A worker pushes shopping carts in front of a Wal-Mart store in La Habra, Calif. Wal-Mart Stores Inc. is forming a partnership with China's largest online direct retailer, giving JD.com ownership of its Yihaodian marketplace platform assets, including the brand, website and appWal Mart Stores JDcom, La Habra, USA

The first quarter has been seen as something of a litmus test for retail.

Could the momentum from a solid fourth quarter continue on without the buying incentive of Christmas? Could the brick-and-mortar crowd show signs of a real pivot toward the digital age? Could they convince shaky investors that, yes, there is still room for stores in the shadow of Amazon’s umbrella?

For many of the large retail and fashion companies looking to put their own money to work, those questions are beside the point. Over the past decade, they have proven that they see themselves as their own best bets.

A spot check of the 11 major U.S. fashion companies that reported quarterly results last week or will do so this week, showed that nine of the companies have been on a stock repurchase tear over the past decade, according to data from S&P Capital IQ.

On average, the nine companies have bought back a third of their own stock since 2008.

They are the true believers that see their shares as undervalued by the market, the supremely confident and the stuck in the mud with no other way to boost their stock price. And they range from Dillard’s Inc., which has bought back 63 percent of stock, or 47.6 million shares, during the 10-year period to L Brands Inc., which reacquired 18 percent of its float, or 61.9 million its shares.

Many retail stocks have been inexpensive over the past decade — the S&P 500 has risen 90.7 percent, while the department stores in the index have gained just 4.4 percent — but that doesn’t necessarily mean they’re a steal.

In a roundabout way, share buybacks transfer value from the selling shareholders to the rest of the investor base. Every share the company buys back makes the rest of the stock outstanding more valuable, at least in theory.

In practice, share buybacks can lead to higher earnings per share even if net income is flat or down.They also prop up stock prices by providing a ready buyer for the shares.

So buybacks can be a sign of strength or a sign of weakness.

“Is that a signal that the retailers are doing everything they can do to strengthen their businesses, so a signal of confidence?” said Leslie Parker, a partner in A.T. Kearney’s retail practice. “If we’re not convinced they are, then we should be highly skeptical as investors.”

Parker said buybacks can indicate that companies “don’t have a better way to use the cash.”

Businesses that have a lot of fundamental issues and that need to be fixed can support their shares through buybacks, but for only so long.

“It has to run out at some point,” Parker said. “You can’t keep that going on forever.”

There are signs that retailers, at least some of them, are starting to look at other ways invest their money, even as they figure out what to do with big gains from the tax reform package President Trump pushed through late last year.

Walmart Inc. has bought back a staggering one billion shares, or 25 percent of its shares in the past 10 years. But it is now also starting to spend big time to develop its e-commerce business, agreeing this month to pay $16 billion to buy control of Flipkart, buying its way into a direct battle with Amazon for control of e-commerce in India. Walmart also spent $3.3 billion for Jet.com and $310 million for Bonobos.

Chief financial officer Brett Biggs told investors this month that Walmart could both spend on the future and on buybacks.

“In the mid- to long-term, as the [Flipkart] business scales and efficiencies are realized, we expect losses to decline and returns to improve,” Biggs said. “Given Walmart’s financial strength, we anticipate the continuation of our current share buyback program while maintaining our strong credit profile.”

Dillard’s, which has not made such a drastic move, is also continuing to invest in its stock and its board just signed off on a new $500 million buyback program.

But the era of buybacks could be ending.

Cowen analyst Oliver Chen said retailers in general are going to be looking more at new ways to spend the cash that comes into their businesses.

“We’re at a point in time now where you’re spending to secure the future,” Chen said. “In the good old days, it was a unit growth story and there was much more abundant free cash flow. Now it’s protecting your balance sheet to have flexibility. In the world of Amazon and the world of retail super powers, as a senior executive thinking about your global destiny, where you want to be in five to 10 years, that will require money, or it will require you getting sold.”

So far, the first-quarter results are mixed to somewhat encouraging — but they’re definitely not a sign that retail can rest on its laurels.

Macy’s Inc., Walmart and Dillard’s all showed a little qualified oomph while Nordstrom Inc.’s 0.6 percent comparable-sales gain disappointed and J.C. Penney Co. Inc. blamed its tepid results on the weather. Kohl’s Corp., TJX Cos. Inc., Ralph Lauren Corp., Tiffany & Co. and L Brands Inc. will offer a fuller picture of retail performance when they weigh in with their results this week.

A Decade of Retail Betting on Retail
Shares Outstanding (in millions) Change since 2008
Dillard’s Inc. 27.6 -63.3%
Gap Inc. 389.3 -47.0%
Kohl’s Corp. 168.2 -45.5%
Macy’s Inc. 306.4 -27.3%
TJX Cos. Inc. 626.9 -26.3%
Walmart Inc. 2950 -25.3%
Nordstrom Inc. 167.8 -22.6%
Ralph Lauren Corp. 81.3 -20.1%
L Brands Inc. 278.8 -18.2%
Source: S&P Capital IQ

 

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