of success in gaining and maintaining broad market acceptance of our exclusive brands;

 

   

our failure to protect our brand image;

 

   

economic conditions, and their effect on the financial and capital markets, our vendors and business partners, employment levels, consumer demand, spending patterns, inflation and the cost of goods;

 

   

our loss of key personnel or our inability to hire additional personnel;

 

   

seasonality of our business;

 

   

increases in costs of raw materials for our merchandise, fuel, or other energy, transportation or utilities costs and in the costs of labor and employment;

 

   

the impact of governmental laws and regulations, accounting rules and regulations, and the outcomes of legal proceedings;

 

   

disruptions in our supply chain and distribution facility;

 

   

damage or interruption to our information systems;

 

   

changes in the competitive environment in our industry and the markets in which we operate, including competition among online retailers;

 

   

natural disasters, unusually adverse weather conditions, pandemic outbreaks, boycotts and geo-political events;

 

   

the incurrence of material uninsured losses or excessive insurance costs;

 

   

our failure to maintain effective internal controls; and

 

   

other factors discussed in other reports or filings filed by us with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended February 2, 2013.

We disclaim any intent or obligation to update these forward-looking statements unless required by applicable law.

Our Business

We operate on a fiscal year calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31 of the following year. For example, references to “fiscal year 2012” refer to the 53 week period ended February 2, 2013.

rue21 is a fast growing specialty apparel retailer offering the newest fashion trends for girls and guys at a great value. Although many of our customers are teenagers, we believe our merchandise appeals to anyone who wants to look or feel 21. Our product offerings fall into three categories: girls apparel; guys apparel and accessories; and girls accessories or our rue21 etc! category. As of August 3, 2013, we operated 959 stores in 47 states.

Merger

On May 23, 2013, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Rhodes Holdco, Inc., a Delaware corporation (“Parent”), and Rhodes Merger Sub, a newly formed Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), providing for the merger (the “Merger”) of Merger Sub with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates of Apax Partners L.P. (“Apax”). The merger consideration is $42.00 per share in cash, without interest. The transaction will be supported through financing to be obtained by affiliates of Apax.

Under the Merger Agreement, each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the Merger (other than (i) shares owned by Parent, Merger Sub, or any other direct or indirect wholly owned subsidiary of Parent and shares owned by the Company or any direct or indirect wholly owned subsidiary of the Company and, in each

 

15


case, not held on behalf of third parties, (ii) shares as otherwise agreed to in writing before the effective time of the Merger between Parent or its affiliates and the holder of such shares and (iii) shares owned by stockholders who have not voted in favor of adoption of the Merger Agreement or consented thereto in writing and who have properly demanded and not withdrawn a demand for appraisal with respect to such shares under Delaware law) will be converted into the right to receive $42.00 per share in cash, without interest.

The Merger is subject to the approval by (i) at least a majority of all outstanding shares of common stock and (ii) a majority of the then-outstanding shares not beneficially owned, directly or indirectly, by Parent, Merger Sub, certain Apax entities, SKM Equity Fund II, L. P. and SKM Investment Fund II (together, the “SKM Funds”) or certain other specified parties, receipt of regulatory approvals, and other customary closing conditions, including, among others, the absence of any order, judgment, injunction, award, decree or writ restraining, enjoining, prohibiting or otherwise preventing consummation of the Merger. The Company has received notice from the Federal Trade Commission granting early termination of the mandatory waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, receipt of which was a condition to consummation of the proposed Merger.

Under the terms of the Merger Agreement, the Company and its advisors were permitted to actively solicit and negotiate alternative acquisition proposals from third parties during a “go-shop” period that began on May 23, 2013 and expired at 11:59 p.m. EDT on July 2, 2013. With the expiration of the “go-shop” period, the Company is now subject to customary “non-solicitation” provisions that limit its ability to solicit, encourage, discuss or negotiate alternative acquisition proposals from third parties or to provide non-public information to third parties. These non-solicitation provisions are subject to a “fiduciary out” provision that allows the Company to provide non-public information and participate in discussions and negotiations with respect to certain unsolicited written acquisition proposals and to terminate the Merger Agreement and enter into an alternative acquisition agreement with respect to a superior proposal in compliance with the terms of the Merger Agreement.

Concurrently with the execution and delivery of the Merger Agreement, the SKM Funds, which collectively own approximately 30% of the outstanding shares of the Company entered into a support agreement with the Company and Apax to vote their shares in favor of the transaction with Apax (the “Support Agreement”). Pursuant to the terms of the Support Agreement, if the agreement with Apax is terminated and the Company terminates the Merger Agreement to accept an all-cash superior proposal of at least $42.00 per share, the SKM Funds have agreed to vote their shares in favor of such superior proposal on the same pro rata basis as unaffiliated stockholders (although SKM Funds can choose to vote all, or an amount between the applicable pro rata proportion and all of their shares in favor of a superior proposal).

