While PetSmart's substantial cash flow made it an attractive buyout candidate, other retailers like Express (EXPR - Get Report) , Aeropostale (ARO) and American Eagle Outfitters (AEO - Get Report) have their own strengths. And they're piquing the interest of private equity firms.
Under pressure from investors, PetSmart agreed to a $8.3 billion buyout deal from BC Partners Sunday -- $8.7 billion including debt. Shares of PetSmart hit an all-time high of $81.44 on Monday, closing up 4.3%, and the stock is still over $81 Wednesday afternoon.
Several clothing retailers -- viewed as ripe for takeovers -- welcomed a significant boost this week in tandem with PetSmart, bucking broader stock market declines.
The number of retail acquisitions has been on the rise, with the retail sector drawing upwards of 50 deals in the second quarter. That's up 52% from the same quarter last year, according to a PricewaterhouseCoopers report.
"We remain optimistic that the retail and consumers sector will continue the positive momentum [as 2014 ends] and outperform the strong activity seen in 2013," PricewaterhouseCooper analysts said in the report.
In other retail and consumer deals this year, Blackstone (BX - Get Report) acquired Gates Global for $5.4 billion, and Golden Gate Capital acquired Red Lobster Seafood from Darden Restaurants (DRI - Get Report) for $2.1 billion.
'Outstanding Interest' in Express Buyout
Express, which has been opening more new outlets for its clothes for men and women in their early 20s, has been the subject of takeover rumors all year. Shares are down nearly 27% year-to-date, trading firmly toward the bottom of its 52-week price range of $11.80 to $19.35. In fact, shares are more than 14% off the original 2010 IPO price of $17.
In June, private-equity firm Sycamore Partners disclosed a 9.9% stake in Express, saying it was interested in a full acquisition. The takeover potential has firms like Nomura holding a buy rating.
"EXPR continues to feel mall pressure, but management highlighted continued success in the newly formed outlet channel and testing of converting in-mall stores to outlets," said Nomura specialty retailing analyst Simeone Siegel in a note. "Based on our conversations, the ongoing hold on buybacks/refinancing looms large on investors' minds as they continue to look toward a buyout.... We think outstanding interest to take the company private loom."
Earlier this month, Express reported third-quarter earnings of $0.17 per share that beat the analyst consensus of 16 cents per share, although net sales fell to $497.6 million from $503.8 million a year prior and missed the Street mark.
Aeropostale Struggles With Profit
Like Express, Aeropostale, which targets mainly teenagers, has already ignited takeover talk. Sycamore Partners acquired a nearly 9% stake in Aeropostale in September. Hirzel Capital Management and Crescendo Partners also own stakes.
Nomura, concerned about Aeropostale's ability to return to profitability, holds a neutral rating but notes the retailer, with freshly returned CEO Julian Geiger, was able to drive its first EBITA improvement in two years.
Down more than 75% year-to-date into its fourth consecutive year of declines, Aeropostale's third-quarter net sales were $452.9 million, above the $444.4-million analyst consensus, though its revised fourth-quarter guidance fell short of expectations.
American Eagle Boasts Operating Income Growth
American Eagle, down about 6% year-to-date, plummeted after its third-quarter results and weaker-than-expected guidance range for fourth-quarter earnings. But while its comparable sales are declining, the rate of decline slowed to 5% for the third quarter vs. the 10% decline in the first quarter and 7% decline in the second quarter.
American Eagle has no debt on its balance sheet. Rare among retailers last quarter, Siegel points out, is the fact that it "was able to grow its operating income, with 17% earnings growth year-over-year in the third quarter." American Eagle is rated Neutral at Nomura.
TheStreet rates Express as a hold, Aeropostale as a sell and American Eagle as a hold.
TheStreet Ratings team rates EXPRESS INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate EXPRESS INC (EXPR) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its reasonable valuation levels, largely solid financial position with reasonable debt levels by most measures and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including feeble growth in the company's earnings per share, deteriorating net income and weak operating cash flow."
You can view the full analysis from the report here: EXPR Ratings Report