Nordstrom $300M Buyback Looks to Fortify Share Price

Nordstrom’s announcement of a $300 million share repurchase program should renew Wall Street’s faith in the company’s financial position.

NEW YORK — Nordstrom’s announcement Wednesday of a new $300 million share repurchase program should renew Wall Street’s faith in the company’s financial position, given its weaker-than-expected earnings guidance last week, which promptly caused the company’s shares to plummet.

The buyback also lends further credence to the retail sector’s improved health, as Nordstrom is the latest to join a swelling number of retailers using their growing cash stockpiles for buybacks and dividend payouts.

Shares of Nordstrom were unchanged at $36.56 in trading Wednesday on the New York Stock Exchange, but are currently off a 52-week high of $46.30 reached on July 28. Based on Wednesday’s closing price, about 8 million total shares should be repurchased under the new program, which will eventually reduce the total share count by 5.8 percent. Nordstrom said the shares will be acquired through open market transactions in the next 12 to 24 months.

“The company’s balance sheet and operating performance are strong and this share repurchase program reflects the confidence we have in our business and our ongoing commitment to return value to shareholders,” said Blake Nordstrom, president of Nordstrom, in a statement.

In its most recent quarterly report last week, the company posted second-quarter profits of $106.9 million, or 75 cents a share, which missed analysts’ estimates by two cents. The profit was up, however, from $65.9 million, or 48 cents, in the year earlier. Nordstrom forecast third-quarter and full-year earnings to be below estimates.

While David Malmgren, a portfolio manager at Fulton Breakefield Broenniman, called Nordstrom’s buyback program “a dividend for shareholders” because it will increase future earnings per share, he thinks the motivation for the announcement is a reaction to last Friday — the first full day of trading after the quarterly report — when Nordstrom’s shares tanked 9.2 percent. “I definitely think they’re saying, ‘We didn’t deserve this.’”

Deniz Anders, a spokeswoman for Nordstrom, said, however, that the buyback announcement was a coincidence with the timing of the quarterly earnings report. “We’ve been evaluating a repurchase for some time now. It’s a great way to use excess cash.” As of July 31, Nordstrom had $485 million of cash in its coffers.

This story first appeared in the August 26, 2004 issue of WWD.  Subscribe Today.

Malmgren said the share buyback program gives Nordstrom the flexibility to hit their EPS targets. “What they can do is accelerate the program if they think that their earnings” could miss analysts’ estimates. The more shares the firm buys back, the more valuable each share becomes.

Dana Cohen of Banc of America Securities agreed with Malmgren, saying in a Wednesday research note the buyback could add about 5 cents a share to full-year 2005 earnings. She also looks at the buyback as a “cushion” for future earnings, but only because she is concerned that the luxury sector faces a potential slowdown.

If a slowdown is indeed looming, then Nordstrom used its cash in a positive way for the existing company, said Malmgren, rather than use it to expand the business. “In retailing, it’s really a matter of fighting over market share, as opposed to really going after growth.”

Meanwhile, Nordstrom’s news comes on the heels of several other similar announcements, as retailers are benefiting from the economy’s big uptick in gross domestic product since the second quarter of 2003. Share repurchases were recently announced by Limited Brands and Jones Apparel Group, while Federated Department Stores and TJX Cos. have reported dividends within the last three months.

“[The retailers] are flush with cash again, and this is a nice signal to send out to the market,” said Ken Wasik of Houlihan Lokey Howard & Zukin, an investment banking firm.

In contrast, the past three years had seen little in the way of similar programs because of the economic recession. Nordstrom, for example, said Wednesday that it last repurchased shares in November 2001.

Nordstrom noted that it still has $82 million remaining on a previous $150 million share repurchase that its board of directors authorized in November 1999. The $300 million program replaces the leftover $82 million, however.

In the end, Nordstrom’s announcement demonstrates the renewed ability retailers have to protect their stock prices.

It’s possible Nordstrom thinks its stock should be trading at a specific level, said Wasik. “Wall Street likes that. [Nordstrom] believes in their stock, and they’re going to manage it to get it back up there.”