Wednesday, November 21, 2007
Attention Target Management: Pay No Attention To Analysts Begging for Buybacks
Big Buybacks Begin to Haunt Firms
More Cash on Hand Might Have Protected Freddie, Fannie Shares
—By GREGORY ZUCKERMAN, KAREN RICHARDSON and JUSTIN LAHART
Driven by billions of dollars in share buybacks, record-setting buyouts and a wave of mergers, the amount of stock in the market shrank by hundreds of billions of dollars in the past four years.
With the supply of stock down and demand strong, the market rallied. Now, as the economy slows and credit markets buckle, high-profile companies are cutting back on buybacks, and some wish they held on to the cash they gave back to shareholders.
—Wall Street Journal, November 21, 2007
So says today’s Wall Street Journal, although this is not news to readers here at NotMakingThisUp (see “The Shareholder Letter You Should, But Won’t, Be Reading Next Spring” from August 8, 2007.
Nevertheless, lest anyone think the Journal is making much ado out of nothing, I would say the Journal goes too easy on those Captains of Industry who chose to pump up their stocks for short-term gain and fleeting kudos from Wall Street’s very fickle Finest.
After all, today’s story politely leaves out one of the all-time great admissions of regret—ranking right up there with Chamberlain after Munich, business-wise—which came yesterday morning from one of the most aggressive practitioners of the “return value to shareholders” school of balance sheet destruction: Steve Odland, the CEO of Office Depot.
A sober Mr. Odland, formerly hailed as the savior of that once-proud office products retailer following a highly successful stint spent largely buying back stock and occasionally running stores at AutoZone, told Wall Street’s Finest:
We are very disappointed in our third-quarter results and remain concerned about the economic environment over the next few quarters. We are also very unhappy with our stock price.
Unfortunately, we have cleared the balance sheet of cash, and our operating cash flows declined, so we don't have the opportunity to buy back shares at a time when we believe they are a huge value. [Emphasis added.]
Specifically, Office Depot “cleared the balance sheet” of $200 million this fiscal year by buying 5.7 million shares at $35 a share.
While that doesn’t sound like much, it came after “clearing the balance sheet” of $971 million in fiscal 2006 by buying 26 million shares at an average price of $37 per share. (Last trade--you don't wanna know.)
Where this leaves Office Depot as a stock, we express no opinion, but management at Target ought to think twice about listening to the barking seals otherwise known as Wall Street’s Finest—the analysts who applaud companies such as Office Depot for giving short-term oriented shareholders short-term rewards such as high-priced stock buybacks without any notion of the kind of painful long-term consequences now being suffered by Office Depot’s shareholders:
Nov. 20 (Bloomberg) -- Target Corp., the second-largest U.S. discount chain, posted an unexpected decline in quarterly profit after consumers facing higher mortgage payments and gasoline expenses cut spending. The retailer also said today it will buy as much as $10 billion of its stock, which lost almost a quarter of its value since reaching a record in July….
``It's the right thing to do to leverage up their balance sheet and buy back stock in the face of slowing overall sales growth,'' [emphasis added] said Jeffrey Klinefelter, an analyst at Piper JaffrayCos. in Minneapolis, who recommends investors hold their shares.
I’d like to see Mr. Klinefelter tell that to a room full of Office Depot shareholders, and get out alive, or, at the very least, with his flippers still attached.
Our metaphorical hat goes off to the Wall Street Journal for flagging a timely and important topic...but how they left out the best part of the Office Depot call is beyond us.
I Am Not Making This Up
© 2007 NotMakingThisUp, LLC
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.
Posted by Jeff Matthews at 8:34 AM