The proposed Merger is expected to close before the end of the 2013 calendar year, subject to approval by the majority of stockholders unaffiliated with the SKM funds as well as customary closing conditions.

The Merger Agreement and the above summary of certain of its terms have been included to provide you with information regarding the terms of the Merger Agreement. Factual disclosures about us contained in this report may supplement, update or modify the factual disclosures about us contained in the Merger Agreement and described in this summary. The representations, warranties and covenants made in the Merger Agreement by us, Parent and Merger Sub were qualified and subject to important limitations agreed to by us, Parent and Merger Sub in connection with negotiating the terms of the Merger Agreement. In particular, in your review of the representations and warranties contained in the Merger Agreement and described in the above summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purposes of establishing the circumstances in which a party to the Merger Agreement may have the right not to close the Merger if the representations and warranties of the other party prove to be untrue due to a change in circumstance or otherwise, and allocating risk between the parties to the Merger Agreement, rather than establishing matters as facts. The representations and warranties may also be subject to a contractual standard of materiality different from those generally applicable to stockholders and reports and documents filed with the SEC and in some cases were qualified by disclosures that were made by each party to the other, which disclosures are not reflected in the Merger Agreement. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this report, may have changed since the date of the Merger Agreement and subsequent developments or new information qualifying a representation or warranty may have been included in this report.

For further information on the Merger, the Merger Agreement and related agreements, please refer to the Current Report on Form 8-K filed on May 24, 2013. The foregoing descriptions of the Merger Agreement and Support Agreement are subject to, and qualified in their entirety by, the full text of those agreements as attached as Exhibits 2.1 and 10.1 respectively to the Form 8-K filed on May 24, 2013, each of which is incorporated by reference herein.

The Company suspended its stock repurchase program as of May 23, 2013 following its entry into the Merger Agreement.

The Merger poses certain risks to the Company during the pendency of the transaction. See “Risk Factors.” in Part II, Item 1A below and in the Quarterly Report on Form 10-Q for the quarterly period ended May 4, 2013.

 

16


Performance Metrics

In order to monitor the Company’s success, the Company’s management monitors certain key performance metrics, including:

Net Sales

Net sales constitute gross sales net of any returns and merchandise discounts. Net sales consist of sales from comparable stores and non-comparable stores.

Comparable Store Sales

A store is included in comparable store sales on the first day of the sixteenth month after its opening, as new stores generally open with above run-rate sales volumes, which usually extend for a period of at least three months, and comparability generally is achieved 12 months after the initial three-month period of store opening. Comparable store sales include existing stores that have been converted to our rue21 etc! layout. When a store that is included in comparable store sales is in the process of being converted to our rue21 etc! layout, net sales from that store remain in comparable store sales. There may be variations in the way in which some of our competitors and other apparel retailers calculate comparable or “same store” sales. As a result, data in this Quarterly Report on Form 10-Q regarding our comparable store sales may not be comparable to similar data made available by other retailers. Non-comparable store sales include sales not included in comparable store sales and sales from closed stores.

Measuring the change in year-over-year comparable store sales allows us to evaluate how our store base is performing. Various factors affect comparable store sales, including:

 

   

consumer preferences, buying trends and overall economic trends;

 

   

our ability to identify and respond effectively to fashion trends and customer preferences;

 

   

competition;

 

   

changes in our merchandise mix;

 

   

pricing;

 

   

the timing of our releases of new merchandise and promotional events;

 

   

the level of customer service that we provide in our stores;

 

   

our ability to source and distribute products efficiently; and

 

   

the number of stores we open, close and convert in any period.

As we continue to pursue our store growth strategy, we expect that a significant percentage of our net sales increase will continue to come from non-comparable store sales. Opening new stores is an important part of our growth strategy. Accordingly, comparable store sales is only one element we use to assess the success of our growth strategy.

The retail apparel industry is cyclical, and consequently our net sales are affected by general economic conditions. Purchases of apparel and accessories are sensitive to a number of factors that influence the levels of consumer spending, including economic conditions and the level of disposable consumer income, consumer debt, interest rates and consumer confidence.

Gross Profit

Gross profit is equal to our net sales minus our cost of goods sold. Gross margin measures gross profit as a percentage of our net sales. Cost of goods sold includes the direct cost of purchased merchandise, distribution center costs, all freight costs incurred to get merchandise to our stores, store occupancy costs and buying costs. The components of our cost of goods sold may not be comparable to those of other retailers.

