Walmart, Target, Home Depot & Co. are buying back shares – does the improvement in balance sheets deceive?

After the retail sector suffered massively from the corona pandemic last year, the industry has now recovered somewhat and the balance sheets of retailers have also improved significantly – but is this positive development deceptive?

• Retail is gradually recovering from the corona pandemic
• Retailers have bought back massive stocks over the past few years
• Share buybacks make profits look stronger, while sales growth is modest

Last year, the retail trade was massively burdened by the measures to counter the spread of the corona pandemic. In many places there were lockdowns and shops had to close, people stayed at home. In the meantime, however, the industry is recovering somewhat and so David Berman is confident about CNBC: “I’ve been optimistic for over a year,” explains the portfolio manager of Durban Capital. “There is a lot of money for the consumer, there are a lot of jobs and there is a lot of demand. Retailers are healthier because the number of stores is decreasing, which creates a more rational environment.” He also regards the supply chain problems as uncritical. “Retailers have pricing power and are able to pass on the higher labor and raw material costs, so gross margins should stay strong, just like they did with Home Depot,” said Berman. Nevertheless, there is also bad news.

Retailers are massively buying back stocks

For some retailers, much of the rising profits over the past decade can be attributed to aggressively buying back stocks. According to Factset data, Dillard’s has reduced the number of its shares by 64 percent since 2011, Kohl’s by 51 percent, Gap by 38 percent, Home Depot by 35 percent, Target by 31 percent, Ross Stores by 25 percent, TJX by 24 percent and Walmart down 22 percent.

This reduction in the number of stocks, according to CNBC, has resulted in retail profits looking stronger over the years because fewer stocks circulate, while sales growth is often modest or nonexistent. For example, Kohl’s will have the same turnover as in 2016, while the result is much stronger and Dillard’s will have the same turnover in 2021 as in 2018, while the result will also be significantly higher here. This is made possible partly through more efficient work that allows more profits to flow into the bottom line, but partly also through regular share buybacks.

Although the corona pandemic temporarily interrupted the share buybacks of many retailers, such as Target Kohl’s and TJX, these have now been resumed. TJX bought back shares worth 300 million US dollars in the second quarter. Kohl’s even bought back shares every quarter of the year from the first quarter of 2010 to the first quarter of 2020. The company then suspended its share buybacks for the remainder of 2020, only to resume them in the first quarter of 2021, according to CNBC, Ben Silverman, director of research at InsiderScore.

Share buyback makes sense?

Joe Feldman, senior managing director of Telsey Group, told CNBC that the retailers are giving shareholders what they want with the buybacks: “The investment community likes to see buybacks because it makes their stocks more valuable,” Feldman said. “It makes trends better than they otherwise would be.” David Berman told CNBC that he was “not a huge fan of share buybacks” despite being confident in the retail sector. He would prefer companies to raise their dividends. Joe Feldman, meanwhile, dismissed the notion that retailers ignore investing in their own business in favor of share buybacks. “The better quality companies invest heavily in digital infrastructure and in the supply chain,” CNBC Feldman said. “Walmart is spending $ 13 billion in investment this year.” According to Feldman, nothing more could be done. “These companies are making so much money that buybacks are a way of giving back to shareholders.”

Black Friday im Fokus

Given the full wallets of consumers and the tight stocks, consumers should, as CNBC reports, not have too high hopes for huge discounts for the upcoming Black Friday. “There may be some moderate sales, but you won’t see massive sales like a few years ago,” Feldman said. This is good news for retailers, but consumers will have to get used to higher prices. “There are many full-price sales to make up for the higher cost,” CNBC Feldman quoted as saying. “You still want some incentive to get people into stores, but right now it’s mostly full price.”

In the near future, according to CNBC, the eyes are likely to turn to an update on stock levels, as the combination of high demand and lack of supply is of course a scenario that retailers want to avoid over the holidays as much as possible. However, aside from concerns about waning consumer incentives, which could be heavily invested in the first quarter, the biggest problem was rising prices, which put profit margins at risk. editors

Image source: Jonathan Weiss /, Ken Wolter /, Niloo /

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