Insider Selling at Michael Kors Hurts Investors

Remember that fall that your son's school football team made it to the state championship game? They worked so hard every day, practicing and running, with you sitting there on the sidelines cheering them on. Then they needed cash to get to the big game and you ponied up a few grand. They were so happy, they put your name on the jerseys.

Then the day came. Tickets to the sold-out game were going for $250 -- this was going to be great! But you never found out, because $250 in your pocket was too hard to resist, so you sold your ticket and drank at the bar instead.

If that rings a bell, you might be the eponymous founder of Michael Kors (NYSE: KORS  ) . The man whose name graces the arms of celebrities and the gowns of first ladies has announced that his share of the company is going to fall even further because he could really do with another $185 million right now. After the transaction, he's down to a mere 2.4% of the company -- the company named after him. That's down from a holding high of 11% before the company IPO in 2011. Investors aren't happy, and there are good reasons not to be. What does Kors' move say about the long-term prospects of his brand?

M.
I had to round up, but the letter M is a percentage representation of how much of the Michael Kors brand Kors owns after the sale. He owns the M in "Michael Kors." I wrote about this a few weeks ago, right after the announcement, but I want to go back and look at the impact that Kors' selling has had on the stock. Since the filing after close on Feb. 19, the company's stock has fallen 10%. That's about $1.3 billion in market cap lopped right off the top. And that's a loss that goes right to shareholders, and which Michael Kors is largely responsible for.

The problem is perception. It's entirely possible that nothing bad is happening. Google (NASDAQ: GOOGL  ) founders Larry Page and Sergey Brin started dropping a whole bunch of shares back in 2010, but the company remained steady. Here's an important difference, though -- the sell-off left the duo with 48% of the voting rights. That means they were still heavily invested in the company, which displayed a strength of conviction in the brand to other shareholders. Kors' move isn't the same thing, because he's down to such a small part of the company that he founded.

The precedent
The other things that have to be running through shareholders' minds are the countless times it didn't work out. In the news this week is the case of Mark Cuban, owner of the Dallas Mavericks NBA team who's being accused of dumping shares in an Internet search company as it went under. He saved his own skin and let the rest of the world burn. There's also the classic Martha Stewart sale of a drug company. She managed to save herself about $45,000.

While big sales from insiders don't mean that something's amiss, it's hard to imagine that they mean everything is awesome. In his defense, a lot of insiders have been selling recently. Larry Page sold off another $65 million, and Rupert Murdoch unloaded $40 million of his shares in News Corp.  (NASDAQ: FOXA  ) , according to Bloomberg. Maybe we're just in that time of year when people need a bit of extra cash for a few houses or for their charities.

The bottom line
Compounding the frustration is big sales by other insiders. CEO John Idol has been getting out of the game as well. He's sold $400 million worth of stock since the IPO. That doesn't reek of faith in the long-term success of the company.

I think it's right that investors are worried and more than a little upset. Kors' sale has probably cost them money. and it makes everyone fearful of what's coming around the bend. If there's one person who knows what's next, it's the man the company is named for. If he's concerned enough to sell, why shouldn't we all be selling?

A closer look
Insider selling aside, Michael Kors is one of today's hottest high-end fashion brands, and that's translated into one of the best-performing stocks in retail -- since its debut on the market in late 2011, the share price has more than doubled. But with all that growth, has the stock finally become too expensive, or is there still room left to run? The Motley Fool's new premium report on Michael Kors gives investors all the information they need to make the right decision. We cover the key must-watch areas, opportunities, and threats to the company that investors need to know. To claim your copy, simply click here now for instant access.


Read/Post Comments (5) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 09, 2013, at 11:38 AM, EquityBull wrote:

    Ownership in the company is changing hands. Does kors have a non compete? How many designs are his now versus his designers? These answers would be of most concern to me.

    Kors himself likely buying homes, yachts and planes and they are not cheap

  • Report this Comment On March 09, 2013, at 11:52 AM, JeffreySwim wrote:

    No doubt it hurts the share price (as it should) but it may simply illustrate that we are in a very low interest rate environment. In such an environment, no financial instruments are cheap and they will exhibit significant volatility. I can understand the execs wanting to avoid the volatility and risks of being disrupted.

    One might as well get used to it and not expect easy money buying equities.

  • Report this Comment On March 11, 2013, at 3:38 PM, PuddinHead42 wrote:

    You mention this

    "In the news this week is the case of Mark Cuban, owner of the Dallas Mavericks NBA team who's being accused of dumping shares in an Internet search company as it went under"

    But that is not as factual as it should be. He was a big owner and the board came to him and said they wanted make a big acquisition or something. He said that was stupid and the should not do it. They said, well, we are going to do it. He said, fine, I am selling because you are idiots.

    That is a little different than the way you made it seem.

  • Report this Comment On March 11, 2013, at 5:44 PM, dmawhinney wrote:

    Michael only sold 3 million shares. The bulk of the shares sold came from Sportswear Holdings - 19.7 million or 63% of its holdings. Time for them to cash out and invest in another IPO.

    Also, CEO John Idol sold 2 million shares from his family trust. Nothing wrong with that either. Would you want your family trust heavily loaded in one stock? Diversification is not a bad idea.

  • Report this Comment On March 21, 2013, at 12:12 PM, elcid24 wrote:

    "After the transaction, he's down to a mere 2.4% of the company"

    Before the transaction, he was already down to a "mere" 3.9% of the company.

    I'd be inclined to ignore the investment activities of a fashion expert. If he were a fashion expert AND a world-class investor, then maybe I'd take greater notice to his selling. The stock was at an all-time high, and dude just wanted some cash. What's the big deal?

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