'Tis the season for insider stock buys
Despite fears of sluggish consumer spending in retail stores this holiday season, industry executives are pulling out their wallets and buying up stock.
NEW YORK (Fortune) -- Despite the uncertainty over a holiday shopping season that threatens to squash retail profits in a melee of discounting, some executives and directors are finding bargains in their companies' beaten down stock.
Company insiders have been purchasing stock at an increasing rate, according to analysts who track the data, a sign that many of these shares, which have plunged in value on recession fears, could be oversold.
Limited Brands (Charts, Fortune 500) insiders are treating themselves to an early Christmas present in the form of $20.6 million in company stock purchases, a vote of confidence in the future of the Victoria's Secret and Bath & Body Works parent.
Nine insiders, including Chief Executive Les Wexner, purchased $7.6 million of stock in the last three trading days, and plan to buy a further $13 million over the next week, according to federal filings.
The insider buying is the first time in five years that executives and directors have made significant purchases of the company's stock. Several analysts said the buying is a bullish sign despite a 44 percent drop in Limited's share price over the past year. Shares soared $1.30, or 7.25 percent, to $19.23 yesterday on the news.
Limited insiders are not alone. Insider buying has increased at other major retailers, including Foot Locker (Charts, Fortune 500), Barnes & Noble (Charts, Fortune 500) and Borders Group (Charts), a signal that some of these stocks, which are trading near their low points for the year, may have hit bottom.
Just as notable is a reduction in insider selling. "There tends to be a fair amount of insider selling in retail and it has slowed dramatically," said Ben Silverman of InsiderScore, which tracks transactions by corporate officers and directors. "Insiders clearly don't want to sell stock at these depressed prices, because they feel their companies' shares will appreciate going forward."
Officers and directors of the Limited have tended to be bigger sellers than buyers in recent years. Company insiders sold $140 million worth of stock last year. Although insiders have not sold any stock so far this year, they have not been buying either - until now.
The last time an insider bought a significant amount of stock was five years ago, in 2002, when director David Kollat purchased $2.5 million shares. "This time around, we are witnessing a much stronger vote of confidence, given that nine insiders, including five officers and four directors, are making more than 10 times [that investment]," wrote Todd Slater of Lazard Capital Markets in a research note.
For Columbus, Ohio-based Limited, the problems of a slowdown in consumer spending were compounded by specific missteps, including uninspiring apparel offerings that weighed on profits and merchandising blunders that left its Victoria's Secret division bloated with unsold lingerie.
Although the company, like other retailers, must still grapple with the likelihood of a recession, many of Limited's other problems are behind it, analysts said. Earlier this year, Limited sold its two apparel divisions, Limited and Express, allowing the company to focus on its faster growing and more profitable Victoria's Secret and Bath & Body Works chains.
Victoria's Secret has cleared out some $1 billion in excess inventory, which should provide a lift to margins next year.
At the same time, an international expansion could funnel as much as $500 million in annual licensing revenue to Limited's bottom line, estimates Lazard's Slater. An added perk: foreign licensees are required to buy merchandise from Limited's two sourcing divisions, mast industries and beauty avenues, which will provide a further boost to profits.
"Limited made its fair share of mistakes in 2007, but the time to buy a stock is when it's unloved," Slater said.
Executives at other retail chains are taking the opportunity of depressed stock prices to add to their holdings. Foot Locker director Matthew McKenna nearly doubled his stake in the company with a Nov. 27, purchase of 8,000 shares at $12.92. The buying was the first by a Foot Locker insider in more than two years, according to InsiderScore. Foot Locker shares are down 48 percent from their recent high last seen in August.
Borders Group Chief Executive George Jones bought 100,000 shares in recent months at an average price of $12.50, marking the first significant insider stock purchase at the company in more than five years. Borders Group's largest shareholder, Pershing Square Management, bought 3.22 million shares in late November, the first time the hedge fund has increased its stake since 2006. Borders shares are down 50 percent from a high last seen in June.
At Barnes & Nobel, Chairman Leonard Riggio bought 600,000 shares in October at an average price of $38.08 a share. The purchase follows two others made in August and September. Prior to these buys, Riggio, the largest shareholder with a 24.5 percent stake, had not bought stock in the company since 2005, according to InsiderScore. Barnes & Noble shares traded yesterday at $39.08, midway between its 52-week-range.
"Sentiment among insiders at major retailers has improved," Silverman of InsiderScore said. Does that mean all the bad news is behind these companies? Not necessarily.