This Incredibly Profitable Retailer is Being Acquired
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently, the specialty apparel retailer rue21 (NASDAQ: RUE) agreed to be bought out by Apax for around $42 per share in cash, with the total transaction worth $1.1 billion. Thus, since the beginning of the year, rue21 has more than doubled from only $20 per share to the acquisition offer of $42 per share. The company will have 40 days to seek better offers. Does rue21 have a fair deal? Let’s find out.
A fair price or not?
rue21, incorporated in 1976, is the specialty apparel retailer operating around 877 stores in small and middle market communities in 47 states in the U.S. The majority of its sales, 57.5% of the total sales, was generated from the girl apparel sales. Girl accessories ranked second, accounting for 23.6% of the total sales in 2012, while guys apparel and accessories represented only 18.9% of the total 2012 revenue. In the past three years, rue21 has grown its number of stores, from 638 in 2010 to 877 in 2012. Its comparable store sales growth has been positive, but at the low level during this three year period. In 2012, its comparable store sales increased by only 0.7%.
What interests me is its conservative capital structure. As of Feb. 2013, it had $178.3 million in total stockholders’ equity, $63.5 million in cash and short-term investments, and no interest-bearing debt. The biggest item in liabilities was accounts payable, at $108.76 million, while the deferred rent, tenant allowances and other long-term liabilities stayed at $59.3 million. Furthermore, rue21’s operation has been quite profitable, with a consistent double-digit return on invested capital. Since 2007, its return on invested capital has stayed in the range of 22.42% to 41.20%. In 2012, its ROIC was nearly 27%. At $42 per share, rue21 is valued at around 9.2 times EV/EBITDA. It seems that rue21 got a fair price, as the EV multiple of around 30 comparable deals was around 8.4, according to Bloomberg.
Its less profitable peers are trading at lower multiples
Compared to its peers Aeropostale (NYSE: ARO) and Abercrombie & Fitch (NYSE: ANF), rue21 has the highest valuation among the three companies. Aeropostale is trading at around $14.60 per share, with a total market cap of $1.14 billion. The market values Aeropostale a bit lower, at 8.18 times EV/EBITDA. In the first quarter of 2013, Aeropostale reported quite a sluggish performance. Revenue decreased from $497.2 million in the first quarter 2012 to $452.3 million in Q1 2013. It produced a loss of $12.17 million, worse than a profit of $10.6 million in the first quarter last year. Aeropostale reported as much as 14% decline in its comparable store sales, compared to a growth of 2% in the same period last year. Thomas Johnson, Aeropostale’s CEO, commented that the sluggish operating performance was due to “a weak macroeconomic environment, as well as unseasonably cool weather.”
Abercrombie & Fitch seems to have the lowest valuation of the trio. At $49.70 per share, Abercrombie & Fitch is worth around $3.9 billion on the market. The market values the company at only 5.8 times EV/EBITDA. In the first quarter of 2013, although it experienced an 8.9% decrease in revenue to $838.8 million, the company narrowed down the loss, from $(21.3) million to only $(7.2) million. The improvement in net earnings was due to gross margin improvement and tighter cost management. For the full year, Abercrombie & Fitch expected to generate around $3.15 to $3.25 earnings per share. Around 40-50 stores would be closed during the year because of natural lease expirations.
rue21 is the most profitable retailer among the three with the highest return on invested capital. In the past twelve months, Abercrombie & Fitch delivered around 12.11% while the Aeropostale’s ROIC was the lowest, at only 8.52%. rue21 and Aeropostale do not pay any dividends, whereas Abercrombie & Fitch is offering shareholders dividends with a yield at 1.6%.
My Foolish take
With around 9.2 times EV/EBITDA, rue21’s shareholders are getting a fair price. Among the three, I like Abercrombie & Fitch the most because of its improving earnings performance, the decent dividend yield and the lowest valuation.
The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!