The Biggest Retailer You've Never Heard Of

If you're over the age of 18, don't live in a small town, and aren't in the market for studded T-shirts emblazoned with the titles of Whitney Houston songs, chances are you've never heard of teen clothing and accessory retailer rue21 (Nasdaq: RUE  ) .

You probably have come across the company's competitors, however. These include better-known and more visible companies, from Wet Seal to dELiA*s and Charlotte Russe to Forever 21 (a separate company not affiliated with rue21).

While rue21 operates over 750 stores at present -- and management believes the market would support opening to at least 1,000 total -- the stores are located primarily in small towns and rural areas, out of view of big-city dwellers. A 2010 article in The Wall Street Journal summarized this strategy: "Rue21 is one of a handful of retailers aggressively targeting secondary markets and rural areas -- cities and towns with populations smaller than 250,000 that offer plenty of shoppers and few competitors."

Rural areas and a "fast fashion" business model
Another component of rue21's retailing strategy is the company's "fast fashion" business model. The company sources merchandise from a diverse network of domestic vendors, moving low-priced products into stores at lightning speed to meet the cravings of trend-conscious teens. So even though the consumer lives in a small community far from a major city, he or she is still able to buy the stylish clothes and accessories glimpsed on TV.

Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) operate in small and midsize communities as well, and they sell low-priced teen fashions. But on breadth and depth of product -- hundreds of items across about 5,000 square feet of dedicated space -- rue21 bests these Goliaths.

Fear the big boxes' big ad budgets
What may be a much more serious threat to rue21 is these larger companies' outsize marketing and advertising budgets, including their ability to partner with celebrities and famous high-fashion designers to promote exclusive clothing and accessory lines. For instance, teen pop star Miley Cyrus has a clothing line in Wal-Mart, while Target has partnered with designers with significant youth appeal, such as Rodarte and Missoni.

Rue21 doesn't use traditional advertising, instead relying on viral and word-of-mouth efforts. And because the company doesn't stamp its own name on tank tops and hoodies, it can't benefit from the subtle product placement that American Eagle (NYSE: AEO  ) and Abercrombie and Fitch (NYSE: ANF  ) so often get on teen-focused reality shows. (My fellow devotees of MTV's Teen Mom 2 will recall how many times character Jenelle Evans wore that blue American Eagle hoodie this past season, and how her boyfriend Kieffer Delp seemed to live in a green Abercrombie one.)

So what's the investment case here?
It's super-cheap to open a new rue21 store. In the latest 10-K, management affixes a $160K price tag to a new store. That's the retail-sector equivalent of a $10 leopard-print pashmina -- except the returns on a rue21 store are much more attractive.

According to the company's latest 10-K: "Our typical new store investment is approximately $160,000, which includes build-out costs. ... New stores generate on average between $900,000 and $1.1 million in net sales per store in the first twelve months."

Companywide, in fiscal 2010 net sales increased 21% to $635 million, driven by new store openings, and net income grew 37% to $30 million. Couple this with a debt-free balance sheet and strong management in the form of president and CEO Robert Fisch, who owns about 5% of the shares and has more than 30 years' experience in retail.

Why not follow this trend? Despite its seeming obscurity, rue21 may be a retailer well worth keeping an eye on.

If you're not sold on the idea of investing in a teen-retail-focused company, why not take a look at a growing broad-line retailer that isn't so focused on a niche market. You can learn more about this emerging market opportunity in the Motley Fool's special free report: "The Motley Fool's Top Stock for 2012." You can click here to access it now.

Catherine Baab-Muguira has no financial interest in any of the companies mentioned here. The Motley Fool owns shares of Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1804888, ~/Articles/ArticleHandler.aspx, 12/20/2014 3:00:04 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement