It always feels good to see CEOs and other management-level employees buying up big swaths of stock in their own company. I also love to see that other big firms are investing in the businesses that I own -- it gives me a sense of ease to see that I'm not the only one. Conversely, it's frustrating to watch a CEO sell off a huge chunk of their holding when the stock price goes up a bit. So it's understandable that Michael Kors (NYSE: KORS ) is taking a little hit today after it filed a shelf offering last night.
A shelf offering is normally a notice that the company wants to issue some new shares, up to a certain number or value, and is then going to actually issue them over a period of time. So it may file to issue 200 shares over two years, and then issue 10 every month for 20 months. But it could also issue all of them at once, or in groups of 50, or none. It's really just a paperwork-saving system of issuance.
Kors' newest filing isn't for new shares, though; it's for shares that have been locked up with major holders since the company went public. The two major sellers are Michael Kors -- the person, not the company -- and Sportswear Holdings. Kors' stake is going to drop from 3.9% down to 2.4%, while Sportswear's will fall from 15.6% to 5.8%. As an extra little kick, CEO John Idol is going to sell off 2 million shares as well.
It's not hard to figure out why the sellers want to sell. Since the company's IPO at the end of 2011, the stock price has risen 160%. If Kors were to get today's share price for his 3 million shares, he'd bring home almost $190 million. That seems like a fair reward for the hard work he's put in, and I don't think anyone would begrudge him the pay, but it irks us to watch these big shareholders sell. Does it mean that he thinks the company has hit its high point? Is he worried about a takeover? What does he know that we don't that's enticing him to sell off? It could simply be that he wants to buy a plane or an island, a la Larry Ellison.
While it's certainly annoying, it's not the end of the world. Kors still has a strong product, and seems to be snatching market share from Coach (NYSE: COH ) and other high-end designers. Comparable sales were up 41% in the last quarter at Kors' American locations, while Coach had a 2% drop in its stores. That should give investors hope for the long haul, and does something to lessen the frustration of seeing insiders sell, but it's not a fix.
This is obviously not the first time insiders have sold off big chunks of a stock. Last June, Target (NYSE: TGT ) insiders sold off $13 million worth of shares in a two week period. That hasn't been an indicator that anything was wrong with the company, though. The stock has increased another 8% since the sell-off, and there aren't any signs pointing to a serious fall in Target's business -- January comparable sales were up 3% at the retailer.
If Target is on the good side of a scale, then Facebook might be on the not-good side. But even in that situation, where insiders sold around $775 million worth of shares since IPO, CEO Mark Zuckerberg has committed to holding on to all of his own shares until later this year. While that may just be a PR move, it shows how important it is for insiders to have a vested interest in a company's stock.
The bottom line
There are a few important details to remember about this move from Kors insiders. First, the selling hasn't happened yet, it's just been set up. While Sportswear will likely sell its 20 million shares, Kors and Idol may decide to hold out for a while longer. Second, insider selling doesn't necessarily indicate that something is wrong in the company, even in the Facebook example. With Kors we're talking about real honest-to-goodness insiders, but in Facebook's case, "insider" is a pretty broad term -- almost everyone in the company was being paid in stock at some point, and selling a bit may have made up for years of underpay.
But we shouldn't let Kors' management off the hook, and the market is reflecting that. The stock is down 3% in the middle of the day on the news. Investors need to be able to trust that the people involved in a company are optimistic about the company's actions, and selling off a meaningful percentage of the company's stock reflects pessimism. At the end of the day, this is bad news for investors.
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