NEW YORK (TheStreet) -- Analysts are already speculating that more retailers will be heading down the M&A rabbit hole following news private equity firm Sycamore Partners, had purchased a 9.9% stake in Express (EXPR - Get Report) with intentions to acquire the teen retailer.
The Sycamore filing, announced last night in a Securities and Exchange Commission filing, will "lead to a search for the next potential M&A candidate in specialty," Wedbush Securities analyst Morry Brown wrote in a June 12 research note to clients. "We note the most attractive candidates are likely to screen in the bottom half of the group on valuation."
Based on the ratio EV/EBITDA, (enterprise value divided by earnings before interest, taxes, depreciation and amortization), Express is the cheapest stock based on that ratio at 3.6 times, according to the Wedbush note. Other cheap retailers on Wedbush's list include: American Eagle Outfitters (AEO - Get Report) at 4.9 times EV/EBITDA; Guess (GES) at 5.4 times; and Abercrombie & Fitch (ANF - Get Report) at 5.8 times, Chico's (CHS) at 6 times and Ann Taylor (ANN) at 6.3 times, and Francesca's Holdings (FRAN) at 6.8 times.
Express, American Eagle, Abercrombie and even Francesca's cater to the teen and early twenties-aged clientele.
The retail industry has been challenging in recent quarters as consumers refrained from purchases as a result of poor weather, lack of compelling product and an increasing move toward online purchases through Amazon (AMZN), which many traditional retailers have been slow to adopt, and cheaper options at discount retailers like TJX's (TJX) TJ Maxx and Marshalls. Consumers are also still hurting from a lower discretionary spending, a reduced willingness to take on credit, and -- in the teen sector specifically -- teens preferring to spend what money they do have on their Apple (AAPL) iPhones and accessories.
Private equity has already been sniffing around the sector eager to grab underperforming stocks. Andrew Burns, an analyst at D.A. Davidson, notes "depressed valuations and operating performance" in the teen retail space will continue to make the niche an interesting area for private equity. "It appears more teen retailers will go this route in 2014," Burns wrote in an email, using Rue 21 (bought by Apax Partners) and Hot Topic (also acquired by Sycamore) as two examples of retail PE deals in 2013. While he wouldn't speculate on any names, "at current valuation levels most publicly-traded teen retailers are potential targets," Burns said.