 

17


Our cost of goods sold is substantially higher in higher volume quarters because cost of goods sold generally increases as net sales increase. Changes in the mix of our products, such as changes in the proportion of accessories, may also impact our overall cost of goods sold. We review our inventory levels on an ongoing basis in order to identify slow-moving merchandise, and generally use markdowns to clear that merchandise. The timing and level of markdowns are not seasonal in nature, but are driven by customer acceptance of our merchandise. If we misjudge the market for our products, we may be faced with significant excess inventories for some products and be required to mark down those products in order to sell them. Significant markdowns have reduced our gross profit in some prior periods and may have a material adverse impact on our earnings for future periods depending on the amount of the markdowns and the amount of merchandise affected.

Selling, General and Administrative Expense

Selling, general and administrative expense includes administration, share-based compensation and store expenses, but excludes store occupancy costs and freight to stores. These expenses do not generally vary proportionately with net sales. As a result, selling, general and administrative expense as a percentage of net sales is usually higher in lower volume quarters and lower in higher volume quarters. The components of our selling, general and administrative expense may not be comparable to those of other retailers. We expect that our selling, general and administrative expense will increase in future periods due to our continuing growth.

 

18


Results of Operations

The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of net sales:

 

     Thirteen weeks ended     Twenty-six weeks ended  
     August 3,     July 28,     August 3,     July 28,  
     2013     2012     2013     2012  
     (Unaudited)  
     (in thousands, except operating data)  

Net sales

   $ 229,322      $ 202,059      $ 453,697      $ 407,674   

Cost of goods sold

     149,763        122,528        284,442        248,462   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     79,559        79,531        169,255        159,212   

Selling, general and administrative expenses

     68,477        57,801        132,181        111,596   

Depreciation and amortization expense

     9,342        8,017        18,387        15,545   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     1,740        13,713        18,687        32,071   

Interest income, net

     22        (22     17        (52
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,718        13,735        18,670        32,123   

Provision for income taxes

     633        4,645        6,786        11,430   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,085      $ 9,090      $ 11,884      $ 20,693   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share

        

Basic

     0.05        0.37        0.50        0.85   

Diluted

     0.04        0.36        0.49        0.83   

Weighted average common shares outstanding

        

Basic

     23,510        24,420        23,659        24,458   

Diluted

     24,314        25,022        24,377        25,079   

Net sales

     100.0     100.0     100.0     100.0

Cost of goods sold

     65.3     60.6     62.7     60.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     34.7     39.4     37.3     39.1

Selling, general and administrative expenses

     29.9     28.6     29.1     27.4

Depreciation and amortization expense

     4.1     4.0     4.1     3.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     0.8     6.8     4.1     7.9

Interest income, net

     0.0     0.0     0.0     0.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     0.7     6.8     4.1     7.9

Provision for income taxes

     0.3     2.3     1.5     2.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     0.5     4.5     2.6     5.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective Tax Rate

     36.8     33.8     36.3     35.6

Operating Data (unaudited)

        

Number of stores open at the end of the period

     959        834        959        834   

Comparable store sales change

     -5.9     0.5     -5.3     1.1

 

19


The approximate percentage of our net sales derived from our product categories, based on our internal merchandising system, is as follows:

 

     Thirteen weeks ended     Twenty-six weeks ended  
     August 3,     July 28,     August 3,     July 28,  
     2013     2012     2013     2012  

Girls

        

Apparel

     58.5     59.4     58.5     58.8

Accessories

     23.0     22.0     23.7     23.3

Guys Apparel and Accessories

     18.5     18.6     17.8     17.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Second Quarter of 2013 Compared to Second Quarter of 2012

Net Sales

During the second quarter of 2013, our net sales increased 13.5%, or $27.2 million, to $229.3 million as compared to $202.1 million in the second quarter of 2012. This increase in net sales was due to an approximate 8% increase in the number of transactions, driven by new store openings during the second quarter of 2013. Net sales also increased primarily due to an increase of 3.7% in the average dollar value of transactions. The average dollar value of transactions increased due to an increase in units per transaction offset by a decrease in average unit retail. During the second quarter of 2013, we opened 41 new stores compared to 39 new stores in the second quarter of 2012. Our comparable store sales decreased 5.9% in the second quarter of 2013 compared to an increase of 0.5% in the second quarter of 2012. There were 778 comparable stores and 181 non-comparable stores open at August 3, 2013 compared to 662 and 172, respectively, at July 28, 2012.

