Footwear Firms Put Money to Work

NEW YORK — Money never sleeps.

Footwear firms such as Genesco Inc., Timberland Co. and Steven Madden Inc. have bought back their own companies’ shares recently, in a bid to reduce burgeoning cash stockpiles and increase returns to shareholders.

According to Jeff Van Sinderen, analyst at B. Riley & Co., these companies have the enviable problem of excess liquidity, caused most often when firms are generating cash but there are few attractive acquisitions to be made — a situation that exists right now.

“Companies holding a lot of cash need to figure out what to do with it. Having it sit on the balance sheet, collecting 1 percent from the bank, is not the best return on capital,” said Van Sinderen.

When Steven Madden, for instance, bought back about $5 million of its shares in the second quarter, leaving it with about $45 million in its authorization, it admitted its first priority was still to make strategic acquisitions.

“We think [more things like Betsey Johnson and Big Buddha] are our best use of cash … and are going to provide us with really outsized returns on our investment, but absent that, we’ll certainly continue to look at share repurchases,” said the company’s CEO, Edward Rosenfeld.

Cindy Knoebel, VP of financial and corporate communications at VF Corp., also said the firm saw “a few opportunities we considered seriously in the last several months, but we felt the valuations were too high.”

VF ended up repurchasing 4.1 million of its own shares in the first nine months of 2010, at a cost totaling $322.2 million, and has 7.6 million shares left that may be purchased under the board’s authorization. It made no buybacks over the same period in 2009.

Analysts said that if profits cannot be plowed back in a way that produces acceptable returns, repurchasing shares is an efficient way to return cash to shareholders and works better than issuing one-time dividends.

It works by reducing a company’s share count such that if profits remain the same, the earnings per share increase.

This is especially true when carried out at a time when a company’s stock is perceived as undervalued or depressed, as repurchases typically lead to a strong return on investment.

Although the majority of footwear companies have seen their share prices rise in the past three months, several of them believe their stocks are still undervalued.

During the second quarter, Polo Ralph Lauren Corp. repurchased roughly 1.2 million shares totaling $100 million, while its stock fell 16 percent between April 1 and June 30. The firm still has about $469 million remaining under its buyback program.

The third quarter saw more companies employ their cash in the same way. Timberland repurchased about 1.7 million shares for $30 million, Nordstrom Inc. bought back around 900,000 shares for $31 million, while Collective Brands Inc. reclaimed 3 percent of its common stock, for $28 million, and plans to buy back $23 million more in the fourth quarter.

Michael Koppel, EVP and CFO of Nordstrom Inc., said in a conference call with analysts that the company was holding larger cash balances than it had historically, owing to lingering economic uncertainty and a desire to maintain a certain amount of flexibility in managing the business.

He added that buying back shares was in line with trying to “achieve the right balance of investing profitably in the business and returning value to shareholders.”

Then there are companies that have been making consistent buybacks throughout the year, such as Hibbett Sports Inc., which has repurchased 1.2 million shares for a total of $30.1 million year-to-date.

Foot Locker Inc. has used $35.9 million of its $250 million share-repurchase program year-to-date to snap up 2.5 million shares of its common stock, as well as paying quarterly dividends to shareholders totaling $70 million.

While stock buybacks are generally indicative of a healthy balance sheet, it’s worth watching the size of the repurchase because it indicates how the company views its underlying business, said analysts.

“If you’re buying back 10 percent of the company, that’s huge. That percentage should move the needle [in the markets],” said Morningstar Inc. analyst Paul Swinand.

“On the one hand, there is value to shareholders. If you buy back, say, half the company, the EPS should double. But on the other hand, remember that companies that don’t have growth prospects don’t invest in growth, so [a repurchase of too large a size] is not always a good sign,” he added.

Genesco last month approved a $35 million stock buyback program, representing roughly 4.5 percent of the company’s market capitalization, after 69 percent of its previous plan of the same size was used up.

Shoe Carnival Inc. is another footwear firm that approved a share repurchase program for up to $25 million of its outstanding common stock, or nearly 8 percent of its current market capitalization, in late August.

But whether it’s for $10 million or $1 billion, analysts agreed that healthy repurchasing activity indicates that companies feel better about the macro economy.

“Two years ago, when everyone was super-fearful, you didn’t see as many buybacks [because] a lot of companies were holding their cash for an eventuality,” said Van Sinderen. “So most of the ones who are doing buybacks now weren’t doing it two years ago.”

Susquehanna Financial analyst Christopher Svezia noted that companies that buy back their own shares believe in their long-term strategy, which encourages investors.

“In some instances it’s not going to happen in the next month or two, but over a period of time. It tells you they’re planning not just for next year but for the next five or six years, because if they buy stock now, they think it’ll be even higher then,” he said. “If you’re repurchasing shares, you’re putting your money where your mouth is and coming along for the ride.”

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