By  on June 16, 2014

Abercrombie & Fitch Co. remained the most attractive takeout target among a group of specialty retailers studied by Jefferies analyst Randal Konik as private equity interest in the sector has intensified.

In judging the attractiveness of companies for a leveraged buyout in his coverage universe, Konik incorporated both their stock valuations and a series of qualitative criteria, including the “compelling, differentiated” nature of a firm’s brand or brands and the strength of its management team.

On that basis, A&F remained in the top spot it held in May among firms considered most attractive to private equity suitors, with Guess Inc. moving up 14 slots to second place, Chico’s FAS Inc. up two slots to third place and American Eagle Outfitters Inc. up four spots to fourth place.

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Zumiez Inc. moved to fifth place based on internal rate of return, essentially a measurement of payback on an acquisition, but rated poorly on qualitative attributes such as global and new market appeal, while Ann Inc. rose to sixth place from 13th and Urban Outfitters Inc. moved to seventh place from 16th 13 months ago.

Based on the IRR analysis of firms covered by Konik, Ross Stores Inc. was the least attractive takeout candidate, with a low IRR of 7 percent, followed by its off-price rival, The TJX Cos. Inc., and Tiffany & Co., both of which registered at 8 percent. IRR assumptions included a 30 percent premium to the firm’s current stock price and the use of free cash flow to pay down debt.

The IRRs for the companies considered most attractive ranged from 21 percent for A&F and Guess to 17 percent for American Eagle, Ann and Urban.

“Not only are companies in our coverage screening well from an LBO perspective,” wrote Konik, but “we see more seasonable weather patterns, leaner inventory levels, an improving macro backdrop, a normalized fiscal and holiday calendar and already negative sentiment as drivers of improved stock performance” in the second half of 2014. Even after rising 0.5 percent to 879.74 Monday, the S&P 500 Retailing Industry Group remained down 6.4 percent for the year.

Sycamore Partners last week revealed it had acquired a 9.9 percent stake in Express Inc. and made public its desire to conduct due diligence on the firm. Sycamore has in the past month also acquired the intellectual property of Coldwater Creek Inc. and extended financing to Aéropostale Inc. convertible into equity in the troubled specialty retailer.

Express isn’t part of Konik’s coverage group and Aéropostale was excluded from the survey because of its recent string of unprofitable quarters.

Companies highlighted in the study generally outperformed their peers in the retail sector on Wall Street on Monday. A&F shares rose 1 percent to $42.14, while Guess’ stock was up 3 percent to $26.83, Chico’s up 1.4 percent to $16.87, American Eagle’s ahead 2.9 percent to $11.64 and Ann’s up 1.4 percent to $40.94. Shares of Urban Outfitters dropped 0.6 percent to $33.32.

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