Question: What do you do when you have to announce quarterly earnings and the numbers don't look so good? Yesterday, American Greetings (NYSE:AM) fell back on the tried-and-true strategy of announcing a bunch of initiatives on how the future will be much better. It seems to have worked quite nicely, as by midday the stock was trading up 4%.

First, the earnings
Sales for the fourth quarter were down 6.8% to $473 million, but topped analyst estimates of $469 million. Earnings from continuing operations were negative $7.7 million, compared to positive $51.1 million in the prior-year quarter. Earnings this year were snipped $16 million from a charge relating to the sale of the company's candle unit. The company blamed a Feb. 13 winter storm for blunting Valentine's Day sales, an important part of fourth-quarter business.

Next, the noise
American Greetings announced several initiatives to improve its long-term return on capital, which included:

  • A $100 million share repurchase program, in addition to the existing program under which the company purchased 3 million shares during the fourth quarter.
  • An increase in the dividend of 25%. That's a huge dividend increase.
  • The closure of 60 of its retail stores, which resulted in a discontinued operations charge of $6.5 million. The company now operates 436 retail stores, down 30% from 632 stores three years ago.
  • Fiscal 2008 EPS guidance between $1.35-$1.55, well above analyst estimates of $1.25-$1.40.

This news follows announcements in March of the completion of a sale of the company's Learning Horizons business, and a partnership with Ellen DeGeneres to launch a new line of signature greeting cards.

Still a cash cow
Despite negative sales growth and disappointing earnings, the company was on target with 2006 free cash flow that exceeded $225 million. That's nearly $4 per share on the average 58 million shares outstanding for the year. Let's face it -- American Greetings, even without top-line growth, is in a business that generates a lot of cash selling greeting cards to retailers Wal-Mart (NYSE:WMT), Target (NYSE:TGT), Walgreen (NYSE:WAG), and the like.

Does growth matter?
I'm pleased to see American Greetings pulling back on failed growth initiatives and focusing on its core business and enhancing cash flow. The stock sports a trailing-12-month P/E of 17, but that's really meaningless. This company is valued on cash flow per share, and the long-term story is market cap of $1.5 billion and debt of $224 million.

Why invest in growth initiatives that may not work? Stick with making top-quality greeting cards and rake in the money, which is what the board has apparently concluded is the right way to go.

Let's say American Greetings can sustain free cash flow of $225 million per year (as it has the past two years). By my calculations, those greenbacks could pay down the debt and buy back all the outstanding shares in eight to nine years, while continuing to fund a tasty dividend along the way.

Would you mind being the only remaining shareholder in the year 2016? Sounds like a sweet deal to me.

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Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles, and owns shares of Wal-Mart, but none of the other companies mentioned in this article. The Fool has a disclosure policy.