During the second quarter of 2013, net sales from the girls apparel, girls accessories and guys apparel and accessories categories grew by approximately 12%,18% and 13%, respectively, as compared to the second quarter of 2012.

Gross Profit

Gross profit was approximately flat in the second quarter of 2013 at $79.6 million as compared to $79.5 million in the second quarter of 2012. Gross margin decreased 470 basis points to 34.7% for the second quarter of 2013 from 39.4% for the second quarter of 2012 largely attributable to merchandise margin. The lower merchandise margin was driven by higher markdowns as compared to the second quarter of 2012. The additional markdowns were taken to clear slow moving inventory. Other cost of goods sold for the second quarter of 2013 decreased slightly as a percentage of sales as compared to second quarter of 2012.

Selling, General and Administrative Expense

Selling, general and administrative expense increased 18.5%, or $10.7 million, to $68.5 million in the second quarter of 2013 as compared to $57.8 million in the second quarter of 2012. As a percentage of net sales, selling, general and administrative expense increased to 29.9% in the second quarter of 2013 as compared to 28.6% in the second quarter of 2012.

Store operating expenses increased by $8.3 million in the second quarter of 2013 as compared to the second quarter of 2012 due primarily to the operation of 959 stores as of August 3, 2013 compared to the operation of 834 stores as of July 28, 2012. As a percentage of net sales, store operating expenses increased to 22.4% for the second quarter of 2013 as compared to 21.3% for the second quarter of 2012.

 

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Administrative and general expense increased 16.0%, or $2.4 million to $17.2 million in the second quarter of 2013 as compared to $14.8 million in the second quarter of 2012. The increase was largely attributable to professional fee expense which increased by $2.4 million, to $3.4 million in the second quarter of 2013 as compared to $1.0 million in the second quarter of 2012. The increase in professional fees is related to costs associated with the Merger.

Depreciation and Amortization Expense

Depreciation and amortization expense increased by $1.3 million to $9.3 million in the second quarter of 2013 as compared to $8.0 million in the second quarter of 2012. Depreciation and amortization expense increased as a percentage of net sales to 4.1% in the second quarter of 2013 as compared to 4.0% in the second quarter of 2012. This increase was driven by capital expenditures related to new store openings.

Provision for Income Taxes

The provision for income taxes decreased $4.0 million to $0.6 million in the second quarter of 2013 as compared to $4.6 million in the second quarter of 2012. The effective tax rates were 36.8% and 33.8% for the second quarter of 2013 and 2012, respectively. The higher effective income tax rate for the second quarter of 2013 was primarily due to a higher effective state income tax rate and lower federal tax credits as compared to the prior year.

Net Income

Net income decreased 88.0%, or $8.0 million, to $1.1 million for the second quarter of 2013 as compared to $9.1 million in the second quarter of 2012. This decrease was due to the factors discussed above.

Year-to-date 2013 Compared to Year-to-date 2012

Net Sales

Net sales increased 11.3%, or $46.0 million, to $453.7 million for the Year-to-date 2013 period from $407.7 million for the Year-to-date 2012 period. The increase in net sales was due to an approximately 8% increase in the number of transactions, primarily driven by new stores opened in 2013. Net sales also increased due to an increase of 3.1% in the average dollar value of transactions. The average dollar value of transactions increased due to an increase in units per transactions offset by a slight decrease in average unit retail. During the Year-to-date 2013 period, we opened 82 new stores as compared to 79 new stores in the Year-to-date 2012 period. Our comparable store sales decreased 5.3% for the Year-to-date 2013 period compared to an increase of 1.1% for the Year-to-date 2012 period. There were 778 comparable and 181 non-comparable stores at August 3, 2013 compared to 662 and 172, respectively, at July 28, 2012.

During Year-to-date 2013, net sales from the girls apparel, girls accessories and guys apparel and accessories categories grew by approximately 11%,13% and 11%, respectively, as compared to the Year-to-date 2012 period.

Gross Profit

Gross profit increased 6.3%, or $10.1 million, in the Year-to-date 2013 period to $169.3 million as compared to $159.2 million in the Year-to-date 2012 period. Gross margin decreased 180 basis points to 37.3% for the Year-to-date 2013 period from 39.1% for the Year-to-date of 2012 period largely attributable to merchandise margin. Other cost of goods sold in the Year-to-date period of 2013 increased slightly as a percentage of sales as compared to the Year-to-date 2012 period.

