Earlier this month, Liz Pratt took a look at department store retailer Saks
Unsurprisingly, Saks shares quickly jumped more than 3% in morning trading today on the news. (The company does not currently pay a regular dividend.) Longtime Saks stockholders are no doubt more than happy to collect. But management also deserves kudos for the straightforward manner in which it intends to deal with its excess cash.
A glance at some recent financials shows a company battling to maintain revenue levels but nevertheless finding ways to widen profit margins. That, plus strong financial management, has helped Saks generate consistently strong free cash flows. When the sale of its private-label credit card business is figured in, Saks' balance sheet is solid. It had some $366 million in cash on hand to close the fiscal year ended Jan. 31.
But the company isn't expanding rapidly, nor does it seem likely to make a massive acquisition anytime soon. A big buyback might help boost earnings per share -- mathematically, at least -- but with the company's shares more than doubling over the last 12 months, an investor might wonder if that's the best use for the money. (The industry as a whole continues to be a challenging environment, as recent news from Dillard Department Stores
And so Saks' management decided to do something so boring it just might work. It bought inventory, paid off debt, and is now preparing to give a goodly chunk of its leftover cash back to investors directly. It's a simple, shareholder-friendly move.
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Fool contributor Dave Marino-Nachison doesn't own any of the companies in this story. He can be reached via email.
