It would be difficult to find circumstances more appropriate for a share repurchase than those facing Lewis Stores over the past four months: little or no debt, growing cash balances, a subdued trading environment and, most significantly, a share price trading at almost half of the company’s net asset value.

Even critics of repurchases acknowledge that spending R95m to buy back its own shares is probably the best thing Lewis could do to enhance shareholder value. It’s the company’s first repurchase since 2007.

So why did its share price slump after the announcement it had fully used its repurchase authority in the four months to end-September? On Monday, Lewis stock dropped a hefty 8% to reach a 10-year low of R27.20.

Retail analyst Syd Vianello reckons the market might have been disappointed to learn this buying support is on hold.

But that is only until the imminent AGM. On October 17 shareholders will get the opportunity to give the board authority to recharge its purchasing capacity. This time shareholders are being asked to approve the repurchase of up to 5% of the shares in issue, up from the 3% limit approved at the 2016 AGM.

Vianello says Lewis, which he describes as being financially conservative, had a number of options: "It could hold onto the cash, pay a special dividend, make an acquisition or repurchase shares."

Holding onto the cash was nonsensical, given the very low gearing and the limited demand to fund growth as a result of the sluggish economy. Paying a special dividend was not appropriate, given the risk that it couldn’t be repeated. And an acquisition was unlikely, given the current economic conditions.

"A repurchase at half of net asset value benefits all the remaining shareholders and hardly makes a dent on the company’s equity base," says Vianello.

David Woollam, a minority shareholder and long-term critic of the company’s management, says he doesn’t normally like share-repurchase programmes. "But in these circumstances it is the most sensible thing for Lewis to do."

crottya@bdfm.co.za

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