* Vitamin Shoppe, two other retailers set IPOs
* IPO investors wary of highly leveraged retail chains
(Repeating item that initialy moved on Friday)
By Phil Wahba
NEW YORK, Oct 23 After two years on the
sidelines, a handful of retailers is getting ready to test the
initial public markets again, emboldened by the stock market
rally and a better consumer spending outlook.
But the companies must prove they can pull in customers
despite the lingering economic slowdown, and must show low-debt
balance sheets if they want to attract investors, according to
bankers and analysts.
Vitamin Shoppe Inc (VSI.N), a North Bergen, New
Jersey-based operator of 434 health supplement stores in the
United States, is the first of three retail IPOs, all owned by
private equity, set to go to market in the coming weeks.
Vitamin Shoppe this week will attempt to become the first
brick-and-mortar retailer to go public in two years.
Consumers have sharply pulled back spending amid rising
unemployment and the global financial crisis, curbing
investors' appetite for IPOs by retailers in particular.
But consumers are beginning to spend again, and the S&P
Retail index .RLX, which tracks retail stocks, is up 82
percent from lows hit last November.
"The coast is clear for high-growth, high-square-footage
companies that have weathered the recession well," said Gregg
Nabhan, a vice chairman at Bank of America Merrill Lynch's
equity capital markets practice.
"The U.S. consumer will be looking to stretch his or her
spending dollar, and we think that is a secular phenomenon" for
the next several years, he said.
The last new stock in the United States by a
brick-and-mortar retailer goes back to October 2007, when
beauty products chain Ulta Salon, Cosmetics & Fragrance Inc
(ULTA.O) went public with a $153.7 million IPO.
Vitamin Shoppe grew at an annual rate of 11.3 percent
between 2005 and 2008, when it reached sales of $601.5 million.
During that time, it opened 171 new stores, according to its
But the company's high debt service costs, a legacy of many
companies owned by private equity, may turn off investors.
Irving Place Capital Management LP, which bought Vitamin Shoppe
in 2002, owns 80 percent of the shares, a stake that will fall
to 54.5 percent after the IPO.
"If they are spending too much on interest, they are
vulnerable to any swing in revenues," said Francis Gaskins,
president of the research firm IPO Desktop.
In the six months that ended June 27, Vitamin Shoppe spent
$7.7 million on interest. Gaskins said this was high in
relation to the chain's $24.8 million in operating income.
The largest retailer in the IPO pipeline is the highly
levered but highly profitable discount chain Dollar General
Corp, backed by private equity firm Kohlberg Kravis Roberts &
Co [KKR.UL]. The 8,577-store chain is expected to go public in
a $750 million IPO in the next few weeks.
In the six months that ended July 31, Dollar General spent
$179.2 million on interest and had an operating profit of
$458.1 million, as sales grew 13.3 percent from a year earlier
to $5.7 billion.
WATCH THAT DEBT
A number of private equity-backed companies have had
disappointing IPOs of late, as investors balked at heavy debt
loads and IPO proceeds going to pay buyout firms rather than
In a Morningstar research note last week, an analyst called
the Vitamin Shoppe IPO "yet another private equity offload" and
said the chain faced a "highly fragmented and intensely
One fast-growing, relatively debt-free retailer expected to
go public this year is youth clothing chain rue21 Inc, which
operates 500 stores in the United States. In the six months
that ended Aug. 1, rue21's sales rose 33.3 percent to $233.1
In contrast to the other retailers gearing up for IPOs,
rue21's interest expense during that six-month period was just
$297,000, on operating income of $14.1 million. The company is
owned by funds advised by private equity firm Apax Partners LLP
and BNP Paribas North America Inc.
The private equity firms behind any IPOs will need to check
their expectations when they price their deals, given the
challenges some recent IPOs have faced, Nabhan said.
"The investor is not going to push back on an IPO unless
valuation and the structure of the deal are misjudged," he
Discount chains and others that offer bargains will likely
lead the IPO charge, he added.
"Other IPOs will come from companies that are participating
in the unwinding of the consumer bubble," he said.
(Reporting by Phil Wahba; editing by John Wallace)