Retailers Employ Share Buybacks to Beat the Street

The news on the U.S. consumer is relentlessly negative this year. Soaring prices for gasoline and food, plunging home prices, spiking foreclosures and credit card delinquencies are all serving to drain off the discretionary dollar. However, retailers are surprising the Street with better than expected earnings per share, often amid negative top line and same-store sales comps. How do they do it? Take a look at Dollar Tree (DLTR).

Dollar Tree (DLTR) markets to the demographic caught in the heart of the consumer squeeze. Wednesday morning, the low end discount retailer reported Q4 sales fell (1.5%) year over year. Net income fell (3%) to $94.7 million. However, through the magic of its share buyback, Dollar Tree reduced its share count by (9.7%), and lifted its EPS to $1.04 from 96c a year ago.

Macy's (M) led a big rally in the department store segment on Tuesday. How did they do it when Q4 sales fell (6.2%)? Better gross margins helped (41.6% vs. 40.9%), but income from continuing ops still declined in the quarter by (1.3%). The kicker was Macy's (17%) year over year share count reduction which yielded a 19.3% EPS increase.

Below are some of the other retailers buying back shares:

• Nordstrom (JWN) Q4 sales fell (4.4%), income fell (8.6%) but EPS grew 3.4%.
• Wal-Mart (WMT) Q4 revenue rose 8.4%, income rose 4.0%, EPS rose 7.4%.
• AutoZone (AZO) Q4 revenue rose 3.0%, income rose 3.6%, EPS rose 15.2%.
• Kohl's (KSS) reports on Thursday, and has an aggressive buyback program.
• Costco (COST) reports on March 5, and has been buying back stock as well.

Of course not all retailers have the cash flow to make these EPS enhancing share buybacks. Heavily leveraged retailers, like Bon-Ton Stores (BONT) or Cost Plus (CPWM), must show EPS growth the old fashioned way. Investors need to examine balance sheets and cash flows to separate the wheat from the chaff.

Disclosure: none

Comments

[deaverb:]

Share Buybacks are a double win for investors. First, as with Dollar Tree, earnings per share improve. Secondly, management stays focused on the business not "deworsification" to quote Peter Lynch, thorugh diversification.

Author does not comment on the strong leadership each buyback company has in their field: DTLR # 1 in dollar business in most metrics--totally number one in dollar only; Wal-Mart, Kohls, Costco and Kohls. Quite a group.

Great article. Great to draw attention to this. And the last reason, stock buybacks not subject to double taxation as dividends are.

2008 Feb 28 09:10 AM