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

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.”

Jeff Matthews
I Am Not Making This Up

© 2008 Not Making This Up 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. 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.


Mark said...

You got me curious, Jeff, so I popped over to Edgar and, well, surprise, surprise:

From Rex's last proxy:

"We have not granted stock options since 2004 and we do not plan to grant stock options or other stock-based incentive awards in the near future... Stuart A. Rose, our Chairman and Chief Executive Officer, has an employment agreement... that provides for an annual salary of $154,500 and annual cash bonuses based upon (i) the earnings before income taxes of our retail business... and (ii) the earnings before income taxes of our synthetic fuel or other alternative energy investments...<<

Gee... notice the complete and totally non-direct-linkage between the stock price and how he gets paid? That comp is based on EARNINGS, not EPS (which would, of course, benefit from a reduced share count).

Now, does anyone want to guess how the CEO of Office Depot gets paid? Okay, that was an easy one:

"The CEO’s 2007 base salary as a percent of target total direct compensation is approximately 10%. The other NEOs’ 2007 base salaries as a percent of target total direct compensation range from 25% to 32%. A majority of the variable pay opportunity is in the form of equity for NEOs, which strongly links them to shareholder interests (and makes the value of this component of compensation variable with changes in our Company’s stock price)."

Well, lol, I guess they should've written "which strongly links them to SHORT TERM shareholder interests".

Certainly, there's no perfect way to compensate officers of a public company, but there will inevitably be ramifications-- either positive or negative-- from whatever method is chosen.

Jeff Matthews said...

Mark gets the First Annual NotMakingThisUp Award for Value-Added Readership.

Thanks, Mark.

Anonymous said...

Jeff: I wouldn't call RSC "a poor man's Best Buy" - I'd call it a poor man's VeraSun without the nice balance sheet and an electronics retailer thrown in for good measure.

While RSC trades at an absurdly low P/E and price/book value, REX Stores main source of income the last quarter came not from its retail operations but its investments in ethanol plants.

I wonder, just from a risk standpoint, what would happen to REX's future net income IF the price of corn per bushel stays above $6 and the price for ethanol doesn't budge above $2.50 over a period of say three to six months?

I know, I know, you probably cannot comment on this, but I'm only putting the question out there as something for investors in REX to consider (and of course I could be wrong).