Wednesday, April 02, 2008
How to Buy Back Stock: Not “Just Because We Can”
"At that point in time, we still have, Doug, correct me if I'm wrong -- about 200,000 shares outstanding on the old buyback. Again, we -- like we buy our stock like we do everything else, if there's an opportunistic place to buy it. We don't just buy it arbitrarily because we can, we buy it to support what we consider basically ridiculously low levels."
The speaker of those words was Stuart Rose.
Stuart Rose runs a small electronics chain called REX Stores—a sort of poor man’s Best Buy, to use a hoary phrase, but one that fits the bill here—and has done so for many years, since the days when REX was more a growth stock and less the value stock it has become.
We mean not to denigrate REX or Mr. Rose, but to praise his stewardship of a business that might well have gone the way of so many brick-and-mortar consumer electronic victims of Best Buy and Amazon.com.
Despite Mr. Rose’s background (I believe he was an investment banker out of DLJ, but I could be making that up), he has caused the company to make a small fortune in synthetic fuels and, more recently, ethanol, while running the appliance chain more or less for cash.
And a good part of that success is this: Rose’s attitude towards share buybacks has always been as hard-headed as the way he manages the business.
Unlike Scott’s Miracle-Gro, Dean Foods, and Office Depot, which collectively might go down as the poster-children of poorly timed "returning-value-to-shareholder" activities such as share buybacks and large one-time dividends, REX Stores has bought its own shares when the price made sense, and held off when it didn’t.
Which is why REX, a tiny company that did a mere $235 million in sales last year, has nearly $100 million in net cash on its books, while Office Depot, which did $15 billion in sales last year, had only $220 million in cash compared to $600 million in debt at the end of 2007, thanks to the “cash-clearing” share repurchases (at more than double the current share price) executed by Office Depot’s eager-to-please-Wall-Street’s-Finest CEO, Steve Odland.
REX Stores may never be a Best Buy, and we don’t know enough about the business itself to even have an opinion about the company as a potential investment—nor would we express such an opinion if we did.
But one thing the company has in its favor: the guy who runs it knows that the trick to buying back stock AND increasing shareholder value is never to buy back stock “just because we can.”
I Am Not Making This Up
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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. The commentary in this blog in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.
Posted by Jeff Matthews at 4:06 PM