Office Depot's Buyback Problem

| About: Office Depot (ODP)

By David Berman

Office Depot Inc. (NYSE:ODP) shares surged on Monday, after it announced upbeat preliminary earnings for the quarter, along with the resignation of its chief executive, Steve Odland. Of course, you have to put this bounce into perspective: The shares are still down about 90% from their highs in 2006.

The recession might be partly to blame, although few retailers have been hit as hard. As blogger Jeff Matthews reminds us, Office Depot stands out as a company that made a big mistake: It used its once-flush balance sheet to buy back its own shares at very high prices – about six times the current price.

“Odland was not alone, of course: hundreds of companies engaged in ‘cash-clearing’ exercises during the heady days of the pre-crisis 2000s, when balance sheets were flush and the uniform question from Wall Street’s Finest – most of whom have never so much had to meet a payroll, let alone run a public company – was ‘What are you doing to ‘return value to shareholders’?”

In other words, Office Depot is a clear case where share buybacks didn’t work. Indeed, the example stands as a reminder that buybacks are often ill-timed exercises rather than signals of insider excitement about a low-valued stock.

Disclosure: None