The Deal: Continuing Slow Sales Send Rue21 Shares Down

NEW YORK ( The Deal) -- Teen apparel retailer Rue21 ( RUE) filed financial data for its second quarter and other data to be supplied to potential lenders for its $990 million buyout by Apax Partners LP.

The May 23 deal offers $42.00 per share in cash for Rue21, and the shares have been down this week over concerns about the industry's performance. Rue shares traded down 25 cents Thursday to $41, at a spread of $1, or 2.4%.

The buyout goes to a vote of Rue21 shareholders Sept. 19. Apax affiliate SKM II owns about 30% and has committed to support the deal.

For the quarter ended Aug. 3, the retailer reported that sales rose 13.5% due to new stores (8%) and the increased size of single transactions (3.7%), although unit sales were lower. Net income decreased 88% compared to the same quarter in 2012 down to $1.1 million from $9.1 million. Merger-related expenses accounted for $2.4 million of the decline. Store operating expenses rose due to the increased number of outlets, and selling, general and administrative expense increased 18%. Earnings per share fell to 5 cents from 50 cents in the second quarter of 2012.

In a separate filing with the Securities and Exchange Commission, Rue21 reported as part of its debt financing activities that the soft sales patterns seen in the second quarter continued into August. "The company took a strategic approach to managing merchandise margin and inventory levels and maintained a normal promotional cadence." August same store sales were down 7.6%, total sales up 4.2%, merchandise margin improved 200 basis points and gross margin improved 40 basis points. Administrative expense for August, excluding stock compensation and merger costs, decreased 4% from August 2012.

Rue21 said in the filing that while it expects for conditions to improve for the teen retail sector into the holiday season, the company is prepared to manage the business for a prolonged period of top line weakness, if necessary. New stores opened for at least 12 months have been consistent in delivering investment returns in excess of 100%. Much of any continued comparable store sales weakness is expected to be offset by cash flows and new store profits. Rue21 said it identified approximately $3 million in expense reductions that it intends to implement during the third quarter.

The buyout has a 20-day debt marketing period beginning Sept. 3. The debt commitment letter with JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc. provides $780 million in a $530 million senior secured term loan, a $250 million senior unsecured bridge facility and a $150 million revolving credit facility. The reverse termination fee is $62.7 million.

-- Written by Scott Stuart in New York

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