Selling, General and Administrative Expense

Selling, general and administrative expense increased 18.4%, or $20.6 million, to $132.2 million in the Year-to-date 2013 period as compared to $111.6 million in the Year-to-date 2012 period. As a percentage of net sales, selling, general and administrative expense increased 170 basis points to 29.1% in the Year-to-date 2013 period as compared to 27.4% in the Year-to-date 2012 period.

Store operating expenses increased by $15.4 million in the Year-to-date 2013 period as compared to the Year-to-date 2012 period due primarily to the operation of 959 stores as of August 3, 2013 compared to the operation of 834 stores as of July 28, 2012. As a percentage of net sales, store operating expenses increased 140 basis points to 21.7% in the Year-to-date 2013 period as compared to 20.3% in the Year-to-date 2012 period.

Administrative and general expense increased $5.2 million in the Year-to-date 2013 period as compared to Year-to-date 2012 period due primarily to higher professional fees as well as incremental costs associated with the future launch of the Ecommerce web site. The increase in professional fees is related to merger and acquisition costs which is expected to close by the end of Fiscal Year 2013. E-commerce start-up costs incremental to the business for planning and designing the e-commerce launch expected to begin operations in late 2013 were $1.5 million in the Year-to-date period of 2013.

 

21


Depreciation and Amortization Expense

Depreciation and amortization expense increased by $2.8 million to $18.4 million in the Year-to-date 2013 period as compared to $15.5 million in the Year-to-date 2012 period. Depreciation and amortization expense increased as a percentage of net sales to 4.1% in the Year-to-date 2013 period as compared to 3.8% in the Year-to-date 2012 period. This increase was driven by capital expenditures relating to new store openings.

Provision for Income Taxes

The provision for income taxes decreased $4.6 million to $6.8 million in the Year-to-date 2013 period as compared to $11.4 million in the Year-to-date 2012 period. This decrease was due primarily to the $13.4 million decrease in pre-tax income. The effective tax rates were 36.3% and 35.6% for the Year-to-date 2013 and 2012 periods, respectively. The higher effective income tax rate in the Year-to-date 2013 period was principally due to a higher effective state income tax rate and lower federal income tax credits as compared to the prior year.

Net Income

Net income decreased 42.6%, or $8.8 million, to $11.9 million for the Year-to-date 2013 period as compared to $20.7 million in the Year-to-date 2012 period. This decrease was due to the factors discussed above.

Liquidity and Capital Resources

We believe that internally generated funds, current cash on hand, and available borrowings under our existing credit facility will be adequate to meet foreseeable liquidity needs. Our primary sources of liquidity are cash flows from operations and availability under our senior secured credit facility. Our primary cash needs are for capital expenditures in connection with opening new stores and converting existing stores to the rue21 etc! format, including the additional working capital required for the related increase in merchandise inventories. Cash has been and may again be required for repurchases of common stock, as well as for investment in information technology and distribution facility enhancements and funding normal working capital requirements. The most significant components of our working capital are cash and cash equivalents, merchandise inventories, accounts payable and other current liabilities. Our operations are seasonal in nature and consist of two principal selling seasons: Spring (the first and second quarters) and Fall (the third and fourth quarters). Generally, our highest sales volume occurs in the fourth quarter, which includes the holiday selling season. Accordingly, cash requirements are highest in the third quarter as our inventories build in advance of the holiday season. In addition, our quarterly results can be affected by the timing of new store openings and store closings, the amount of sales contributed by new and existing stores and the timing of certain holidays.

If the Merger is consummated, subsequent to the Merger, we expect to be substantially leveraged. Our liquidity requirements will be significantly changed, primarily due to the addition of debt service requirements to our existing cash needs discussed above. Our ability to fund our operations and make planned capital expenditures, to fund post-Merger debt service requirements and to remain in compliance with the financial covenants depends on our future financing activities, our future operating performance and our future cash flow, which in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control. See Item 1A. “Risk Factors” in Part II of this report. Management believes that, in the event the Merger is not consummated, our current balances of cash and cash equivalents, cash flow from operations and availability under the senior secured credit facility will be adequate to finance planned capital expenditures and working capital needs for the next 12 months.

As of August 3, 2013, we had cash, cash equivalents, and short term investments totaling $49.8 million. Our cash and cash equivalents consist of cash on deposit, credit and debit card transactions and investments with a maturity of 90 days or less. Our cash, cash equivalents and short term investments balance at August 3, 2013 decreased by $13.7 million from $63.5 million at February 2, 2013. Components of this change in cash for the Year-to-date 2013 period, as well as for change in cash for the Year-to-date 2012 period, are provided below in more detail.

