On May 25, seven key insiders of Charming Shoppes (NASDAQ:CHRS) sold 1.4 million shares for almost $11 million in gross proceeds. Most of the shares came from options with an exercise price of $6, which were then sold at $7.85.
After the sale, the top five insiders held only about 935,000 shares. These five executives accounted for 1.3 million of the 1.4 million shares sold -- they had just sold well over half of their holdings in the company.
If I were an investor or an employee (or both), I would be livid. Simply put, I believe senior management should eat its own cooking. If the executive team believes it is creating long-term value for the shareholders, at a minimum, it should be betting on itself.
The executive team at Charming Shoppes needs to read a copy of Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) "owner's manual." Chairman and CEO Warren Buffett has over 99% of his net worth in Berkshire Hathaway stock. Buffett clearly articulates the underlying principle: "We want to make money only when (our investors) do and in exactly the same proportion. Moreover, when I do something dumb, I want you to be able to derive some solace from the fact that my financial suffering is proportional to yours." Seems reasonable. But investors in Charming Shoppes will not be able to derive similar solace if their stock should fall -- the executive team will already have cashed out more than half its holdings.
Management's rush to the exits does not seem to be driven by an extraordinary valuation relative to the company's peer group. The stock trades at a price-to-earnings ratio of 18, which is the same P/E as Yahoo!'s Retail Apparel Index. That index includes companies such as Gap (NYSE:GPS), Nordstrom (NYSE:JWN), Limited (NYSE:LTD), AnnTaylor (NYSE:ANN), and Chico's (NYSE:CHS).
Recent operating results also do not raise any red flags. As Dave Marino-Nachison reported on May 20, five days before the executive selling, the company just came off a great first quarter and the stock has had a great run since 2003. In addition, the company recently reported strong sales growth in May.
Despite the lack of any clear warning signs to those of us outside the company, management doesn't seem optimistic about the future prospects of the stock, and it certainly has the best information available. My advice to any individual investor currently long Charming Shoppes: Think about following management's lead and quickly dumping those shares. More likely than not, those executives know something that you don't about what's looming on the horizon.
Fool contributor Salim Haji lives Denver, Colo. He owns shares in Berkshire Hathaway, but not in any of the other companies mentioned.
