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Will Investors Rue the Loss of rue21, inc. (RUE)?

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rue21, inc. (NASDAQ:RUE)Teen apparel retailer rue21, inc. (NASDAQ:RUE) recently announced its intention to be acquired by Apax Partners in a buyout valued at $1.1 billion, or $42 a share. Apax already owns 30% of rue21, inc. (NASDAQ:RUE), but the announcement delighted investors and the stock shot up nearly 23% to just under the target acquisition price.

CEO Bob Fisch noted in a press release that the transaction would allow the company to expand its footprint to over 1,700 stores and focus on achieving long-term objectives, including successfully implementing e-commerce initiatives and rueMan, a new brand of accessories, watches, and jewelry. rue21, inc. (NASDAQ:RUE) currently has about 1,000 stores nationally, and competes with American Eagle Outfitters (NYSE:AEO) and Abercrombie & Fitch Co. (NYSE:ANF) in apparel, and in the accessories category.

RUE Inventories Chart

RUE Inventories data by YCharts.

In the past, my research has incorporated a Motley Fool Earnings Quality (EQ) Score that taps into a database that ranks individual stocks. The database designates an A through F weekly ranking, based on price, cash flow, revenue, and relative strength, among other things. Stocks with poor earnings quality tend to underperform, so we look for trends that might predict future outcomes.

In terms of earnings quality, rue21, inc. (NASDAQ:RUE) is in the middle of the pack at a C. Revenue is growing adequately, and inventories are generally under control — one of any retailer’s more important metrics to consider. Not adequately displayed by the chart, however, is that inventory values have been growing slightly faster than revenue growth. rue21, inc. (NASDAQ:RUE)’s receivables are under control. However, days payable outstanding have averaged 77 days over the previous four quarters, and payables as a percentage of revenue have averaged 52%. Operating cash flow has averaged just under $19 million per quarter for the last eight quarters, but the OCF margin has narrowed from 11% to 8% of revenue.

rue21, inc. (NASDAQ:RUE)’s sales equaled $901.89 million and EBITDA totaled $101.42 million for the past four quarters, so the $1.1 billion deal works out to be 1.22 times sales and 10.8 times EBITDA for the 70% of the company that Apex does not currently own. Investors should take the deal.

American Eagle Outfitters
American Eagle Outfitters got its wings clipped after hatching some lackluster quarterly results during the week. Year-over-year revenue was down 4% to $679.5 million, and EPS flew the coop at only $0.14, down 38% from last year’s number. The MF EQ database ranked American Eagle as a solid A stock, but keep in mind this factors in long-term trends — and one quarter does not a trend make.

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