rue21, inc. (RUE): This Incredibly Profitable Retailer is Being Acquired

Its less profitable peers are trading at lower multiples

Compared to its peers Aeropostale, Inc. (NYSE:ARO) and Abercrombie & Fitch Co. (NYSE:ANF), rue21 has the highest valuation among the three companies. Aeropostale is trading at around $14.60 per share, with a total market cap of $1.14 billion. The market values Aeropostale a bit lower, at 8.18 times EV/EBITDA. In the first quarter of 2013, Aeropostale reported quite a sluggish performance. Revenue decreased from $497.2 million in the first quarter 2012 to $452.3 million in Q1 2013. It produced a loss of $12.17 million, worse than a profit of $10.6 million in the first quarter last year. Aeropostale reported as much as 14% decline in its comparable store sales, compared to a growth of 2% in the same period last year. Thomas Johnson, Aeropostale’s CEO, commented that the sluggish operating performance was due to “a weak macroeconomic environment, as well as unseasonably cool weather.”

Abercrombie & Fitch seems to have the lowest valuation of the trio. At $49.70 per share, Abercrombie & Fitch is worth around $3.9 billion on the market. The market values the company at only 5.8 times EV/EBITDA. In the first quarter of 2013, although it experienced an 8.9% decrease in revenue to $838.8 million, the company narrowed down the loss, from $(21.3) million to only $(7.2) million. The improvement in net earnings was due to gross margin improvement and tighter cost management. For the full year, Abercrombie & Fitch expected to generate around $3.15 to $3.25 earnings per share. Around 40-50 stores would be closed during the year because of natural lease expirations.

rue21, inc. (NASDAQ:RUE) is the most profitable retailer among the three with the highest return on invested capital. In the past twelve months, Abercrombie & Fitch delivered around 12.11% while the Aeropostale’s ROIC was the lowest, at only 8.52%. rue21 and Aeropostale do not pay any dividends, whereas Abercrombie & Fitch is offering shareholders dividends with a yield at 1.6%.

My Foolish take

With around 9.2 times EV/EBITDA, rue21, inc. (NASDAQ:RUE)’s shareholders are getting a fair price. Among the three, I like Abercrombie & Fitch the most because of its improving earnings performance, the decent dividend yield and the lowest valuation.

Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article This Incredibly Profitable Retailer is Being Acquired originally appeared on Fool.com.

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