For the teens: rue21
Meanwhile, rue21, inc. (NASDAQ:RUE) has been a hot name in teen fashion. The retailer, which sells tank tops, graphic tees, and accessories at affordable prices, operates approximately 1,000 stores across the United States, with an average store size between 5,000 to 6,000 square feet. The store was formerly known as Pennsylvania Fashions, which filed for bankruptcy in 2002. After it emerged from bankruptcy in May 2003 as rue21, inc. (NASDAQ:RUE), it began expanding aggressively from its small footprint of 170 stores. In fiscal 2012, rue21, inc. (NASDAQ:RUE) opened 125 new locations, and has a long-term goal of opening 1,700 locations.
During its fourth quarter, rue21, inc. (NASDAQ:RUE)’s revenue rose 22.4% to $269.05 million, while earnings per share rose 25.0% to $0.65. Same-store sales rose 0.7%, during a tough holiday season when many teen apparel retailers posted horrifying declines. By comparison, Aeropostale, which targets the same demographic, reported an 8.0% plunge in same-store sales.
While rue21, inc. (NASDAQ:RUE)’s numbers are firm enough to justify an investment at current levels, the real story behind this company is the LBO (leveraged buyout) buzz surrounding the company. Private equity firms have been on a shopping spree, picking up 38 apparel and shoe retailers last year.
Since rue21, inc. (NASDAQ:RUE) has no debt and is forecast to triple its free cash flow to $49 million this year, it has been listed along with Aeropostale and Abercrombie & Fitch as one of the three most attractive LBO targets among U.S. specialty apparel retailers, according to Jefferies Group analyst Randal Konik. According to Konik, if a buyer purchases rue21 with an acquisition premium of 30% and a minimum equity contribution of 25%, rue21 could generate an internal rate of return between 29% to 31%.
Yet that’s not to say that investors should own rue21 merely to expect a buyout, since the company still is fundamentally sound enough to continue growing on its own.
For the Moms: Vera Bradley
Last but not least, Vera Bradley, Inc. (NASDAQ:VRA), which I consider an undervalued growth stock, is my favorite pick in the handbags and accessories market. The company, which is mainly known for its iconic patterned bags, lacks the higher profile of its rivals Coach, Inc. (NYSE:COH), Michael Kors Holdings Ltd (NYSE:KORS), and Fifth & Pacific Companies Inc (NYSE:FNP) (Juicy Couture, Kate Spade), but nonetheless doubled its annual revenue between 2008 and 2012 from $239 million to $541 million. Net earnings during that period nearly tripled from $24 million to $69 million.
Last quarter, Vera Bradley, Inc. (NASDAQ:VRA) reported a 21% increase in revenue to $162.6 million, while earnings climbed 25% to $0.62 per share, or $25.1 million. Same-store sales slid 0.4%, but e-commerce sales rose 23%.
Yet the main reason I like Vera Bradley, Inc. (NASDAQ:VRA) is its new Baby line, which caused a surge in expenses last quarter but adds designer diaper bags, clothes, blankets, changing pads and tops to its product line. This line targets an untapped female demographic, of busy mothers who still enjoy a touch of affordable luxury in their lives.
Shareholders will know on May 27 if Vera’s efforts to reach moms has paid off, but I believe that strong retail numbers and improving consumer sentiment will yield positive results.
The Foolish Bottom Line
In closing, let’s stack up these three small cap stocks to gauge their fundamentals.
Forward P/E | Price to Sales (ttm) | Debt to Equity | Profit Margin | Same-store sales (mrq) | Qty. EPS Growth (Y-O-Y) | Qty. Revenue Growth (Y-O-Y) | |
Francesca’s Holdings | 18.92 | 4.46 | No debt | 15.88% | +16.7% | 78.00% | 40.60% |
rue21 | 14.09 | 0.89 | No debt | 4.87% | +0.7% | 16.40% | 22.40% |
Vera Bradley | 10.89 | 1.65 | 7.77 | 2.73% | -0.4% | 25.00% | 20.90% |
Advantage | Vera Bradley | rue21 | Francesca, rue21 | Francesca | Francesca | Francesca | Francesca |
Source: Yahoo Finance, May 14
In my opinion, all three stocks represent solid investments on three different levels – Francesca’s is a great growth stock, while Vera Bradley, Inc. (NASDAQ:VRA) is a fundamentally cheap value stock. rue21 is somewhere in between, but is an attractive LBO candidate that can still hold its own against bigger competitors.
Therefore, all three companies should continue growing as U.S. retail numbers continue to improve.
The article 3 Small Cap Plays on Rising Retail Sales originally appeared on Fool.com and is written by Leo Sun.
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