 

22


A summary of operating, investing and financing activities are shown in the following table:

 

     Twenty-six weeks ended  
     August 3,     July 28,  
     2013     2012  
     (in thousands)  

Provided by operating activities

   $ 32,698      $ 28,481   

Used for investing activities

     (12,567     (17,971

Used for financing activities

     (13,818     (12,635
  

 

 

   

 

 

 

Increase (Decrease) in cash and cash equivalents

   $ 6,313      $ (2,125
  

 

 

   

 

 

 

Operating Activities

Operating activities consist primarily of net income adjusted for non-cash items, including depreciation and amortization, deferred taxes, the effect of working capital changes and tenant allowances received from landlords.

 

     Twenty-six weeks ended  
     August 3,     July 28,  
     2013     2012  
     (in thousands)  

Net income

   $ 11,884      $ 20,693   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     18,387        15,545   

Deferred taxes

     (5,476     (4,758

Stock-based compensation

     5,530        5,123   

Merchandise inventory

     (25,556     (29,728

Accounts payable

     26,227        17,611   

Accrued income and franchise taxes

     2,045        (742

Deferred rent and tenant allowances

     6,153        8,880   

Other working capital components

     (6,027     (3,902

All other

     (469     (241
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 32,698      $ 28,481   
  

 

 

   

 

 

 

Net cash provided by operating activities was $32.7 million and $28.5 million for the Year-to-date 2013 period and the Year-to-date 2012 period, respectively. The increase of $4.2 million in the Year-to-date 2013 period as compared to the Year-to-date 2012 period was primarily due to faster growth in accounts payable ($8.6 million) and slower growth in inventory ($4.2 million) offset by lower net income ($8.8 million) and lower deferred rent and tenant allowances ($2.7 million). Depreciation and amortization increased $2.8 million.

 

23


Investing Activities

Investing activities consist principally of capital expenditures for new and converted stores.

 

     Twenty-six weeks ended  
     August 3,     July 28,  
     2013     2012  
     (in thousands)  

Capital expenditures, net of tenant allowances

   $ (22,510   $ (19,825

Tenant allowances

     (10,057     (11,146

Purchase of short term investments

     —          (17,000

Proceeds from the sale of short term investments

     20,000        30,000   
  

 

 

   

 

 

 

Net cash used for investing activities

   $ (12,567   $ (17,971
  

 

 

   

 

 

 

For the Year-to-date 2013 period capital expenditures increased $1.6 million to $32.6 million as compared to $31.0 million in the Year-to-date 2012 period. During the Year-to-date 2013, we opened 82 new stores as compared to 79 new stores in the Year-to-date 2012 period, respectively. Capital expenditures, net of tenant allowances, for the new stores and conversions of existing stores increased $0.9 million to $12.8 million during the Year-to-date 2013 as compared to $11.9 million in the comparable prior year period. The Company expects total capital expenditures, net of tenant allowances, for fiscal year 2013 to be approximately $47.0 million to $53.0 million.

Purchases and sales of short term investments resulted in an additional $20.0 million source of cash in the Year-to-date 2013 period compared to $13.0 million in the Year-to-date 2012 period. The Company was invested in highly liquid short term investments.

Financing Activities

Financing activities consist principally of repurchases of common stock as well as for the withholding of common stock from employees for the payment of taxes in conjunction with the vesting of share-based payments. Net cash of $13.6 million was used in the repurchase of the publicly announced program during the Year-to-date period of 2013 as compared to $12.9 million in the Year-to-date period of 2012.

 

     Twenty-six weeks ended  
     August 3,     July 28,  
     2013     2012  
     (in thousands)  

Withholding of common stock from employees

   $ (1,229   $ (341

Repurchase of common stock as part of a publicly announced program

     (13,575     (12,917

Proceeds from stock options exercised

     356        297   

Excess tax benefits from stock-based award activities

     630        326   
  

 

 

   

 

 

 

Net cash used for financing activities

   $ (13,818   $ (12,635
  

 

 

   

 

 

 

 

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Senior Secured Credit Facility

Effective April 5, 2013, we amended and restated our senior secured credit facility with Bank of America, N.A., and JP Morgan Chase Bank, N.A. Key provisions of the agreement including a borrowing ceiling to $100 million, which is further expandable at our option up to a maximum of $130 million under certain defined conditions, and a five-year term. Borrowing will bear interest at i) the base rate (the higher of a) the Federal Funds rate plus .50%, b) Bank of America’s prime rate, and c) the LIBOR rate for a one month interest period, plus 1.0%, plus an applicable margin between 0.50% and 1.00% or ii) the adjusted LIBOR rate plus 1.00% plus the applicable margin between 1.50% to 2.00%. Availability under our senior secured credit facility is collateralized by a first priority interest in all of our assets. There were no borrowings as of August 3, 2013 and July 28, 2012, under the senior secured credit facility.

