Gap’s Stock Buybacks Look a Little Too Much Like Repurchases at Sears
The Gap (GPS) has been buying up its own shares lately in order to mollify investors while it closes or fixes its underperforming stores. Shareholders, however, might be happier if that money was spent on something else. Just ask anyone stuck with shares of Sears Holdings (SHLD) at the moment.
Sears shares have been tanking this week after the company reported that same-store sales were way down at both Sears and Kmart in the pre-Christmas season, a time that brought gains to competitors.
The announcement included news that Sears would close about 120 stores to generate much needed cash. Part of the reason it needs cash is that the company has spent a lot of it buying back its own shares over the years, even as cash flow turned negative.
Few investors complained about those share repurchases as they occurred. But with the shares down 57% in less than two months, suddenly there are lots of suggestions about how Sears should have spent its cash when it had it – mainly on the kind of constant remodeling and updating projects most retailers deem necessary for success. It’s been clear for five years that Sears needed to do something different to keep customers coming through the door.
Gap’s issues are not of the same magnitude of Sears’. But it does face some Sears-like challenges. The company has struggled to keep U.S. customers since the kids started shopping at American Eagle (AEO) and Abercrombie and Fitch (ANF) a decade ago. It hasn’t been able to recapture a Gap-specific style like the one that put a generation into its khakis and oxfords in the 1990s. After so many years of trying, investors are skeptical that management can ever find a niche as great as the one it once held.
In October, Gap announced plans to close 21% of all of its stores to focus on growth overseas. And in November, Gap announced it would add $500 million to its stock repurchase plan. The company had already spent $2 billion on its own shares in 2011 alone.
Is this money well-spent? While it’s impossible to peg the exact the impact of stock repurchases, Gap’s spending surely made the company ratios look better to investors. The improved return on equity figure may have spurred some buying in the shares that bolstered the price, at least temporarily.
But as the disaster of Sears so inelegantly points out, stock buybacks can’t save shareholders when the core business doesn’t perform. Long-term investors aren’t likely to get a lot of joy from their Gap shares unless the company can find a way to get shoppers interested in their stores again. Two billion-plus dollars would have gone a long way toward a successful search.