Loaded with cash, apparel retailers have begun adopting more aggressive share buyback plans to woo shareholders and boost earnings per share.
"As retail stocks get hit, and with a recession looming, these companies get more aggressive with buybacks because there is nothing else to do with the cash at this point," explained Thomas Filandro, retail analyst at Susqehanna Financial Group. "They may as well use the cash to reward shareholders who are sticking with the company through difficult times."
Buybacks cushion earnings per share by reducing the number of shares outstanding, making the company attractive to investors. And since many retail stocks have been trading at 52-week lows, companies are able to buy back shares at attractive prices.
Specialty retailers such as American Eagle Outfitters, Aéropostale, Limited Brands, Abercrombie & Fitch, Tween Brands, Gap Inc., AnnTaylor Stores Corp. and Hot Topic were especially active this year in buying back stock.
"Shareholders like it when management buys stock when the company is down and out," said Kimberly Greenberger, specialty retail analyst at Citigroup. "They want to see the company support the stock, and believe buybacks are a good use of cash."
Apparel retailers generated a lot of cash in the last three years before the recent economic downturn, and with fewer investment opportunities, repurchase programs are seen as a wise strategic move.
"Share repurchase programs are a better use of cash then investing in an alternative growth vehicle," Greenberger said. "Managements have not been disciplined in growing new concepts."
Greenberger said of the 17 stocks she covers, 10 increased their repurchase activity this year, with many of these companies doubling the size of its plans.
While a majority of these companies embarked on share repurchase plans prior to the flood of economic uncertainty, they continue to take an aggressive approach.
Gap Inc. repurchased 48 million shares during the third quarter, having utilized $887 million of the $1.5 billion repurchase program announced in August.
"Regarding Gap, the buyback not only reflects the company's excess cash position and strong cash flow generation, but also reflects the current control within the business — in particular on the inventory front — as well as management's positive view for a turnaround," Filandro said.Children's retailer Gymboree authorized an additional $25 million to purchase shares, and Aéropostale approved a $250 million increase, bringing its total share repurchase program to $600 million. Additionally, Target approved a new $10 billion buyback program to replace a previous $8 billion authorization.
Within the specialty sector, buybacks are predominantly funded with cash on hand or cash flow generation, although some companies have taken on debt to fund buybacks, Filandro said.
While buybacks are a solid investment in the current economic environment, dividends could be an even more compelling use of this excess cash, Greenberger said, adding that there is also risk in such strategies.
"Companies are potentially pushing the risk in this caustic economic environment by impairing financial flexibility and depleting themselves of cash," she said.
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