Bidz.com Stock Buybacks: A Wise Move?

Why are Bidz.com (NASDAQ: BIDZ) insiders selling shares as the company is buying back shares, especially when management has claimed that the company’s shares are undervalued? Legendary investor Warren Buffett, CEO of Berkshire Hathaway (NYSE: BRKA), was once said:

Now, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason: to pump or support the stock price... We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated."

Note: Bold print and italics added by me.

Does Bidz.com’s share repurchase program really build “intrinsic value” or is it a short-term ploy “to pump or support the stock price” as insiders sell their shares?

During the Q2 2008 earnings call, CFO Lawrence Kong claimed:

As of July 31, 2008, we had repurchased a total of approximately 1,024,000 shares in the open market for a total of $8.8 million at an average price of $8.58 per share. We continue to repurchase in the open market under the stock repurchase program and still have approximately $11.2 million for additional share repurchases under our current program. The stock repurchase program reflects our continued confidence in the market opportunity and strategy and what [inaudible] appears to be at the undervaluation of our stock at current levels. We believe our stock to be a strong investment opportunity and a good use of our cash resources.

Note: Bold print and italics added by me.

Lawrence Kong claimed that, “We believe our stock to be a strong investment opportunity…..” Yet, most recently on September 3, 2008, Lawrence Kong sold 53,801 shares and pocketed gross proceeds of $239,764 or about $8.98 per share. Kong and other Bidz.com insiders have unloaded about 480,000 shares so far this year, pocketing gross proceeds in excess of $5.2 million, while the company has been repurchasing its stock (Source: SEC Form 4 Reports).

In some instances, Bidz.com has paid more money per share to buy back its shares, than the price per share received by insiders who sold their shares. For, example, in May and June 2008, Bidz.com repurchased 54,000 shares and paid $501,714 or about $9.29 per share. By comparison, Lawrence Kong recently sold 53,801 shares at an average price of $8.98 per share.

In certain other instances, other insiders have also sold their shares for less money per share than the company, at times, paid to buy back shares on the open market. For example, in February 2008, CEO David Zinberg sold 5,000 shares at $7.50 per share for gross proceeds of $37,500. That same month, Marina Zinberg (Vice President and sister of David Zinberg) sold 15,000 shares at $7.49 per share and received gross proceeds of $112,350. In March 2008, Bidz.com repurchased 433,827 shares at an average price per share of $8.11.

Does Bidz.com management personally hold the same views on the value of company stock as officially espoused by the company?

Examining Share repurchases for the six months ended June 30, 2008

While Lawrence Kong has claimed that Bidz.com’s share repurchase program is a “good use of our cash resources,” during the six-months ended June 30, 2008, the company utilized significant financial resources to repurchase shares of common stock. That resulted in very low cash balances at the end of Q2 2008 and the company had to draw on its line of credit to make certain inventory purchases.

During the first six months of fiscal year 2008, BIDZ.com repurchased 823,297 shares, paying $6.965 million or an average price of $8.46 per share (Source: Q1 2008 10-Q report and Q2 2008 10-Q report). During that same period, reported net income was $8.22 million and net cash provided by operating activities was $3.342 million. Therefore, the company’s expenditures for share repurchases amounted to 85% of reported net income and more than twice the amount of net cash provided by operating activities. At the end of the second quarter, the Bidz.com cash balance dropped $5.975 million to a mere $618,000 from $6.593 million in the previous quarter.

As of June 30, 2008, Bidz.com’s reported net working capital of $31.877 million. However, the company’s working capital comprised almost entirely of inventory totaling $54.732 million, which took on average about 120 days to sell during the six-month period. In a previous blog post, I raised serious questions about Bidz.com’s compliance with GAAP in valuing inventory.

In addition, by June 2008, the company spent a cumulative total of $7.85 million to repurchase 923,297 shares since the beginning of its stock repurchase program in 2007. The stock repurchase program reduced available net working capital by about 20%. With relatively low cash balances totaling $618,000 and most of its working capital tied up in low turnover inventory, Bidz.com had to utilize its line to credit to make certain inventory purchases. As of June 30, 2008, Bidz.com owed $5.6 million under its line of credit.

During the Q2 2008 earnings call, CFO Lawrence Kong claimed:

Our positive cash flow and revolving line of credit provide us with strong liquidity to continue to successfully grow the business.

Note: Bold print and italics added by me.

However, as detailed above, about twice the amount of net cash provided by operating activities was utilized to buy back stock during the first six-months of the fiscal year. During the six-month period ended June 30, 2008, Bidz.com expended $6.965 million or $3.623 million in excess of cash flows of $3.342 million to repurchase its common stock. The end result was a low cash balance of $618,000 and and line of credit balance of $5.6 million. In effect, Bidz.com's share repurchases are being financed in part with short term credit. It is a risky move to use a revolving line of credit to fund stock repurchases and the same time use it to provide funds to operate a business.

