Comparing on the basis of historical margins, though rue21, inc. (NASDAQ:RUE) has gross margins in line with its peers, it loses out on the operating margins. It has the lowest operating margin among the three. This means that the company spends its revenue for other uses and will have to focus on reducing the same.
Looking at the turnover ratios, rue21, inc. (NASDAQ:RUE) has an alarming inventory turnover of 103 days. This is relatively high when compared to its peers Aeropostale, Inc. (NYSE:ARO)’s 31 days and American Eagle Outfitter’s (NYSE:AEO) 58 days. This may be an indication that the company is not able to sell its inventory due to lower demand.
Further, rue21 also has aggressive expansion plans and the highest capital expenditure when compared to peers. In FY12, it opened 125 new stores, plans to open another 125 in FY13 and expects to open over 100 stores every year in the foreseeable future. It also plans to remodel 20 plus existing stores to a new format, and expects sales to pick up at least 15%.
This refresh strategy will be in addition to its existing plans of converting its remaining 100 rue21 stores into the rue21 etc! store format. Capital expenditure is expected to be $670 million for FY13, up 50% from FY12, primarily focused on its two new distribution centers. If the company is not able to rack up higher sales in FY13, its large capital expenditure may put a strain on its FY13 cash flows.
To put things in perspective, the company generated $646 million in operating cash flows in the three quarters of 2012, which were largely used for capital expenditure ($255 million), share repurchases ($334 million), and paying dividends ($94 million). It reported a $26 million decrease in its cash balance.
In comparison, Aeropostale, Inc. (NYSE:ARO) opened only 27 stores in FY12 (net of closure) and plans to open 14 stores in FY13. Its expected FY13 capital expenditure is $89 million, up 23% from FY12. American Eagle Outfitters plans to open 50 stores in FY13 a with capital expenditure budget of $250 million to $280 million (up from $94 million in FY12).
Conclusion
On its earnings call, the company announced various initiatives – remodeling its stores, capitalizing on the men’s business in smaller markets where there is little/no competition, rolling out larger 6,000 square foot store format in approximately 20-25 new and existing locations in select markets, and launch of its e-commerce business in FY2014.
rue21 aims to be a $2 billion, 1,700 store company in the next 5 years, and it may achieve it, given its strong expansion plans and initiatives to improve traffic in its stores. Given its better and positive outlook versus peers, it is a good short-term investment. But in the long run, one needs to keep an eye on the company’s cash flow generation, sales per store, growth in sales, and inventory levels.
The article Is This Stock Worth Buying? originally appeared on Fool.com and is written by Sujata Dutta.
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