Our senior secured credit facility includes a fixed charge covenant applicable only if net availability falls below a 10% threshold. We are in compliance with all covenants under our senior secured credit facility as of August 3, 2013 and expect to remain in compliance for the next twelve months.

Off Balance Sheet Arrangements

We are not a party to any off balance sheet arrangements.

Contractual Obligations

There have been no significant changes to our contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013, other than those which occur in the normal course of business.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in accordance with GAAP requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the consolidated financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the consolidated financial statements. There have been no significant changes to our critical accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended February  2, 2013.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to the quantitative and qualitative information concerning our market risk since the end of the most recent fiscal year as disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013. For further information, see Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rule 13(a)-15(e), as of the end of the period covered by this Quarterly Report on Form 10-Q pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q are effective at a reasonable assurance level in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent or detect all error and all fraud. While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Changes in Internal Control over Financial Reporting

There was no change to our internal control over financial reporting during the second quarter of fiscal year 2013 that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

 

25


PART II—OTHER INFORMATION

 

ITEM 1. Legal Proceedings

On May 30, 2013, the Southeastern Pennsylvania Transportation Authority, on behalf of itself and a putative class of public stockholders of the Company, filed a complaint in the Court of Chancery in the State of Delaware against the Company, the directors of the Company, Apax and several funds affiliated with Apax (collectively hereafter, “Apax”) and Apax-affiliated entities participating in the proposed Merger pursuant to the Merger Agreement (the “Apax Entities”). The complaint alleged, among other things, that the Company and its directors breached their fiduciary duties to the Company’s public stockholders by authorizing the Merger for inadequate consideration, without a reasonable independent process and without a fair opportunity to seek and secure the best sale price for stockholders; that Apax, Apax affiliated members of the Company’s board of directors and the Company’s chief executive officer breached their duty of loyalty and entire fairness to the Company through causing or supporting the Merger which plaintiff alleged does not include a fair price and was not the result of fair dealing; and that the Apax Entities aided and abetted the other defendants’ alleged breaches of fiduciary duty. The plaintiff was seeking, among other things, a judgment determining that the action is a proper class action and that the plaintiff is a proper class representative; to enjoin the defendants from taking steps to implement the acquisition of the Company at a price that is not fair and equitable and under terms presently proposed; to rescind the Merger (or awarding damages to the class) in the event of its consummation prior to the entry of final judgment; to enjoin any material transactions or changes to the Company’s business and assets until a proper process is conducted to evaluate strategic alternatives; and the award of compensatory damages and fees, expenses and costs of attorneys and experts. The suit was dismissed without prejudice on July 30, 2013, with each party bearing its own costs.

We are also subject to various proceedings, lawsuits, disputes, and claims arising in the ordinary course of our business. Many of these actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against us from time to time include commercial, intellectual property, customer, and employment actions, including class action lawsuits. The plaintiffs in some actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages, and some are covered in part by insurance. We cannot predict with assurance the outcome of actions brought against us. Accordingly, adverse developments, settlements, or resolutions may occur and negatively impact income in the quarter of such development, settlement, or resolution. If a potential loss arising from these lawsuits, claims and pending actions is probable and reasonably estimable, we record the estimated liability based on circumstances and assumptions existing at the time.

 

ITEM 1A. RISK FACTORS

Our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 and our Quarterly Report on Form 10-Q for the quarterly period ended May 4, 2013 contain detailed discussions of certain risk factors that could materially adversely affect our business, operating results, or financial condition. The following risk factors, related to the contemplated Merger, supplement and should be read in conjunction with those addressed in the Form 10-K and Form 10-Q.

Uncertainties associated with the Merger may cause us to lose key customers and key personnel.

As a result of the uncertainty surrounding the conduct of our business following the completion of the Merger, we may lose key customers and our employees may be uncertain about their future roles and relationships with us following the completion of the Merger, which may adversely affect our ability to retain them.

Failure to complete the Merger could negatively impact our business and the market price of our shares.

If the Merger is not completed for any reason, we will be subject to a number of material risks, including the disruption to our business resulting from the announcement of the signing of the Merger Agreement, the diversion of management’s attention from our day-to-day business and the substantial restrictions imposed by the Merger Agreement on the operation of our business during the period before the completion of the Merger which may make it difficult for us to achieve our business goals if the Merger does not occur.

