Fin - Daniel Gross - US

Sears Shows the Softer Side of Serial Stock Buybacks

Contrary Indicator

In 2004, when hedge fund manager Ed Lampert created Sears Holdings by lashing together Sears and K-Mart, he set out to revive two storied but faded retail franchises. Investors had high hopes, since Sears Holdings offered them the opportunity to, in effect, invest alongside a legendary hedge fund manager. But in a world of e-commerce, big box retailers and new consumption and shopping patterns, Sears and K-Mart have struggled to keep up. The publicity-shy Lampert seems to be admitting that it's just not working out. As a tough piece by Kit Roane on Fortune.com notes, Lampert recently offered something of a mea culpa, "In many of our businesses, even in a tougher environment, we ought to be doing a lot better." The stock has fallen recently in part due to disappointing results. "These results point to the increasingly dire prospects for Sears," said Credit Suisse analyst Gary Balter.

Over the years, investors and analysts hoped that Lampert, a genius stockpicker and corporate fix-it man, would breathe new life into old retail formats, or figure out a strategy to liberate the value of its vast real estate holdings, or use the cash flow that Sears and K-Mart generate to buy other companies, or stocks of other companies. Or something. While Sears itself hasn't turned into a hedge fund, Sears Holding has spent a ton of money over the years on one particular stock: Sears Holdings. And a glance at the company's share repurchases offers a cautionary tale on how a shareholder friendly maneuver can backfire.

The quarterly and annual reports, available here, as well as Sears Holding's 2005 10-K, tell the story of the company's serial buybacks. Here are the numbers I culled:

Fiscal 2005: $600 million on 5 million shares, average price of $120

Fiscal 2006: $806 million on 6 million shares, average price of $133

Fiscal 2007: $2.9 billion on 21.7 million shares, average price of $135

Fiscal 2008: $678 million on 10.3 million shares, average price of $65.58

Fiscal 2009: $424 million on 7.1 million shares, average price of $59.81

Fiscal 2010: $394 million on 5 million shares, average price of $71.76

First quarter of 2011 so far: $101 million on 1.2 million shares, average price of $81.61

All in, Sears says it has repurchased approximately 56.9 million of the Company's common shares at a total cost of $5.9 billion since the third quarter of fiscal 2005. That's an average price of $103.70. And there's more to come. At the end of April, the company "had $86 million of remaining authorization under our common share repurchase program." It also announced this month that the board "has approved the repurchase of up to an additional $500 million of the Company's common shares."

In the accompanying video, I discuss Sears with Jeff Macke and Matt Nesto of the Breakout.

In theory, big buybacks are friendly to shareholders. Buying back stock reduces the overall share count. That can make earnings-per-share figures look more impressive. And if a stock's price rises over time, share repurchases are a genius move. But for companies that generate cash as their business, competitive standing and stock decline, big serial buybacks are a pretty inefficient use of money.

Sears shareholders have done quite poorly with these repurchases. Here's a five-year chart of Sears Holdings. With the stock at about $77, shareholders are down more than 25 percent on their purchases, or about $1.52 billion. Of course, this is a dilemma many mature companies face, from Intel to Microsoft. Owners are reluctant to plunge capital into the business, rapidly shifting markets make it difficult to decide where to invest, the markets are leery of gigantic acquisitions, and long-suffering shareholders are anxious for returns. Share buybacks are generally efficient ways to return cash to investors. But sometimes, if you really want to return cash to shareholders, the best way is often just to give them the cash.

Perhaps Lampert's next bold move at Sears will be to reinstate a dividend.

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