rue21, inc. (RUE): This Incredibly Profitable Retailer is Being Acquired

Recently, the specialty apparel retailer rue21, inc. (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, inc. (NASDAQ:RUE), 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, inc. (NASDAQ:RUE)’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.