If the Merger Agreement is not adopted by the Company’s stockholders or if the Merger is not completed for any other reason, rue21’s stockholders will not receive any payment for their shares in connection with the Merger. Instead, rue21 will remain an independent public company, and the shares will continue to be quoted on the NASDAQ. In addition, if the Merger is not completed, the Company expects that management will operate rue21’s business in a manner similar to that in which it is being operated today and that rue21’s stockholders will continue to be subject to the same risks and opportunities to which they are currently subject, including, without limitation, risks related to the competitive specialty retail industry in which rue21 operates and adverse economic conditions.

 

26


Furthermore, if the Merger is not completed, and depending on the circumstances that would have caused the Merger not to be completed, the price of the shares may decline significantly. If that were to occur, it is uncertain when, if ever, the price of the shares would return to the prices at which the shares currently trade. Accordingly, if the Merger is not completed, there can be no assurance as to the effect of these risks and opportunities on the future value of your shares. If the Merger is not completed, the Company’s board of directors will continue to evaluate and review the Company’s business operations, properties, dividend policy, stock repurchase policy and capitalization, among other things, make such changes as are deemed appropriate and continue to seek to identify strategic alternatives to enhance stockholder value. If the Merger Agreement is not adopted by the Company’s stockholders or if the Merger is not completed for any other reason, there can be no assurance that any other transaction acceptable to rue21 will be offered or that rue21’s business, prospects or results of operation will not be adversely impacted.

Failure to complete the Merger could trigger the payment of a termination fee.

If the Merger Agreement is terminated, under specified circumstances, rue21 would be required to pay a termination fee in an amount equal to $31.359 million.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in the “Risk Factors” sections in the Annual Report on Form 10-K for the year ended February 2, 2013 and the Quarterly Report on Form 10-Q for the quarter ended May 4, 2013, together with the cautionary statement under the caption “Forward-Looking Statements” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report. These described risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information regarding our repurchases of our common stock during the 13 weeks Ended August 3, 2013.

 

Period

  Total Number of Shares
Purchased
    Average Price Paid per
Share (1)
    Total Number of
Shares Purchased as
Part of Publicly
Announced
Programs (1)
    Approximate Dollar of
shares Value of Shares that
May Yet Be Purchased
Under the Plans or
Programs (1)
 

May 5, 2013 to June 1, 2013

    92,300      $ 34.00        92,300      $ 36,426,806   

June 2, 2013 to July 6, 2013

    —          —          —          36,426,806   

July 7, 2013 to August 3, 2013

    —          —          —          36,426,806   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    92,300      $ 34.00        92,300      $ 36,426,806   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) All of the above repurchases were made on the open market at prevailing market rates plus related expenses under our stock repurchase program, which authorized the repurchase of up to $50 million in common stock. Our stock repurchase program was authorized by our Board of Directors and publicly announced on May 24, 2012. The authorization was increased by $25 million on March 21, 2013. The Company suspended its stock repurchase program as of May  23, 2013 following the announcement of the Merger.

Item 6. Exhibits

 

    2.1    Agreement and Plan of Merger, dated May 23, 2013, by and among rue21, inc, Rhodes Holdco, Inc. and Rhodes Holdco, Inc., incorporated by reference to Exhibit 2.1 to Registrant’s Form 8-K (File No. 001-34536) filed on May 24, 2013.
  10.1    Support Agreement, dated May 23, 2013 by and among the stockholders listed on the signature page thereto, rue21, inc and, solely for purposes of Section 1(a) thereof, and, to the extent applicable, Section 9 thereof, Rhodes Holdco, Inc., incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K (File No. 001-34536) filed on May 24, 2013.
  10.2*    Equity Commitment Letter, dated May 23, 2013, by and among the Company, Parent, Apax VIII-A L.P., Apax VIII-B L.P., Apax VIII-1 L.P., and Apax VIII-2 L.P.
  10.3*    Amended and Restated 2009 Omnibus Incentive Plan.
  10.4*    Annual Incentive Bonus Plan.

 

27


  31.1*   Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of rue21, inc. (Section 302 of the Sarbanes-Oxley Act of 2002)
  31.2*   Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of rue21, inc. (Section 302 of the Sarbanes-Oxley Act of 2002)
  32.1**   Certification of the Chief Executive Officer of rue21, inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2**   Certification of the Chief Financial Officer of rue21, inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101   Interactive Data File

 

* Filed herewith
** Furnished herewith

 

28


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    rue21, inc.
Date: September 12, 2013     By  

 /s/ Robert Fisch

     

Robert Fisch

Chairman and Chief Executive Officer

Date: September 12, 2013     By  

 /s/ Keith McDonough

     

Keith McDonough

Senior Vice President and Chief Financial Officer

 

29