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Coverage Initiation: rue21 (RUE)
rue21 (RUE) is a specialty retailer of private label apparel and accessories. The company’s target consumers are 11- to -17 year olds who aspire to be “21” and adults who want to look and feel “21”. The value priced, fashionable merchandise offerings include a broad assortment of boys’ and girls’ apparel, along with jewelry, handbags, intimate apparel, and footwear. The company operated 535 stores in 43 states at the end of fiscal 2009 (278 Strip Centers, 146 Regional Malls, 111 Outlet Centers). Rue21 sells its products under various brand names, such as rue21, rue21 etc!, Carbon, tarea, and rueKicks. The merchandise mix is approximately 57% girls’ apparel, 24% girls’ accessories, and 19% boys’ apparel and accessories.
The company was founded in 1976, as Pennsylvania Fashions, Inc, and expanded to 285 stores by 1988. In 2002, the company filed for Chapter 11 bankruptcy, eventually emerging in 2003 with private equity investor Saunders Karp and Megrue (now part of Apax Partners) , who brought in current CEO Bob Fisch , as the majority shareholder. Rue21 went public on November 13, 2009, at a price of $19 per share. The stock nearly doubled within its first six months of trading, but has declined from its high in April.
A balance of fresh, fast-fashion offerings (the stores receive daily shipments of new products) and attractive value has helped the retailer maintain relatively solid performances throughout the challenging retail environment of the past couple of years. Indeed, it posted 34% and 75% top- and bottom-line gains in fiscal 2009, respectively, while expanding square footage by 23%. The pace of store expansion remains aggressive, following 30%-plus annual square footage growth in 2007 and 2008. rue21 opened 31 stores in the first quarter of fiscal 2010, and is targeting 100 stores for the full year. This, together with an ongoing conversion of its store base to the larger rue 21 etc! format, should result in square-footage growth of around 20%, a pace that it should be able to maintain over the next few years.
The company’s real estate strategy focuses on under penetrated markets with minimal competition. This has yielded a high concentration of off-mall and strip center locations (73%), which generally attract more value-conscious consumers. Indeed, the proximity to big-box value anchors at strip malls, such as Wal-Mart (WMT - Free Analyst Report), Target (TGT), and Kohl’s (KSS), has helped drive traffic and attract new customers, even though these retailers compete to some degree. Furthermore, there is much more room for growth at off mall and strip center locations, compared to at the mall. We believe that rue21 can nearly double its store base to around 1,000 (from the current 565) by 2014. Indeed, just looking at the huge gap between its store count and that of its typical center anchors in the U.S. (Wal-Mart, Target and Kohl’s have over 6,000 locations combined), makes it clear that there are plenty of potential locations for rue21 stores.
Rapidly expanding, higher-margined categories like accessories and jewelry, should have an increasingly large impact in the coming years, thereby providing a boost to the bottom line. In addition to expanding its store count, the company is in the midst of converting all of its existing stores to a larger format (an increase of around 1,000 square feet, or 25%). The new store type emphasizes the accessories categories, including the addition of a separate store-in-store with rue21 etc! girls’ jewelry.
Lean inventory management has rue21 well positioned for potential deterioration in consumer spending. The company ended the first quarter with a 12% decline in inventory per square foot, while posting an 8% same-store sales gain. The favorable inventory position is largely the result of a domestic sourcing program which allows for shorter average lead times than competitors and the constant updating of its fast-fashion assortments.
rue21 is one of the few attractive high-growth stories in the retail sector. And we believe that store expansion, along with top- and bottom-line growth, should continue at a high-teens-to 20% clip over the next 3 to 5 years. However, investors should not minimize the potential for execution risk with a rapidly-expanding business, or the company’s exposure to a sharp drop in consumer spending (rue21 has significant exposure to lower-income consumers). Thus, investors should be mindful of the valuation (which is reasonable at the current 25 times forward earnings, though not cheap) and look for attractive entry points.