GOBankingRates

Don’t Be Fooled: Retailers Could Be Boosting Stocks With Buybacks

Lokibaho / Getty Images

A bunch of retailers reported earnings this week, including big names like Walmart, Target, TJX Cos., Lowe’s, Macy’s, Williams-Sonoma and Ross Stores, and there has already been plenty of cheery news.

See: Target, Amazon and 4 More Retailers That Will Reward You for Turning In Your Old Stuff
Find: 21 Items That Are Always Cheaper at Costco

Among the chains that have breezed past quarterly earnings expectations include Walmart, Target, Lowe’s, Macy’s and TJX. Some even hiked their estimates for the current quarter. All have produced solid results despite supply-chain and labor problems, helped by an improving economy and pent-up consumer demand ahead of the holiday season after a long dry spell caused by the COVID-19 pandemic.

Sounds good, right?

For some retailers, yes. But for others? Maybe not so much.

Before putting your money into retail stocks bolstered by stellar financial returns, make sure there’s nothing going on behind the scenes — like retailers aggressively buying back their own stocks to boost their earnings and share prices.

That’s become quite a thing over the last decade, CNBC reported. Some of the country’s biggest retailers have drastically reduced their share count since 2011, a move that makes earnings look stronger because of fewer shares outstanding. Here’s a list of retailers and their share count reductions over the past 10 years, according to FactSet:

Building Wealth

Because of aggressive buybacks, some retailers have logged strong earnings growth even as sales have been stagnant. CNBC pointed to Kohl’s, which is expected to have similar sales this year as it did in 2016, but with much better earnings. Likewise, Dillard’s will have about the same sales this year as in 2018, but with much higher earnings.

This doesn’t have to be the result of buybacks, of course. Earnings can improve because of better operating efficiencies even as sales go sideways. But continual buybacks also help. Retailers such as Target, TJX and Kohl’s halted buybacks during the COVID-19 pandemic but have now resumed them. TJX in particular got a boost from buybacks when it reported this week. Walmart allotted $2.2 million third quarter for buybacks as part of a $20 billion buyback plan, which was announced earlier in the year.

Not everyone likes the strategy.

“I am not a big fan of buying back stock,” David Berman, portfolio manager at Durban Capital, told CNBC. “I would rather they increase their dividends.”

See: 11 Social Security Mistakes That Can Cost You a Fortune
Find: Inflation and the Consumer Price Index: How They Work and How They Affect You

At the same time, he’s bullish on the retail sector right now, saying that “there is plenty of money for the consumer, jobs are plentiful, and demand is strong. Retailers are more healthy because store count is down, so there is a more rational environment.”

More From GOBankingRates