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When Stock Buybacks Go Horribly Wrong
When companies have a burning need to boost their stock price and/or have no organic growth opportunities requiring fresh investment, they do one thing: engage in stock buybacks (usually funded with recently issued bonds). We first warned about the dangers of such a "strategy" in 2012, and most recently, earlier today the WSJ once again noted that "U.S. Firms Spend More on Buybacks Than Factories."
The reality is that stock buybacks are great... as long as the stock price keeps rising. They are also great as long as the stock isn't so illiquid that once the sole buyer withdraws, be it the company itself or its CEO (in the case of Hanergy using corporate funds) the stock crashes.
The real problem emerges when after sinking hundreds of millions, or more, in stock buybacks, the stock no longer keeps rising.
This is precisely what happened to KORS stock. As Dominique Dassault points out, earlier today Michael Kors reported abysmal earnings which have lobbed a whopping 23% off the stock price and the market cap of KORS just today.
But it was not KORS' operational issues that were troubling: it is how much the company burned on stock buybacks. In KORS' earnings release we read:
During the quarter, the Company repurchased 1,409,682 shares of the Company’s ordinary shares for approximately $92.0 million in open market transactions
This means in the quarter ended March 31, KORS spent $92 million supporting its stock ahead of what it knew would be an earnings debacle. It also means that its average purchase price was $65.3/share in Q4, or 40% higher than KORS' last trade at $46.50.
But that's not all. Last quarter, after authorizing $1.5 billion for stock repurchases, KORS reported the following:
During the quarter, the Company repurchased 5,068,813 shares of the Company’s ordinary shares for approximately $399.9 million.
In other words, KORS' average price in Q3 was $78.9, a 70% premium to the current market price.
Combining the two quarters, we calculate that KORS spent $492 million to repurchase 6.5 million shares at an average price of $75.9, some $30 higher than current market levels, and a 63% premium!
Needless to say, any portfolio manager who had spent half a billion only to see his investment return -40% that same year, would have been fired long ago. But not KORS management team, the same management team which in Q3 made the following statement:
Joseph B. Parsons , Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer, stated, “We are pleased to have repurchased approximately 5.1 million shares this quarter. This action demonstrates the Board and management’s confidence in our ability to generate strong free cash flow and to achieve our long term growth objectives
Perversely he is somewhat accurate, but here is the full story: in Q3 the company generated $474 million in cash from operations, the most in years. Of this amount, it spent $125 million on CapEx and $400 million on buybacks.
That $400 million is now worth $236 million.
Perhaps that is why Mr. Parsons did not have any commentary about how "pleased" he was to announce a further $92 million in KORS buybacks : $92 million which at today's KORS stock price is worth $65 million today.
Said otherwise, of the $500 million KORS spent on buybacks in the past two quarters, it already has a paper loss of $200 million. Incidentally, KORS spent about $200 million on capex for all of fiscal 2014.
And that, in a nutshell, is what happens when stock buybacks go horribly wrong.
Expect to see just this outcome for increasingly more stocks who are only propped up thanks to billions and billions in repurchases by management, which does nothing but merely delay the inevitable day of reckoning when massively overvalued and artificially supported stocks finally meet gravity.
As for KORS, which should be repurchasing stock precisely on today's epic rout, it very well may do just that: as the company conveniently noted in the release:
The Company also announced today that the Board of Directors approved an amendment to its share repurchase program on May 20, 2015, at its regularly scheduled Board meeting, authorizing the repurchase of up to an additional $500 million of the Company’s ordinary shares and extending the program through May 2017. This increases the initial repurchase authorization previously announced in November 2014 to $1.5 billion, of which approximately $1.0 billion is available for future repurchases over the next two years.
KORS also noted: "Share repurchases may be made in open market or privately negotiated transactions, subject to market conditions, applicable legal requirements, trading restrictions under the Company’s insider trading policy, and other relevant factors. The program may be suspended or discontinued at any time."
A few more quarters in which the IRR on buybacks is -40% and something tells us the future of KORS buyback program may be in very serious jeopardy.
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When these companies crash and burn and have to lay off workers, I hope the workers show up at the executives' homes.
They better keep buying Moar or they are truly fucked
Horribly wrong? Are you serious? The goal is to prop the stock to further enrich the executives of the company. Done and done! This exercise went horribly right. Unless of course you care about shareholders or the longterm viability of the company. In that case, I guess you are right.
Peter Schiff talked about this months ago and it is an oddly obvious point which goes unnoticed and unmentioned - these companies almost universally are buying back stocks at breakneck paces at record highs, helping fuel further highs inflating a bubble, which can only reasonably end 1 way.
Trav style face meltings.
No different than the average retarded stock bull...
Unfortunately, thanks to a steady diet of TV, flouride, and diet colas, American workers aren't as exhuberant as their European counterparts when it comes to [literally] holding the boss' feet to the fire.
How's them AAPL buybacks doing since the iWatch is such a big suck-sess?
I still get a good laugh out of the articles talking about how the iwatch alone could and very well might cripple gold mine supply.
So instead of insiders trying to sell all shares before bad news, now it's stock buybacks.
Make that WAS stock buybacks.
While others are crashing and burning, companies that still can will probably still continue with the buybacks. This insanity doesn't end until the entire populace is forced to stare real collapse in the face.
Expensively Purchased Shares (EPS) does matter.
So they used the company to bail out the executives and friends. Same shit, different day.
It seems like more companies are embracing the NINJA, NODOC, ARM mortgage style of corporate finance made popular during the previous real-estate crash...
Abysmal earnings cannot be the reason the stock is down. There must be something else going on? CEO retiring?
when you are the only buyer of your own stock....go figure...pay high prices....and lose it all
i have no problem with that. the company has cash and zero debt. however, the temption trade/transact on insider info in this name must be enormous.
There is another problem with that company.
They have a know brand name, but not for good design nor for quality. They should have spent the money on designers. But they have choosen not to.
At the end the one last stock left will be worth 0.
"When Stock Buybacks Attack!", season premire on History.
Just watch. The company will now borrow money to fund insider share buybacks prior to the release of more bad news. They will then use the proceeds to buy their own recently-sold shares back at a discount and pocket a hefty premium. Perfect racket.
KORS' strategy is apparently no different than my precious metals buying experience.
I got a Kors leather bag for a gift and the thing disintegrated in a couple months being used for the office. Total junk. Sorry Mikey.
I had some Chinese-made immitation Rolex watches that lasted much longer than that. They also kept good time as mechanical watches. They cost me about $30 each in Taiwan, and the average schmuck on the street could not tell the difference between them and a real Rolex. One good thing about buying those cheap watches is that when the do crap out after a few years, you can just toss 'em in the can and get another one.
So what? They got their bonuses didn't they? Any talk of clawbacks? There you go.
"This means in the quarter ended March 31, KORS spent $92 million supporting its stock ahead of what it knew would be an earnings debacle."
Why not let all publicly-traded companies simply double-seasonally adjust their EPS data before reporting it. Why not? Makes about as much fvcking sense as anything else does these days.
FUBAR.
How many of these companies will even be around a decade from now?
Maybe all this stock buy-back stuff is a way of clearing out the dead wood. Companies that can't compete just pump all their money into their own stocks until the stocks go to zero and the company gets liquidated.
Good. We have too many damned companies anyway. What we need are REAL businesses with REAL products and business models based on actually SELLING those products to the public.
Let the stock buyback purge continue...soak up all that orphan capital. A lot of phony "value" has to be obliterated before we can get back to normal business.
This is expediting the process of destroying the retirement savings of the average American who has their 401ks and IRAs in publicly traded companies. The banks and oligarchs win either way, because they get the another company to liquidate and sell to their friends for pennies on the dollar. The biggest loser here is the retail investor who still has their retirement in mutual funds. I can't get mad at a dog for barking, just as I can't get mad at a sheep for getting fleeced. Their bleeting hurts my ears though.
So knock gold price down to buy ???? Yet raise the stock price to buy ???? Ok. Got it.
It's all good, they are just dollar cost averaging.
Big buys at $1.37 /share will average out for a win.
I'm not very good at count-y kind of stuff though.
Why would companies such as Apple need a factory when they make all of their money on labor arbitrage. Same with Google, Microsoft and all of those useless companies that don't actually make anything.
The US and other western countries are just fat cash cows to be milked by Apple.
Moooo fellow heifers ...
They should do an offering to definitely screw the investors.
So who will be left holding the bag...
had to say it
According to his lifestyle choices, it sounds like he holds the bag daily.
Lowes(LOW) is going to be a single digit stock within two years. They are the kings of buybacks!!!
It's called 'debt destruction' and it's a perfect example of what happens during the early period of a deflationary depression. KORS is not the first to suffer the reality of bubble implosion, nor will it be the last...
http://www.globaldeflationnews.com/inflation-vs-deflation-part-4is-the-u...
Do the losses qualify for a capital loss at tax time?
Crash and burn you tribal fag.
How many "private transactions" were buying out exec options at absurd prices. Didnt we used to call this a pump and dump. Silly me.
Talk about massive destruction of capital! So KORS management determines that there is no possible way of earning a higher return than buying their own stock -- they can't produce a product that will generate more value -- that's all I need to know about the medium/long-term attractiveness of the company. Their core value-creation mechanism has expired, and so will the company.
The shareholders will probably sue them...for not buying enough stock to prop up the price.
LMFAO!!!! MOAR BYEBAX!!!!
How's that $200M cap loss KORS? You fucking dickheads!!!! Have fun with that debt!!!!
FUCK YOU MICHAEL KORS!!! BASTARD!!!!!!!!
Dumbass businesses doing dumbass things equals dumbass results. Not much of an IQ required to successfully implement this strategy. Just look at the idiot USSA companies doing this....