Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19
US Corporate Debt Is at Risk of a Flash Crash - 10th Aug 19
EURODOLLAR futures above 2016 highs: FED to cut over 100 bps quickly - 10th Aug 19
Market’s flight-to-safety: Should You Buy Stocks Now? - 10th Aug 19
The Cold, Hard Math Tells Netflix Stock Could Crash 70% - 10th Aug 19
Our Custom Index Charts Suggest Stock Markets Are In For A Wild Ride - 9th Aug 19
Bitcoin Price Triggers Ahead - 9th Aug 19
Walmart Is Coming for Amazon - 9th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Stock Buybacks and Sears’ Death Spiral

Companies / Retail Sector Feb 06, 2015 - 10:35 AM GMT

By: LewRockwell

Companies

Eric Englund writes On November 17, 2004, big news hit the retail world. Attention Kmart shareholders, your company announced that it was going to purchase Sears, Roebuck for $11 billion. In a November 18, 2004 New York Times article, it was stated: “The takeover is a triumph for Kmart’s largest shareholder, Edward S. Lampert, a billionaire investor who pushed the company to emerge from bankruptcy barely 18 months ago, shut many stores and sold dozens of others to Sears as he presided over a run-up in Kmart’s value on Wall Street.” It was further reported, in this article, that:  “’This is going to be an enormous undertaking,’ said Mr. Lampert, who is Kmart’s chairman and will become chairman of the new company, to be called Sears Holdings. ‘We’re really not looking to have two separate cultures. We’re hoping to blend these into one great culture.’” To be sure, it is wonderful to have a great corporate culture; however, culture doesn’t matter if a company is broke. Under the chairmanship of Eddie Lampert, Sears has been driven to financial insolvency. I firmly believe Sears will declare bankruptcy and Eddie Lampert’s penchant for stock buybacks will have played a key role in breaking this company.


Euphoria reigned when Kmart announced the takeover of Sears. Per the above-mentioned New York Times article: “Expressing faith in Mr. Lampert’s track record of squeezing profit from poorly managed companies, Wall Street cheered the news yesterday. The share price of Kmart rose nearly $8, to close at $109. Sears, Roebuck jumped $7.79, or more than 17 percent, to $52.99.” Oh, and the first year of operations, for this newly combined company, was a promising one. For fiscal-year 2005, Sears’ revenues were $48.9 billion with a net profit of $858 million. At fiscal year-end 2005, the balance sheet looked healthy too; with nearly $4.9 billion of working capital, $11.6 billion of equity, over $4.4 billion of cash, and a total-liabilities-to-equity ratio of 1.6 to 1. By the close of fiscal-year 2005, Sears Holdings Corporation’s share price was $114.74. Having faith, in Eddie Lampert, seemed to be well placed.

2005 did not turn out to be a fluke. Sears turned profits in 2006, 2007, 2008, 2009, and 2010. Over the six-year period, of 2005 to 2010, Sears’ cumulative net profit was $3.8 billion. Sears’ and Kmart’s employees were working hard and making Eddie Lampert look good. A feel-good story, correct?

Unfortunately, the answer is “no”. While front-line and backroom employees were doing their part, Eddie Lampert and Sears’ top executives were busy strip mining Sears’ balance sheet. Sears undertook stock buybacks, from 2005 to 2010, that totaled nearly $5.83 billion; meaning share repurchases exceeded profits, over this six-year period, by a little over $2 billion. Considering Kmart emerged from bankruptcy just 18 months before the acquisition of Sears, it seems counterintuitive for an executive team to willfully weaken Sears’ balance sheet instead of building as much financial strength as possible. Did Eddie Lampert, a Yale educated businessman, not learn any lessons from Kmart’s bankruptcy?

Well, the tough times came for Sears. This retailer lost $3.12 billion in 2011, $1.054 billion in 2012, and $1.116 billion in 2013. With big-box retailing being an ultra-competitive business, sound balance sheet management is critical. So why would a retailer’s management team knowingly weaken the company’s cash, working capital and equity positions; which is exactly what stock buybacks do. To me the answer is that short-term personal financial gain, for executives, trumped long-term strategic planning.

