Sears announced their earnings yesterday evening and the numbers were awful (I hate to be so critical of trader turned retailer Eddie Lampert), though not quite as awful as analysts expected (those analysts sure are good at guessing corporate earnings, huh?!?). Shares are popping over 22%. In addition to their better than expected earnings the company also announced that they had repurchased $40MM worth of shares during the quarter for an average price of $41. With the stock trading at $60 as I type, that is looking like a pretty slick trade, but upon further investigation we find out that Sears has been buying back shares since 2005 when the stock traded MUCH higher.
I have never been a proponent of buybacks. While management’s claim it is a vote of confidence in the company it is actually nothing more than a way for companies to fictitiously boost EPS. For instance, this quarter Sears is reporting 10MM less shares than they had in the same quarter last year. Revenues were down 10% year over year and the share buyback boosted EPS by nearly 10%. This was not due to organic growth and real strength (as the revenues clearly display), but a smaller float. Buybacks make sense sometimes. It makes sense to return this money to shareholders if you are a vibrant thriving corporation with strong organic growth and a healthy long-term outlook. That is a company I want a larger stake in. Buy back my shares, give me a larger stake. That’s okay. But if you’re a struggling low growth corporation like Sears buybacks make no sense. That money should be reinvested in the actual core businesses rather than some short-term EPS fix. The facts speak for themselves.
Since 2005 Sears has repurchased $5.06B worth of stock. They did so at an average price of $111. With the current price of $62 shareholders who received this extra ownership in the company own a stock that is down on average 44% since the buybacks began. Some deal they got huh?
One of the things that differentiates a good trader from a bad trader is his ability to part with bad trades. Ed Lampert clearly forgot this rule when he decided he was (not) going to beat WalMart and Target at the game they had perfected. Instead of parting ways with this terrible trade, Sears has continued to pile money into buybacks while their stores languish and their sales drop like a rock in water. The idea of investing in your own company via buybacks is great, but let’s try to do so in a way that might actually contribute to the long-term viability of the company as opposed to some quick EPS fix. If Lampert wants to be a retailer he needs to focus more on the retail business and less on his shareholder’s immediate satisfaction.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.