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Investing Strategies / It's Earnings That Count


Subject:  Re: Question for Hewitt about WACC Date:  2/25/2008  11:13 AM
Author:  valuemoosie Number:  1438 of 1817

Select Comfort, however, is an example of a company that levered up... put the proceeds into share repurchases between $15-20, and then the wheels fell off. Their balance sheet has deteriorated considerably, and they'd be in a much stronger position to weather their current trouble if they'd just stayed debt free.

Ah, this is the crux of the matter - taking on debt wasn't in and of itself a bad move. It's what they used the debt proceeds for that was dumb. It was the spending, not the borrowing, that ruined their balance sheet. Granted, with SCSS you may say that if they weren't going to repurchase, then why borrow. Sure, but assuming a smarter management, with identifiable value-add opportunities, they could have perhaps put the debt to good use, thereby returning more value to shareholders by using cheaper capital.

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