The following table should be embarrassing for Eddie Lampert, Sears’ board members, and its executives—dollar figures are in millions:

For the seven years Sears Holdings undertook share repurchases, the buybacks exceeded net profits in five of those years. This is what I mean by strip mining Sears’ balance sheet. Once management grasped the magnitude of the losses Sears was facing, the buybacks ceased; and should have never happened in the first place.

Through the third quarter of fiscal-year 2014, Sears Holdings’ net loss was $1.523 billion. And now, nearly ten years after Eddie Lampert’s triumphant acquisition of Sears, this retailer’s balance sheet is in tatters. As of the third-quarter ending November 1, 2014, cash stands at a paltry $326 million; working capital is negative $823 million while equity has nearly vanished and is merely $126 million. On top of this miniscule equity position stands a mountain of liabilities totaling $15.043 billion; leaving a mind-numbing total-liabilities-to-equity ratio of 119.4 to 1 (a ratio of 3 to 1 is considered to be a bit high and worrisome; so higher is not better).

When Sears’ ugly third-quarter results were announced on December 4, 2014, investors who visited Sears Holdings Corporation’s website were provided with some positive spin and perhaps a vision for soldiering forward:

“We remain intently focused on delivering an unparalleled integrated retail experience for our customers through Shop Your Way and above all, returning Sears Holdings to profitability,” said Edward S. Lampert, Sears Holdings’ Chairman and Chief Executive Officer. “During the quarter, we unveiled or expanded several Integrated Retail customer initiatives, which helped drive online and multi-channel sales. Our members are responding to our transformation, and we are encouraged by the year-over-year domestic Adjusted EBITDA trends, which mark a positive departure from the prior six quarters. At the same time, we continue to enhance the Company’s capital structure and liquidity to support our transformation into an integrated membership-focused company.”

I find the last sentence, of this paragraph, to be stunningly disingenuous. After all, now that Sears is broke, executive management is looking for ways to enhance Sears’ capital structure and liquidity. You’ll never hear a board member, or a high-level executive, admit that their company’s stock buybacks were a mistake. But if you do the simple math, and add back the $6.011 billion Sears Holdings threw away via share repurchases, you’d have a company that remains soundly capitalized and liquid enough to support a corporate transformation.

Of course, let’s not forget a premise behind stock buybacks is to enhance shareholder value. At fiscal year-end 2005, Sears’ stock was trading at $114.74. Sears’ stock, presently, is trading at $33.30; a decline of over 70%. Sears’ share repurchase program, accordingly, has resulted in the exact opposite of its intended outcome of enhancing shareholder value. Had the stock buybacks not occurred, Sears’ balance sheet would be markedly stronger and, hence, deserving of a much higher share price than it currently enjoys.

Considering 2014’s anemic Christmas season, I predict Sears Holdings’ net worth will fall into negative territory when it reports fiscal-year 2014’s results. When a company has little cash, negative working capital, and a negative net worth, it is painfully insolvent. I also predict that when Sears declares bankruptcy, the talking heads on CNBC and Bloomberg TV will not call Eddie Lampert onto the carpet and question Sears’ reckless stock buyback program running from 2005 to 2011. How did flushing away over $6 billion, for share repurchases, enhance shareholder value for Sears’ stockholders? This is not a question that will be posed by our lapdog media; yet the answer will be obvious when Sears’ shares hit $0.

Eric Englund

http://www.lewrockwell.com

Eric Englund [send him mail], who has an MBA from Boise State University, lives in the state of Oregon. He is the publisher of The Hyperinflation Survival Guide by Dr. Gerald Swanson. He is also a member of The National Society, Sons of the American Revolution. You are invited to visit his website.

© 2015 Copyright Eric Englund - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules