Buy low and sell high - it's the mantra of investors everywhere. So when news came out Jul. 11, 2012 that Abercrombie & Fitch (NYSE:ANF) was going to announce a big-time share repurchase program on August 15 when releasing its second quarter earnings, its stock jumped 5%. Investors seem to like the move. However, most companies fail to execute share repurchases properly so it will be interesting to see if it can follow through and buy at these low prices. Is it a good or bad move? Here are the pros and cons.
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Investors are unhappy for several reasons; the biggest being the cash Abercrombie is bleeding to move into Europe. It opened its first London store in March 2007, and by July of that year was announcing further plans for the United Kingdom, Italy, France, Germany, Spain, Denmark and Sweden. Influenced by sales per store numbers that were three times those in the United States when it opened its first five Canadian stores in 2006, Abercrombie figured Europe was ready for the taking. Then the European economy went into the tank along with everyone else's and expansion of any kind began to come into question, especially after the Euro crisis. There are currently 75 stores scattered across 10 European countries. That's not even four times the number of stores in Canada (19), yet the European population is approximately 20 times that of America's neighbor to the North. Taking the foot off the expansion pedal, despite a poor showing in recent quarters and redeploying cash for share repurchases could hurt the long-term potential overseas.
Up until the 5% pop, Abercrombie's stock traded at a two-year low. Historically, it's repurchased 17.7 million shares at an average of $47.26. In the past two fiscal years it's paid an average of $53.18 a share for $272.8 million. If you're a proponent of share repurchases - I'm not - buying at today's prices would provide shareholders with a significant boost. However, analyst Brian Sozzi believes Abercrombie will make a significant downward earnings revision sometime in the next two to three quarters that will knock the stock down even further. If management can keep its powder dry until later in the year, it could find itself buying back shares at less than $30, but that's a big "if."
The Bottom Line
The retailers that win in the coming decade will be those leading the charge internationally. With Europe hurting, American retailers will be able to negotiate better lease arrangements than if the economy was doing well. This will pay dividends long-term. The Jones Group (NYSE:JNY), Gap (NYSE:GPS) and True Religion (Nasdaq:TRLG) are just three examples of American retailers expanding in Europe with many more to follow. To put the brakes on European expansion at this point makes absolutely no sense. With less than $60 million in long-term debt, I would continue as planned in Europe while also repurchasing shares under $35 using cash from operations. Should shares drop below $30, I would add to the debt in order to repurchase as many as possible. Even with a significant earnings warning, it has the financial stability to stay the course until economies improve.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.