How an Executive Departure Can Be Bad (or Good) for Your Stock's Value

By David Sterman
October 21, 2010

When a company dumps an executive, it's definitely a sign that it's time to step back, look at the big picture, and try to get a feeling for whether the news is a positive or negative for the company's stock. The circumstances behind the change are crucial, so let's take a look at three companies that recently announced executive departures -- Christopher & Banks (NYSE: CBK), Local.com (Nasdaq: LOCM) and Vitacost.com (Nasdaq: VITC) -- to see what we can discern.

These three companies all announced executive departures after Tuesday's market close. Investors tend to be very wary of such news, and CBK and LOCM slumped badly on the news. VITC, which had already been pummeled in recent months, was largely unaffected.

But a shake-up at the top is not always bad. In fact, it can sometimes be the best thing for shareholders. Let's take a closer look at why these companies got rid of their executives and what the implications are for shareholders.

Time's Up for Christopher & Banks CEO
I've written about Christopher & Banks several times this year and usually noted that CEO Lorna Nagler, who was brought in back in 2007, was one of the key reasons for my bullishness. Under her watch, the women's apparel retailer cut costs, improved logistics tracking, and opened up to creative new approaches. But I also noted that shares are in a funk due to tepid sales, which can largely be attributed to the still-slow economy.

The company's board doesn't see it that way. It seems they are quite frustrated by the slow pace of sales and have simply lost patience with Nagler. The retailer recently had slow summer sales, a direct result of missteps relating to fashion choices. Though they also got rid of the head of merchandising, the highest ranking executive in charge of purchasing, the buck ultimately stops with the CEO.

Ironically, Nagler's successor stands to benefit from the groundwork she laid. Christopher & Banks still has a strong reputation, a healthy balance sheet, lean costs, and the potential for higher sales as the economy rebounds. 

Christopher & Banks' chairman will handle management duties while they look for Nagler's replacement, and because he's been leading the board for five years, operations shouldn't be heavily affected. Net/net, this departure is probably a good thing. The retailer gets a fresh perspective on how to get sales moving, and because changes are being made at a good company with very high standards, the stock looks like a great value at recent prices.

Local.com Tries to Readjust Its Priorities
On Tuesday, Local.com announced that CFO Brenda Agius was leaving the company -- effective immediately -- ostensibly to move her family back to the East Coast. The company, which runs websites with local search engines, has recently been dogged by allegations that some members of management have a shady past.

Local.com's shares plunged in August over concerns that Agius, while serving as CFO of a different company, goosed sales by making a lot of acquisitions that ultimately had little value in terms of profits. Similar allegations were raised regarding Local.com. In this case, Agius is either at the heart of a real flaw in the company's business model, or simply a scapegoat for their current weak share price. Either way, this should be of great concern to investors.

This type of executive departure is likely a sign of ongoing chaos within Local.com. Investors should wait for operations to stabilize, even if it means waiting several quarters, before taking a position in this now-cheap stock.

Just One Piece of a Much Larger Problem
Shares of online vitamin retailer Vitacost.com have lost half their value in the last six months after a series of stumbles. Missteps included a botched capacity expansion, out-of-control shipping costs, and misguided promotional efforts that led gross margins to slump. 

Several executives have already been asked to leave, or left of their own volition, and Chief Financial Officer Richard Smith is now joining them. If he left simply because he was not up to the task, the company would have thanked him for his service in noting his departure. Instead, the company simply said he "is no longer with the company." That kind of terse send-off implies that Smith left under bad circumstances. Whatever the circumstances, investors should steer clear.

Executive departures that appear abrupt, and lend the appearance of a chaotic operating environment, should be seen as a clear negative. Of course, executives leave companies all the time. In many instances, they’ve found a better job or are simply ready to retire. A retiring executive should time their departure several months out to allay any concerns of problems. And a job-hopping executive should have another good position lined up (which may be hard to know about until that executive lands at the new job and an announcement is made).

CFO departure is one of five red flags I mentioned in my educational piece, 11 Things Every Trader Should Know (it's #4 on the list). It doesn't necessarily spell doom for a stock, but it's definitely a signal that you should take a closer look.