3 Retailers Buying Back their Own Shares
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Share repurchases are one of the most powerful ways to compound investor capital. Charlie Munger calls companies that buy back their stock the “cannibals,” one of his three favorite places to find the best long-term winners.
Some slower-growing retail chains are taking to repurchases to drive shareholder wealth. Here are three retailers that have repurchased more than 5% of their stock in the past year.
Autozone (NYSE: AZO)
Autozone is a multi-year multi-bagger of a stock that's rallying on the explosion in car repair over replacement. When automobile sales tumbled during the Great Recession, Autozone was poised for profits as Americans began keeping their cars on the road longer. The average American car is now more than 10 years old.
All those repairs have been excellent for Autozone's bottom line. Earnings per share rocketed from $10.14 in 2008 to $25.60 in the trailing 12 month period. Aggressive repurchases slashed the company's outstanding shares by 41.2% since 2008.
The company had $603 million of repurchase firepower remaining in its buyback authorization as of the last earnings call. The company funds its repurchases with excess cash flow and cheap debt financing. Some investors may be turned off by the company's negative book value, but impressive annual free cash flow generation in the range of $850-$970 million in the last three years protect investors from downside risks.
All in, Autozone is a highly-competitive retailer in a less than competitive space. With ROIC on its retail stores coming in above 20% per year over much of the last decade, Autozone has a clear competitive advantage it's using to drive excess returns for investors. Investors shouldn't worry about this company's aggressive repurchase schedule. Insiders frequently comment on shareholder value creation, noting that they do have an eye on price – if Autozone stock gets too pricey, management would instead turn to a dividend. Either way, investors win.
Macy's (NYSE: M)
Macy's is one of the few companies that has done just fine even as competing department stores like J.C. Penney are sucked into a long-term decline.
In 2009, the company cut thousands of jobs in a cost-cutting program that gave the company a lower cost base and freed up financial capital to deleverage the business model. In every year since 2009, the company has managed to produce more than $1 billion in annual free cash flow generation, while holding its gross margin above 40% of sales.
Macy's has $1.5 billion in repurchase authority remaining and the cash to make repurchases happen. $1.8 billion in cash on the balance sheet affords Macy's the ability to buy back stock without straining its financial condition. With equity market value of $18 billion, a repurchase at current price would slash share count by 8.3%, driving EPS gains going forward.
Bed Bath & Beyond (NASDAQ: BBBY)
This specialty retailer remains as one of my favorite proxies for a rising housing market. The company has a long track record of delivering high returns on invested capital, as its scale gives it a moat in home furnishings.
As of March 2, the company had $2.4 billion remaining in its share repurchase authorization, equal to 16% of total shares outstanding. A new repurchase authorization comes after a decade of share buybacks. Diluted shares outstanding fell from 305 million in 2004 to 228 million at the end of the most recent quarter.
What makes Bed Bath & Beyond's strategy so rewarding for investors is management's patience in growing the business. Whereas many retail chains use a booming business to justify more stores, more employees, and higher fixed costs, this company's management is focused on total returns to the shareholder. If repurchases offer better returns than risky new store openings, capital flows quickly and heavily to repurchases.
The extent of excellent capital allocation doesn't seem to be priced into the stock, however. The company trades at 12 times forward earnings estimates and roughly 20 times annual free cash flow. Organic growth from rising consumer spending and an improving housing market only stand to lever the company to the upside, especially as it retires shares as part of its freshly announced $2.5 billion program.
Why retail cannibals rock
Agency problems are the biggest issues with minor equity positions. Management often has incentives that run counter to shareholder interests. A new acquisition, growing store counts, or a combination of the two leads to a larger enterprise, which in turn is often used to justify a bigger salary.
Managers who are not afraid to pass up on growth opportunities to repurchase shares are managers worth running the companies in your portfolio. These three companies have a history of being excellent capital allocators for their shareholders, and shareholders have come to expect nothing less.
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Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!