Back in early December, Claire's retained Goldman Sachs (NYSE:GS) to explore "strategic alternatives" -- the usually convoluted of way saying the company is looking to sell out.
On the face of it, Claire's looks like a good prospect for a buyout. The company has a strong niche in the teen market and has been able to handle tough competition, from the likes of dELiA*s (NASDAQ:DLIA), Hot Topic (NASDAQ:HOTT), and Tween Brands (NYSE:TWB). What's more, the fourth quarter was decent, with sales increasing 6% to $347.6 million.
But then again, private-equity firms usually have access to internal projections. Might they see some upcoming problems?
We do know that net income slipped from $38.1 million to $36.6 million and that comparable sales were flat. Claire's valuation is not cheap, either. For example, in Goldman Sachs' valuation of the proposed Eddie Bauer (NASDAQ:EBHI) deal, the analysis shows a mean EBITDA multiple of 8.5 for retail buyouts, while the multiple for Claire's sits at 10. At that level, it would be tough for private-equity firms to squeeze out returns for their own investors, especially if the company is having some operational issues.
As I recommended when I last wrote about this stock for the Fool, it's really not a good idea to buy Claire's based on the buyout speculation. In fact, if it's true that private-equity firms are getting cold feet, there may be even more downside in the stock.
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Fool contributor Tom Taulli does not own shares mentioned in this article. He is currently ranked 1,623 out of more than 23,000 participants in Motley Fool CAPS. He is also author of the Random House book The Complete M&A Handbook.