Are Bidz.com's share repurchases really a good long term use of shareholder resources at this time? I don't think so.

To be continued….

Disclosure: Not long or short Bidz.com securities

Comments

[Alma Templeton:]

Of course, Antar fails to mention the key facts

1. Both Zinbergs were under pre-designed agreements to sell at a certain time regardless of the price, so the price at the point at which they sold should not be a representation of their thoughts on whether it was undervalued given that they were legally compelled to sell.

2. Kong's actual transaction was a net exercise of options soon to expire in which he obtained shares by surrendering the amount applicable to cover the option price and payroll taxes to the company, and consequently increased his actual position. The full filing states that he acquired 75,000 and disposed of 53,801. It breaks the transaction down by stating: "Represents a net exercise of stock options expiring on December 5, 2008. The value of 53,801 shares surrendered back to the Company and retired, equals the amount necessary to pay the exercise price and payroll taxes." Kong had to do something with the options before the upcoming expiration, but Antar doesn’t mention this.

This is quite typical of Antar. He is more than capable of reading the filing properly and representing it properly. However, he intentionally fails to do so because it would not be in line with how those who pull his strings want the facts to be distorted. Antar would seem to be nothing more than a paid shill and can be lumped in with other undesirable elements like Gary Weiss and Floyd Schneider. In fact, certain allegations have been made that he is employed through Magic Consulting (run by ex-con Michelle Sarian), a group that takes consulting contracts on from Third Point, a firm currently under investigation by the SEC.

Sam likes to pass himself off as a reformed criminal, but he's simply a flim flam scammer moved on to another long con. I hope that Magic Consulting covers his legal fees.

2008 Sep 08 03:15 AM

[chris_dress:]

Sam:

who is paying you?

2008 Sep 08 10:41 AM

[LBC:]

Felons typically lose the right to vote. Maybe they should also lose the right to publish.

2008 Sep 08 01:29 PM

[BeCareful:]

Jesus Antar, what the hell are you trying to do to BIDZ? Clearly your first bashing was ineffective - let it go. Throwing out unrelated quotes from Warren Buffet in an irrational response to your first "piece" not bringing the stock down is a clear indicator that you're getting desperate in your short position. I'm sorry you and your kin are losing money betting against a company that consistently beats earnings. I'm sorry you didn't have the foresight to place your bets on the correct side of the BIDZ coin. But this gives you no credence to rehash old, unfounded accusations, or to twist facts and quotes from investors (Buffett) who have zero claim in BIDZ stock in an attempt to smear a company who is not only heads-and-tails over its competition in terms of performance and growth, but has a solid business plan and is executing it in spades.

Clearly you are paid for what you're doing here, but if I were the hiring agent, I'd ask for my money back. You're unsuccessful at what you do, and ultimately what you're ATTEMPTING to do. If you're on the short side of BIDZ, you're going to lose the farm that you've bet. This is a guarantee. And any interim malfeasance you wish to dish out only serves as temporary entertainment as this company ascends to become the gem of the jewelery industry.

You sicken me, and this should be illegal.

Shame on you Antar. Shame.

2008 Sep 08 01:36 PM

[Bidz Customer:]

Great comments. I have nothing to add but my support for Bidz.com. It's a great company (I'm a customer), great stock (I'm an investor who have made a considerable amount on Bidz stock), and most of all, I'm an American who is smarter than you, Antar. I hope all investors can really research before making wrong decisions based on the Paid Articles folks such as Antar are publishing. Shame on you, Antar! Bidz will make it big, no matter how many times shorts repeat the same thing over and over again. Although, I strongly believe in free speech, Ex-Felons should not be allowed to publish any financial information, especially when it may effect the price of any company's stock. You will soon go away, Antar. Do what you can now because your time is limited with this publication.

2008 Sep 09 06:08 PM

[Scott Evans:]

What a joke..If my figures are correct, BIDZ is moving on average 12,000 items a day at 50.00 average, that's $600,000. per day, with receivable in under 7 days. At 600,000 per day, that' appx 30,000,000. per month. I guess that's why BIDZ has bought back all that stock with cash and has paid down a recent $24million dollar bankruptcy purchase down to 6 million while buying back stock too. Had they not bought back stock, that 24 million purchase would be paid for and Bidz would be debt free with millions in the bank...

I am estimated these figures, if I am wrong, please tell me... but give me a break...

BIDZ is an undervalued stock PERIOD, that's why they are buying back stock.... NO BRAINER.... If Berkshire was trading for 10,000.00 per share, I bet they'd be buying their stock back with cash just like bidz.

Yeah, NILE was trading over 100.00, BIDZ should be there right now in my opinion.

2008 Sep 09 07:40 PM

[Scott Evans:]

Correction, 18 million a month, not 30 million...lol... been a long day:)

2008 Sep 09 07:44 PM

[Antar hater:]

Alma made you look like even more of a fool than you already are.
Antar, You are a has been loser

2008 Sep 12 12:58 PM