Stock Buybacks, Not Consumer Spending, Drive Earnings for Some Retailers
Supply-chain issues, rising inflation, and higher labor costs have not hurt retailers’ ability to post strong earnings per share this year. But some companies have stock buybacks, not consumers, to thank for their earnings growth.
Over the last decade, a laundry list of retailers including Dillard’s (DDS), Kohl’s (KSS), Home Depot (HD), and Gap (GPS) bought back shares, reducing their shares outstanding. Doing this can make a company’s earnings appear stronger. For example, sales at Kohl’s have been about the same as they were in 2016, but earnings have grown because of stock buybacks. The same goes for Dillard’s: the company’s earnings have been surging even though revenue is the same as it was in 2018. Cost-cutting is one contributing factor, but stock buybacks have also played a big role.
Share Repurchases Are Back
Retailers put share repurchase programs on hold during the pandemic, but have recently started to buy shares again. Kohl’s resumed its share buyback program in the first quarter of this year. From 2010 through the early part of 2020, Kohl’s bought shares every quarter. Meanwhile, TJX (TJX), bought back $300 million in shares during the second quarter.
Investors seem to be applauding these stock buybacks, sending retailers’ stocks soaring this year. However, critics argue that retailers would be better off spending money on improving their online business and bulking up their supply chains.
Concerns Linger Over Rising Prices
In addition to stock buybacks, retailers have rising prices to thank for their growing earnings. With the cost for materials, freight, and labor rising, retailers have been passing along the extra expenses to consumers. These price hikes are more than offsetting the increased expenses. So far, consumers seem to be taking the price increases in stride. Retail sales in October gained 1.7%, surpassing economists’ expectations.
Still, it is not clear how long high inflation will last and how long consumers will be willing to pay higher prices. If consumers pull back spending, this could be a blow for earnings that even stock buybacks can’t fix.
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