JDA to Buy Back Shares as Retailers Hope for an Uptick in 2009

Published: March 16, 2009

by Alex Woodie

JDA Software Group, like most enterprise software vendors, is feeling the pain of the global economic recession. As corporate executives put the clamp down on big new software projects with multi-year time horizons, vendors like JDA have been forced to scramble to find ways to create shorter-term value for customers. One surefire way of giving value to shareholders is to buy back its stock, which JDA last week announced it will start doing.

JDA has seen its share of bad news over the last year. For starters, its stock has been hit hard by the bear market, losing more than 50 percent of its value from June 2008, when it was trading at nearly $21 per share, to the beginning of this month, when it was trading for a little over $9. For a company that brought in a record $390 million in revenues last year, the loss of $350 million or so in market capitalization represents a painful fall back to almost exactly book value--or square one for a forward-looking technology firm like JDA.

After the economy and markets imploded last October, JDA decided to call off its planned $346 million acquisition of i2 Technologies, which would have strengthened JDA's supply chain business and made it more competitive around the world against rivals like Manhattan Associates, Oracle (Retek), and SAP (which, by the way, have price-to-book ratios of 2.04, 3.46, and 4.31, respectively, indicating the relative strength the market has ascribed to them).

JDA, whose specialty remains software used by retail store chains (with some supply chain expertise for process manufacturing thanks to the 2006 acquisition of Manugistics), also lost two big-name retail customers over the last few months: Circuit City and Mervyn's, both of which declared bankruptcy and shut down operations. Both Circuit City and Mervyn's were also sizable AS/400 shops, and had been featured in JDA marketing materials over the years.

While things likely will get worse before they get better, JDA CEO Hamish Brewer and CFO Kristen Magnuson didn't have the luxury of waiting for the economy to improve; they felt the need to make the JDA's stock more attractive to investors in the short term. To that end, the company announced a one-year plan to buy back up to $30 million worth of stock on the open market.

JDA's strategy to expand shareholder value through acquisition has been consistently executed over the past 10 years," Brewer said in a statement accompanying the announcement. "However, at the current stock price, we believe that the best use of the proceeds from our record sales and profits is to buy our own stock."

The news paid off immediately for JDA, as its stock (which is traded on the NASDAQ and which does not pay dividends to shareholders), jumped more than 15 percent following the announcement, to trade at about $11. The increase also coincided with the best week on Wall Street this year. As JDA gobbles up as much of its 31.5 million publicly traded shares as it can, it will effectively increase its earnings per share number, making it more attractive to investors (even if it doesn't pay a dividend).

JDA is highly unlikely this year to top the record-setting revenues and profits of 2008, but it's not all doom-and-gloom for the Scottsdale, Arizona, company, or the retail IT sector as a whole. IBM and Aldata Solution last week released a survey that found retail executives are perhaps more bullish than their counterparts in other industries.

About a quarter of the executives surveyed said they expect IT budgets to increase in 2010 (as a percentage of sales), while half said they expect their IT budgets to stay about the same. But little of that uptick will go to big, expensive implementations of new ERP and merchandise management systems. Instead, most of the increase will come from projects already underway, and iterative enhancements to existing systems.

"There is little appetite to rip and replace entire systems, but a real focus on putting in solutions in specific areas, such as automatic replenishment, where the gains can be felt in months, rather than years," says Allan Davies, CMO for Aldata. "It is quite clear that CIOs are not losing their nerve, and that retailers continue to see IT investment not as a luxury, but as a means of reducing cost and improving business performance."

Mutual fund company Oppenheimer also reiterated its "outperform" rating for JDA, and its average rating by analysts is currently a "buy," up from "hold" last month.

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