Daniel Gross

The Softer Side of Sears’ Buybacks, Cont’d

Sears Holdings, the amalgam of old-school retailing brands Sears and K-Mart, has been in the news again — for all the wrong reasons. In late December, the company said same-store sales for 2011 would disappoint: off 1.8 percent for K-Mart, and 3.3 percent for U.S. Sears stores. That closed out a sixth straight year in which sales fell. Last week, lender CIT said it would stop providing financing to Sears suppliers. The combination of falling sales, falling operating income, and nervous creditors makes for a toxic cocktail. Since late October 2011, Sears' stock has fallen 56 percent. Now there are suggestions that Edward Lampert, the famed hedge fund manager who has run and controlled Sears for the last several years, may be considering ending shareholders' long misery by taking the company private.

Given the rising concerns about Sears' cash position, it's worth revisiting a topic we first covered last May: the company's long, expensive, and, not-very-successful buyback efforts.

Hedge funds are in the business of allocating capital, putting money into different stocks and different asset classes. Corporate managers also have to allocate capital. They can take money thrown off by operations and use it to spruce up stores, invest in better systems, make acquisitions, raise salaries, or return capital to shareholders through dividends, or stock buybacks. As the head of Sears Holdings, Edward Lampert has chosen to allocate a lot of Sears' cash flow to buying back company shares.

But for a genius stock picker like Lampert, the repeated, serial investments in Sears stock have thus far proven to be poor choices.

Consider the purchases:

In 2005, Sears spent $600 million on its own shares, buying 5 million shares, at an average price of $120

In 2006, Sears spent $806 million on its own shares, buying six million shares, at an average price of $133.

In 2007, Sears spent $2.9 billion on its own shares, buying 21.7 million shares, at an average price of $135.

In 2008, Sears spent $678 million on its own shares, buying 10.3 million shares, at an average price of $65.58.

In 2009, Sears spent $424 million on its own shares, buying 7.1 million shares, at an average price of $59.81

In 2010, Sears spent $394 million on its own shares, buying 6.6 million shares at an average price o $71.76.

And in the first nine months of fiscal 2011, it spent $163 million on its shares, without specifying the average price. For most of that period, the stock traded in the 70s and 80s.

For the $5.5 billion spent between 2005 and 2010, Sears paid an average price of $97 a share. The stock currently trades for about $36, giving it a market capitalization of about $3.9 billion. In other words, the company has lost about 62 percent on the investment it made in its own shares between 2005 and 2010. And with some lenders expressing concern about its cash position, the company could really use some of that cash.

Now, the $5.5 billion spent on shares went into the pockets of shareholders who sold stock back to the company. They benefited from Lampert's strategy — he took them out of the stock at a far higher price than it would fetch today. And to his credit, Lampert didn't dump his own shares when the stock soared. To the contrary, as the buybacks reduced the number of shares outstanding, Lampert's ownership of Sears has increased.

But for the investors who held on along with Lampert, the experience hasn't been so great. Investors drove up the shares of Sears Holdings in the years after Lampert's takeover because they believed he'd reinvigorate the tired brands of Sears and K-Mart. Failing that, shareholders figured he'd use some of his financial brilliance to generate returns, by pulling off some smart mergers or liberating the value of the company's huge real estate holdings. But that hasn't quite worked out. Retailing has changed dramatically in the past several years, and many of those changes have not been friendly to established big-box retailers like Sears and K-Mart. And it turns out a hedge fund manager didn't have many better ideas on how to fix Sears and K-Mart than the experienced retail executives who had previously run the companies.

Daniel Gross is economics editor at Yahoo! Finance

Follow him on Twitter@grossdm; email him at grossdaniel11@yahoo.com

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