Consolidated Stores: Escalating the Online Toy Wars - TheStreet

Consolidated Stores: Escalating the Online Toy Wars

Plus, finding no sin in Cincinnati Bell's acquisition of IXC.
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It's clear that investors haven't greeted

Consolidated Stores'

(CNS) - Get Report

decision to bet its marbles on the Internet with unalloyed enthusiasm.

After a relatively upbeat analyst conference in June, Consolidated failed to meet earnings expectations, and the stock promptly lost more than half its value. In September,

Standard & Poor's

revised its outlook for the company to negative, citing increased risk associated with its Internet strategy and continued weakness in the overall toy retailing business.

Nevertheless, management is positioning the newly minted

KBkids.com

-- a joint venture of which it owns 80% -- to challenge the leaders in online toy sales by Christmas. With stiff competition from

SmarterKids.com

,

eToys

(ETYS)

, and

toysrus.com

-- not to mention

Amazon.com

(AMZN) - Get Report

-- that will take some doing.

But according to KBkids.com CEO

Srikant Srinivasan

, the company has invested some $80 million in the project, and there is an additional $50 million in promotion reportedly on the way. And now, finally, we have evidence that management is putting its own money where its mouth is.

In late August and early September, with the stock trading in the mid-teens, six prominent execs acquired a combined 661,721 shares of Consolidated stock. Of the total, 24,000 shares were picked up on the open market, while the remainder was acquired through the exercise of nonqualified stock options. Among those acquiring shares were Chairman William Kelley, CFO Michael Potter, Treasurer James McGrady and Executive Vice President Kent Larsson. It may be worth considering that CEO Kelley last bought shares back in 1994 at $8 apiece.

The combination of options exercises and open-market buys is also something we like to see. What's more, when these insiders exercised options to acquire stock in the past, it had been their habit to turn around and dump the acquired shares, something that, so far at least, they haven't done. And while there is always the chance that the activity has been orchestrated for the watchful investor's eye, the fact that so much of the accumulation involved options exercises in lieu of higher-profile open-market purchases tells us otherwise.

Of course, Consolidated is at heart a closeout retailer, and it's uncertain whether the company can turn things around by selling toys on the Internet. But at least the wind is now in its favor: Closeout sales have at last shown signs of improvement, and September numbers came in well ahead of most analysts' forecasts. And management is addressing the consumer's confusion (or even distaste) over closeout goods by launching a multimillion-dollar celebrity advertising campaign, focusing on the company's ability to offer brand-name products at lower prices.

The coming season should prove interesting. The blowout release of

Sega's

Dreamcast will boost all retailers -- Consolidated included -- and analysts are warming to the sector. But no matter how things shake out, we can rest assured that Consolidated Stores' management has a good deal at stake. Remember, executives exercising nonqualified options incur a tax liability based on the difference between the option strike price and the market price on the day of the exercise. Should all this insider buying turn out to have been so much stage management to impress investors, it could become an expensive show, indeed.

Ringing Cincinnati's Bell

Cincinnati Bell

(CSN)

has become yet another old-line company blazing a new trail, with the proposed acquisition of coast-to-coast fiber-optic network carrier

IXC Communications

(IIXC)

. Long a dependable, if somewhat unglamorous, local phone utility, Cincinnati Bell has bet the bank on earning its place in the communications revolution. The cost is high: Not only has management conceded that the IXC deal will do a number on its earnings over the next several years, but the company will no longer pay a dividend. This may have alienated some core investors, but Cincinnati Bell recently accepted a $400 million investment from Robert Bass'

Oak Hill Capital Partners

, half of which will reportedly be used to repurchase Cincinnati Bell shares.

Also charged by the company's new direction have been its directors, four of whom acquired a combined 46,975 shares in July and August, including 30,975 shares on the open market at $18.06 to $21.44 per share. Notably, the activity began the very day following the IXC merger announcement. Director William Friedlander, already a considerable holder of Cincinnati Bell stock, purchased 23,975 shares. The purchase was his largest to date. Fellow Director Mary Nelson acquired 16,000 shares through the exercise of options.

To be sure, the volume of the activity is not overwhelming in absolute terms. It is worth considering, however, that despite the recent setback, Cincinnati Bell continues to trade at historically high levels, and insider accumulation near historical highs is exceedingly rare. And investors? Though initially unimpressed -- Cincinnati Bell shares sold off nearly $4, or 16% on the day the acquisition was announced -- they may be coming around, with insiders leading the way.

Bob Gabele has been tracking and analyzing insider trading since 1978, most recently for First Call/Thomson Financial. This column is not meant as investment advice; it is instead meant to provide insight into the methods of insider trading. At time of publication, Gabele held no position in any of the companies discussed in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabele appreciates your feedback at

rgabele@thestreet.com.