Timing Is Right for Rue21's IPO, if it Doesn't Overexpand

Initial public offerings are making a comeback, sporting the largest deal volume since January 2008, and the retail industry is at the forefront of this development. Retailers that cater to consumer needs during the recession, which are mentioned in this space, like Dollar General and Vitamin Shoppe, are logically making a lot of headway.

Another retail IPO gaining some attention lately is that of apparel chain Rue21. The Warrendale, Pa.-based company, which operates just over 500 stores across the country, targets boys and girls ages 11 to 17 at affordable prices. Rue 21 is looking to raise $115 million on shares priced between $16 and $18.

The time seems right for this proposition. Value-apparel retail is hot right now, across many different categories. TJX Cos., which offers clothes across age ranges and styles, seems made for the recession. Nordstrom’s Rack stores and Saks’ Off 5th chain are examples of department-store offshoots outperforming their parent concepts. And there are numerous fashion-oriented chains targeting a younger audience that are expanding like crazy, such as H&M, Zara and Forever 21.

Rue21 actually shares a lot of traits with Forever 21 besides the numerals in their names. Both have similar customers, are expanding rapidly and are apparently experiencing sales booms. In the case of Rue21, during the six months ended Aug. 1, stores open at least a year posted a 4.1-percent sales gain, according to a recent SEC filing, a very strong increase in this environment. Net income came in at $8.3 million, up from just under $5.2 million.

One potentially troubling characteristic that Rue21 shares with Forever 21 is the chain’s aggressive store-expansion push. At a time when most chains are being conservative about store openings, Rue21 has 85 new units on tap this fiscal year and another 100 in 2010. Management plans to have more than 1,000 locations in five years. Can the market support that? Maybe. But it would be comforting to see the chain take a more conservative approach.

In a prior incarnation, Rue21’s former parent company filed for bankruptcy in 2002 and closed stores. Hopefully Rue21 doesn’t become a victim of its own success, finding itself in a scenario where fast fashion goes out of style with hundreds of stores too many.