United Arrows' Xmas Present to Investors

United Arrows (TSE Code 7606) is a well-run, rapidly growing, Tokyo-based clothing specialty retailer thought highly of by investors, analysts and customers alike. By way of full disclosure, I am not conflicted by having a long or short position one way or the other. With that out of the way, I would bring to your attention that their Board has done something quite unusual, and it might even be said, magnanimous for their more performance-conscious shareholders: they have announced a more-than 1.5 million share buy-back (almost 7% of share outstanding) to be completed between today and December 27th.

My first thought was "Hallelujah & Merry Xmas!". My second thought once the emotion had subsided was: "How Generous!" and what a coincidence of timing to announce the fixed-period repurchase of 6.3% of your stock at the most illiquid time of year. Then I noticed the caveat: they'll only buy shares at YEN 5208, and not a YEN more. Which is fine except that momentum and growth investors have pushed the stock towards the more lofty level of YEN 7000. Bah Humbug!!

But what does this really mean? Yes, the company has put a 25% stop-loss under the current share price. Is is it simply public relations? Or are they trying to buy it on the cheap by suckering in a large and unwitting shareholder into selling at a discount? Is it a statement about the current value of the company? Is it a statement about the Owner's / Manager's / Board of Director's (yes they happen to be one and the same) view of prevailing fair valuation? It would indeed be novel for them (as owners of stores selling clothes fit for an emperor) to come out and say that "the emperor has no clothes" so to speak, or in this case that he is "over-dressed". After all, the stock is trading at quite lofty multiples (36x FY06 and 31x FY07 consensus EPS) for a company with forecast growth of 15%. It must be considered, however, that the Board are simply sophisticated and experienced stock market operators, and that YEN 5,208 is simply the result of hard, cold and objective analysis. It may be the modeled liquidity discount that a small-float, highly accumulated and probably-over-valued momentum stock would command in the open-market if such a cmparably-sized shareholding were to be sold in the open market and predatory traders were able to sniff it out. Nothing pejorative intended, nor insulting towards the foreign growth aficionados who see diamonds where others see quartz.

Perhaps I'll put in a call to the founder/owner/manager Shigematsu-San and ask for the real skinny....