Wednesday, March 15, 2006

Another Letter

Sears Holdings posted its quarterly letter to shareholders today. Make sure to review the discussion of which operating metrics truly matter (hint: it's not same-store-sales). One WEB reference was also made in regards to the efficiency of retiring shares:

During 2005 we announced the intention to repurchase $1 billion of our stock. To put this in context for retail companies, in the last few years Wal-Mart has repurchased over $13 billion of stock, Home Depot has repurchased over $7 billion, Target has repurchased over $2 billion, and JC Penney has repurchased over $4 billion. In addition, each of those companies has paid out significant dividends over the same period of time. We completed almost $600 million of our repurchase program as of the end of the fiscal year and expect to continue to repurchase shares as long as we feel that it is a good use of our capital and that market conditions make it attractive.

While most observers focus on repurchases as a way to return cash to shareholders or to offset the dilution from options, it has other consequences as well. For those shareholders who choose to sell some or all of their shares, repurchases provide liquidity. For those shareholders who choose to hold their shares, their ownership percentage in the company increases. Either decision can be a good or bad one depending on the price paid and the subsequent performance of the company. For example, a shareholder who owns one percent of a company and chooses not to sell as that company repurchases shares will see his ownership percentage increase. Should the price paid for the repurchase be too high or the performance of the company subsequently decline, that shareholder would have a greater participation on the downside than he would have had before. Conversely, if the price paid was reasonable and the company goes on to perform well, participation in the increase in value would be magnified.

Warren Buffett makes clear that his goal is to increase the per-share value of Berkshire Hathaway. Similarly, our goal is to increase the per-share value of Sears Holdings. At the present time, I believe that the most significant lever for creating per-share value is in improving the operations of our core business. To the extent that we also have fewer shares outstanding, the returns to shareholders can be further magnified so long as we pay a reasonable price for the shares repurchased.