Retailer Not So Charming

In early June, Fool contributor Salim Haji took a look at some insider selling among women's apparel retailer Charming Shoppes (Nasdaq: CHRS) and, simply put, didn't like what he saw. It's easy to see why: Although we generally don't consider insider sales bad news -- everyone needs to make money, after all -- Salim pointed out that the sales represented large portions of their holdings and, even stranger, didn't seem predicated upon any substantial publicly available bad news about the company. (Quite the contrary, actually.)

"Think about following management's lead," he wrote at the time, "and quickly dumping those shares." Generally speaking, however, investors didn't take his advice -- until yesterday, that is. And yesterday was likely too late for many. The company said yesterday morning that total sales for the five weeks ended July 3 fell 1%; same-store sales for that period were off 2% year over year. That's in stark contrast to May sales and comps, which were much stronger.

The company is holding fast to its fiscal Q2 (ending July 31) EPS projection of between $0.21 and $0.23, which would be an improvement over last year's $0.18 (before a $0.03 per share charge related to a cost reduction plan) and 2002's $0.20. (It's worth pointing out that the company has actually decreased its store count in recent years. It's at 2,234 this year, down from 2,240 in 2003 and 2,334 in 2002; that'll surely impact net income, particularly with revenues and same-store sales coming under pressure.)

The main lesson investors should take from this news, however, is that Charming Shoppes' management needs to be watched closely. The company has a strong market position and has demonstrated operating leverage, generated good free cash flow, and boasted a strong balance sheet. There's a lot to like, but seeming "coincidences" such as the one Salim sniffed out should ruffle the feathers of management's co-owners.

Fool contributor Dave Marino-Nachison doesn't own shares of Charming Shoppes.