Resurrected Teen Apparel Retailer Tries To Buck Industry Trends

• Amy Reeves
• On 6:12 pm EST, Monday November 9, 2009

Rue21 Inc.

Warrendale, Pa.

(724) 776-9780

rue21.com

Lead underwriters:

BofA Merrill Lynch, Goldman Sachs and JPMorgan Chase

Offering price: $16-$18

Expected date: Nov. 12

Ticker: RUE

THE BUZZ

What do IPO investors and "Twilight" fans have in common? For one thing, they both thrive on anticipation. And as teenage girls everywhere count the days till the Nov. 20 release of the latest film in the vampire saga, they'll have something else in common: Rue21.

Since emerging from bankruptcy in 2003, the clothing retailer has prided itself on nimbleness in keeping up with teen trends. Now it's selling a diverse line of T-shirts with images from the upcoming "Twilight: New Moon." But don't expect that to wear out its welcome. In the pre-IPO roadshow, CEO Robert Fisch said customers typically drop by stores two or three times a week to see what's new.

The timing of the IPO could be better, though. Last week, several of Rue21's peers, notably Aeropostale (NYSE:ARO - News), reported third-quarter results below expectations. Rue21 says its same-store sales grew 13.5% in the quarter, but industry conditions often affect an IPO's reception.

"What's important are the fundamentals of the company, but also that the market might not be ready to affirm that this sector is ready for another growth spurt," said David Menlow, president of IPO Financial.

The fact that this is a story where a private equity firm, Apax Partners, snapped up a bankrupt company for literally a penny a share might also cast a shadow on the deal, Menlow says. However, the fact that Apax isn't actually selling any shares in the IPO is an encouraging sign, he says.

THE COMPANY

The firm was first incorporated as Pennsylvania Fashions in 1976. It filed for bankruptcy in 2002 and its new CEO, Fisch, overhauled the business and refocused it under one brand name, Rue21. The name is the French word for "street" combined with the ideal age of its customers. The prospectus explains: "Our merchandise is designed to appeal to 11- to 17-year-olds who aspire to be '21' and adults who want to look and feel '21.'"

Since then, Rue21 has grown rapidly and now runs over 500 stores in 43 states, with the greatest concentration in the South. It offers value-priced clothing in small to midsize markets; many of its locations are next-door neighbors to Wal-Mart (NYSE:WMT - News). About half its stores are in strip malls, with the rest split between regional malls and outlet centers.

All the products are designed and made exclusively for Rue21, through outsourcing arrangements. Over the last few years, the firm has rolled out several subbrands. It launched its male line, Carbon, in 2005. In 2006 it launched a female accessory division called etc!, which it has remodeled more than half of its stores to accommodate.

There's also an intimate-apparel brand, a shoe department and a growing array of fragrances for both sexes.

Rue21 has a very low marketing budget, relying on a viral strategy to reach its teenage base through such conduits as Facebook and Twitter. Local stores also coordinate some community-based advertising with their host malls. Despite its tech-friendliness, the company does not sell products online, though Fisch has said that it may do so in the future.

RISKS/CHALLENGES

Teen clothing retailers serve a notoriously fickle customer base. If Rue21 doesn't keep up with current fashion trends, its shoppers could readily defect to any of a number of vendors, including Aeropostale, American Eagle (NYSE:AEO - News) and even big-box stores like Target (NYSE:TGT - News).

The company has doubled its store count in the last three years and plans to double it again over the next five. Opening new stores always costs money, and the firm could overextend itself, especially if the retail sector remains shaky. Rue21 will have little debt after using IPO proceeds to pay most of it off. But the company warns that it may incur more debt in the future.

All the products are made by third parties, mostly in China and India. A disruption in these relationships, or in the trade between the U.S. and Asia, could drive up costs.

The company doesn't own any real estate, but leases all its property. That puts it somewhat at the mercy of its landlords. Also, it has only one distribution center for the whole system, making it vulnerable to fire or natural disaster.

The principal stockholders will still own more than 70% of shares after the IPO, with private equity partner Apax owning more than half. This will limit the power of public shareholders.

THE RESULTS

In the first half of the year ended Aug. 1, sales grew 33.3% from the year-ago period to $233.1 million. Same-store sales climbed 4.1%. Net income rose 61% to $8.3 million.

Preliminary results for the quarter ended Oct. 31 have sales rising 40.7% to $137.1 million, with same-store sales up 13.5%.

USE OF PROCEEDS

Rue21 expects to raise $22.1 million from its minority portion of the 5.8-million-share offering. It will use the money to pay down debt.

THE MANAGEMENT

Robert Fisch

Chief executive and president

Joined in 2001. From 1987 to 1999 he was president of Casual Corner Group. He is also a director at Children's Place Retail Stores (NasdaqGS:PLCE - News).

Kim Reynolds

Senior vice president and general merchandise manager

Joined in 2001 after holding the same position at Casual Corner from 1987 to 1999.

Keith McDonough

Senior vice president and CFO

Joined in 2003 after 12 years as chief operating officer at Iron Age Corp., a shoe seller.

Buzz up!