RUE TAKE TWO

There’s nothing wrong with cashing out while the iron is hot, but with new issues being shelved by the day and at the same time the pipeline is building for offerings by other retailers, we wonder if this is already the beginning of a more pronounced slowdown in fundamentals and share price performance for Rue 21.

 

 

There’s no question that the hottest growth story in all of specialty retailing is recently IPO’d Rue 21.  Perhaps this is because it is also one of the only true unit growth stories in all of retail. Whether the company ever fully realizes its 1,500 store stated potential remains to be seen, but with a current base of 500 there appears to be plenty of runway ahead.  Now officially public for 3 months, the value priced fashion retailer catering to 11-17 year olds is prepping for its first secondary.  Private equity sponsor, Apax Partners, is the primary seller with 5 million shares expected to hit the market.  On the plus side, a slug of stock at this magnitude will nearly double the company’s float and likely provide some liquidity for the thinly traded shares whose volume is just averaging 128,000 shares/day.  On the flip side, the speed at which Apax is looking to exit its position is certainly worth noting.  There’s nothing wrong with cashing out while the iron is hot, but with new issues being shelved by the day and  at the same time the pipeline is building for offerings by other retailers, we wonder if this is already the beginning of a more pronounced slowdown in fundamentals and share price performance for Rue 21.

 

According to Hedgeye’s quantitative model, the shares have already broken the TRADE line of $29.21- not a good sign for the bulls. 

 

 RUE TAKE TWO - RUE 21 chart

 

From a fundamental standpoint, the company’s results out of the box have been nothing short of stellar.  Earnings for the holiday period were pre-announced to be 50% above Street estimates ($0.30 vs. $0.20 est.)  However, same-store sales did slow to a mid-single digit rate from 13.5% in 3Q.  Management was quick to point out that compares were tougher in 4Q.  Same store sales are slowing against tough compares, square footage growth is ramping up, and earnings are coming in substantially higher than expected.  This certainly sounds like a good time for some good old-fashioned risk management on the part of Apax, a.k.a taking money of the table.  From our risk management standpoint, this is setting up to be a short.  We cannot help but recall the company’s investor presentation from the ICR conference in California just about a month ago.   We suspect this will actually be recycled for the upcoming roadshow.  A recap of the notes from the conference reads:

 

The first five minutes were centered on the company’s recent IPO, strong share price performance, growth track record, and plan to dominate retailing like we’ve never seen before (we may be exaggerating, but not by much).  Key points from Rue (that are not made up):

 

  • When asked by the company’s pre-IPO investors if they were ready to go public, the CEO responded “Why not?”.  The entire IPO process was completed in 3 months!
  • On several occasions during the presentation, the CEO mentioned that Rue is the fastest growing retailer in the U.S.  With just over 500 stores, management now believes there is an opportunity for 1,500 stores! Prior expectations were for a 1,000. 
  • It’s all about speed.  Speed to market on merchandising through exclusive use of domestic resources and US based importers.  Speed to open stores, which only takes 6 weeks from signing a lease.  Speed to double the store base which should only take another 3.5 years. 
  • Finally, the CEO ended with “I’m proud to say our stock price is up 60% since the IPO and we’ve added $300 million to our market cap”.  Hmm…it seems clear what motivates these guys.

 

The timing here is key.  It’s probably best to let the dust settle on the secondary process and keep an eye out for the road show.  Management’s short history in the public eye suggests they’ll follow the deal with additional upside.  Both quarters out of the box have been blowouts to the upside.  However, nothing last forever, let alone industry leading growth driven by a value-priced, fashion merchandising strategy.  Ironically, RUE went public on the same day as Dollar General- two companies with value propositions and growth prospects bolstered by a weak economy, not an improving one.

 

Eric Levine

Director


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