In response to management announcing a sweeping set of financial maneuvers, shares of Guess? (NYSE:GES) rose 10% as of 3:05 p.m. EDT on Tuesday.
Here's an overview of the key announcements.
- Guess? has initiated an accelerated share-repurchase program of $150 million or more. An additional $50 million worth of shares will be repurchased in open-market and/or privately negotiated transactions.
- To fund the stock-buyback program, Guess? is offering a $250 million convertible senior note due in 2024. This number could also grow by an additional $37.5 million if an option is exercised.
- Management has decided to cut its quarterly dividend in half to $0.1125 per share.
- The company will also enter into a bond hedge and warrant transaction that is designed to limit the potential dilution from the offering.
- The deal is expected to be eventually settled in cash.
Traders are applauding management's capital-allocation decision.
There is an argument to be made that Guess?'s stock is cheap right now. Shares are currently trading for around 13 times next year's earnings estimates, which is a sizable discount to the S&P 500 in general. If the company can successfully execute against its turnaround plan, it is possible that this maneuver will create shareholder value in the future.
However, I'm not a big fan of borrowing money to buy back stock under any circumstances, even if the numbers do seem to make sense. For that reason, my plan remains to root for this company's success from a distance.