It can naturally be nerve-racking when the CEO of one of your investments is selling shares on the open market. It begs the question: Is he or she selling due to a lack of confidence in the future and should you sell as well? While it's impossible to know for sure the reasons behind Dollar General's (NYSE:DG) CEO Richard Dreiling selling, turn to the histories of Dollar Tree Stores (NASDAQ:DLTR) and Family Dollar Stores (UNKNOWN:FDO.DL) to help analyze its meaning.
According to a March 19 filing with the U.S. Securities and Exchange Commission, Dreiling sold the majority of his shares in the company in the open market for nearly $19 million. Should you be worried?
The General could be peaking
Dollar General has enjoyed 24 consecutive years of successful same-store sales growth. This is a record Dollar General is proud of, and a reversal could spell trouble for the stock price. Same-store sales were up 3.3% for 2013 but only 1.6% for the fourth quarter.
The earnings press release stated:
"The increase in sales of consumables outpaced the increase in sales of non-consumables, with sales of tobacco, perishables and candy and snacks contributing the majority of the increase throughout the year."
This suggests same-store sales may actually be declining for its core products.
Tobacco not only stimulated additional sales of tobacco itself, but it brought more traffic in the door. Excluding tobacco, Dollar General may have been on its way to negative same-store sales...and still may be in the future. The Dreiling selling is perhaps ahead of a peak on the horizon.
The earnings report warned about "an aggressive competitive retail landscape and our customers' uncertainty about spending in the current economic environment." Even Dreiling stated, "We remain cautious on the current operating environment and the many challenges our customer is facing in 2014."
The negative Family
Family Dollar Stores is an example of a dollar store with negative same-store sales, as it has been seeing persistent declines for several quarters now. Last quarter, Family Dollar Stores saw another 2.8% drop in same-store sales.
CEO Howard Levine has blamed "economic uncertainties...an intensified promotional environment...softness in discretionary categories...[and] a difficult operating environment." Could this be true for Dollar General also?
Levine has been selling large quantities of shares for two years. With the benefit of hindsight, those sales successfully foreshadowed Family Dollar Stores' lackluster performance in its financials and its stock price.
Money grows on dollar trees
For Bob Sasser, CEO of Dollar Tree, is a counter example because his selling proved to be meaningless so far. . Sometimes CEOs do some selling for diversification or other personal reasons even though the company is still wrong. Sasser has been selling shares here and there for the last couple of years yet Dollar Tree has continued to impress with an exploding top line, same-store sales, and bottom line as well as a stock price that is higher than Sasser's sales.
2012 saw a 3.4% same-store sales rise. 2013 saw another pop of 2.4%. Dollar Tree expects 2014 to show another jump in the "low single-digit" percentage. It looks as though Sasser would have done better if he held off, and so would have investors who got spooked and sold.
Foolish final thoughts
Looking back over the last two years, Dreiling has been selling shares of Dollar General at prices that have since proven to be too cheap. Will that continue to be the case with the latest large batch of sales? It remains to be seen. However, the best you can ever hope for with insider sales is that they prove to have little or no meaning...they never mean good news. Fools should watch Dollar General's same-store sales trend extra closely just in case.
Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.