Rue21 on rocky road to $1.1B buyout
Declining sales is causing problems for banks helping to finance the $1.1 billion leveraged buyout of teen retailer rue21 Inc.
The Marshall-based retailer on Thursday said its sales in the third quarter continue to fall — down 9.5 percent at stores open at least a year — through Tuesday.
Rue21 disclosed the information so it “may be provided to prospective lenders” in connection with the buyout, the company said in a securities filing on Thursday. Those lenders are considering whether to purchase debt from three Wall Street banks who committed to providing $780 million for the buyout by London-based private equity firm Apax Partners.
The filing appears to support reports that the banks — JPMorgan Chase & Co., Bank of America and Goldman Sachs Group Inc. — are having problems raising the money. They may face losses if they can't sell all of the debt or have to cut the price to make it more attractive.
“It appears the banks mispriced the bond offering with a rate too low,” said Greg Drahuschak, analyst with Janney Montgomery Scott in Pittsburgh.
The banks committed to furnishing the money when the buyout is completed, now expected in early October. Completing the deal is not dependent upon the banks selling the debt to lenders, securities filings said.
Spokesmen for the three banks declined to comment, as did spokesman Jared Levy for rue21, and Sarah Rajani for Apax Partners.
Rue21 announced on May 22 that it agreed to be acquired for $42 per share by Apax Partners, which controls 30 percent of rue21's stock. A week ago, shareholders voted overwhelmingly to approve the buyout. Shares declined 82 cents on Thursday to $39.66.
Rue21 sells value-priced apparel to teens and young adults through stores in strip centers and malls. It operates 971 stores in 47 states and competes with retailers such as Wal-Mart, Forever 21, Marshalls and T.J. Maxx. CEO Bob Fisch has said rue21's long-term objective is to increase stores to more than 1,700 in the United States.
It employs more than 10,000 worldwide, including about 300 at its headquarters and 200 at a distribution center in Weirton, W.Va.
Rue21's performance was a concern at Apax even before the leveraged buyout was announced. On Dec. 5, 2012, JPMorgan noted Apax's concerns regarding negative trends and future risks with respect to the company's same store sales growth, according to the proxy statement describing the transaction.
Prior to that, however, on Nov. 29, a letter from Apax to a special committee of rue21's board mentioned letters from JPMorgan and Bank of America stating that each institution was “highly confident” of its ability to provide financing for the proposed transaction.
In the first quarter ended May 4, the retailer reported a 6.9 percent decline in net income to $10.8 million versus $11.6 million a year earlier. Total sales increased 8.7 percent, to $224 million from $206 million as it added stores.
But in early August, the retailer said that tough sales in its spring and early summer quarter forced it to mark down merchandise by 22 percent and sell nearly half of its inventory to an unnamed third party. Markdowns were 22 percent higher than a three-year average, and same-store sales declined by an estimated 5.9 percent. Same-store sales are a good measure of a retailer's performance because it differentiates between revenue growth from improved management and gains from opening new outlets.
Benefiting from the opening of 125 new stores during the past year, the retailer estimated total second-quarter sales of $229.3 million, up 13.5 percent from year-ago sales of $202.1 million.
Retail analyst Adrienne Tennant at Janney Montgomery Scott noted that most clothing retailers like rue21 suffered from weak mall traffic since July 4, and promotions remained aggressive, especially among the teen retailers.
It has not yet issued final second quarter results, but Thursday's securities filing said a soft sales pattern noted in August is continuing in the third quarter. September sales so far were down 12.8 percent.
Compared to a year ago, when it had 120 fewer stores, total sales for the quarter to date are up 2.3 percent. Rue21 said it has managed inventory and promotions with the expectation of lower sales. That resulted in a 2 percent improvement in margins for August and an expected 1.5 percent improvement in September.
John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or firstname.lastname@example.org.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Balancing gas pipeline expansion, environmental unease a problem in Pennsylvania
- Hospitals turn to technology to tear down language barriers with patients
- Symposiums to spotlight Pittsburgh’s role as an energy powerhouse
- More companies embrace exchanges to curb health care costs
- Bayer to spin off plastics unit as separate company; employment to remain stable
- Chemical used for freshness leaves EU with little appetite for U.S. apples
- Mylan CEO Bresch sets sights on growth
- Getting into executive pipeline may require schmoozing
- MarksJarvis: Benefits, not just pay, hit the skids
- U.S. Steel shares jump on turnaround strategy
- Consol, Noble expect at least $325 million from partnership’s IPO